Edited version of your written advice

Authorisation Number: 1013079373426

Date of advice: 30 August 2016

Ruling

Subject: Residential Premises: Input Taxed Supply

Question

Are the properties situated at X ('the Properties') residential premises and therefore an input taxed supply under section 40-65 of the A New Tax System (Goods and Services) Act 1999 ('GST Act')?

Answer

Yes

Relevant facts and circumstances

A ('Purchaser') executed a contract with B ('Vendor') on X ('the Contract') to acquire the Properties.

Settlement is scheduled to occur on X.

Special condition Y of the Contract states:

If the purchaser obtains a written ruling from the Australian Tax Office that GST is not payable by the vendor or the purchaser on this contract then GST will not apply to this contract.

The Vendor has treated the supply of the Properties as fully taxable.

The Purchaser is of the view that the Properties are residential premises, the sale of which are input taxed under section 40-65 of the GST Act. Applying subsection 11-15(2) of the GST Act, the Purchaser is of the view that their acquisition is not a creditable acquisition because it is input taxed.

The Properties

The Properties consist of two buildings, each located on a separate parcel of land, a drive way and car park.

The two buildings on the Properties were originally residential premises. Basic modifications were made to the interiors of the Properties converting them into medical consultation rooms to allow for the provision of medical services in both buildings. The alterations were minor, and include the installation of reception desks and sinks in some consultation rooms. No major renovation took place that required a building permit.

Both buildings now offer 'waiting rooms' which were previously residential living areas, 'consultation rooms' which were previously bedrooms or living areas, and 'staff meal areas' which are still effectively kitchens. The bathrooms also remain, and both contain shower facilities, not ordinarily used by patients attending the premises for medical services.

Both buildings are fit for human habitation, and continue to provide shelter and basic living facilities. They are not new residential premises, and their physical characteristics indicate they are residential premises to be used predominantly for residential accommodation.

Relevant legislative provisions

A New Tax System (Goods and Services) Act 1999 section 11-15 and

A New Tax System (Goods and Services) Act 1999 section 40-65.

Reasons for decision

Section 9-5 of the GST Act excludes a supply from being a taxable supply to the extent that it is input taxed.

Subsections 11-15(1) and (2) of the GST Act state:

11-15 meaning of creditable purpose

(1) You acquire anything for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Subsection 40-65(1) of the GST Act states:

40-65 Sales of residential premises

(1) A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

The term *residential premises is defined in section 195 of the GST Act as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation: or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential occupation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

To determine whether the Properties are residential premises for GST purposes, it is necessary to examine their physical characteristics. Paragraph 10 of Goods and Services Tax Ruling GSTR 2012/5 (Goods and services tax: residential premises) states:

The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

In Sunchen Pty Ltd v Federal Commissioner of Taxation Edmonds and Gilmour JJ held that the phrase 'to be used predominantly for residential accommodation' does not refer to use by any particular person, but to the attributes of the property to which it is suited. In this respect the operation of subsection 40-65(1) is not to be determined by the subjective intention of the purchaser. It is to be determined objectively based on the physical characteristics of the property.

You have advised that the buildings on the Properties were originally residential premises which have had some minor modifications to allow them to be used as medical consultation rooms. In South Steyne Hotel Pty Ltd v FC of T it was held that only the elements of shelter and basic living facilities are necessary for premises to satisfy the definition of residential premises. As indicated at paragraph 81 of GSTR 2012/5, it is a question of fact whether the physical characteristics of the building demonstrate that the premises are suitable for, and capable of, being occupied as a residence or for residential accommodation.

Based on the information you have provided, we consider that the buildings on the Properties would still provide shelter and basic living facilities. Removal of the modifications made to convert the original dwellings into medical consultation rooms would not prevent the buildings from being capable of being used as residential premises. For example:

● both buildings remain intact and are capable of providing shelter;

● both buildings remain structurally fit for human habitation;

● current 'waiting rooms' could easily revert to residential living areas';

● current 'consultation rooms' could easily revert to bedrooms or living areas;

● current 'staff meal areas' could easily revert to residential kitchens;

● cooking facilities remain useable; and

● original bathrooms (both containing shower facilities) “not ordinarily used by patients” remain useable.

As indicated in paragraph 72 of GSTR 2012/5, to be considered residential premises, it is important that the Properties retain the above physical characteristics at the time of supply.

For the above reasons, we concur with your view that the supply of the Properties will be an input taxed supply of residential premises under section 40-65 of the GST Act. As the supply is input taxed, it is not a taxable supply under section 9-5 and is therefore not for a creditable purpose under section 11-15. Applying section 11-20, you are not entitled to any input tax credits for the acquisition because it is not a creditable acquisition.