Edited version of your written advice

Authorisation Number: 1013099474337

Date of advice: 4 November 2016

Ruling

Subject: GST and commercial premises

Question 1

Is the sale by Entity A of Property A to Entity B a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes. The sale is a wholly taxable supply. There is no residential component.

Question 2

Is the sale by Entity A of Property B to Entity C a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes. The sale is a wholly taxable supply. There is no residential component.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A entered into a contract for the sale and purchase of land (the Contract) on DDMMYYYY for the sale of the Property to Entity D.

The Property was utilised as a clinic.

The date of settlement was DDMMYYYY.

The Property comprises of two titles supplied as follows:

● Property A supplied to Entity B

● Property B supplied to Entity C

Property A consists of:

● A building comprising a house, reception and office (Clinic)

● amenities building

● gardens, and

● drive way and bitumen sealed areas (parking).

Property B consists of:

● a building (Consulting Rooms)

● bitumen carpark and garden.

You have provided a copy of a heritage study for the house. The house is heritage listed, which protects various elements of the house.

You have provided a copy of a valuation document. Property A includes a heritage listed former residence that was converted for various uses. Property A also includes an amenities building with an office area. Property B includes a building utilised as office and consulting rooms.

You have provided a copy of an information document about the Property.

You have provided a copy of a floor plan for Property A.

You have provided a copy of a floor plan for Property B.

The Consulting Rooms building was originally constructed as living quarters and subsequently converted to office and consulting rooms. You do not have details of how the supply of accommodation operated.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5, and

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

Reasons for decision

In this reasoning, please note:

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Under section 9-5, you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with the indirect tax zone (Australia), and

d) you are registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply of Property A and Property B (the Property) by Entity A is made for consideration and in the course or furtherance of their enterprise. In addition, the Property is located in Australia and Entity A is registered for GST.

Therefore, the supply by Entity A will be a taxable supply unless it is GST-free or input taxed. In the current factual circumstances there is no provision in the GST Act whereby any portion of the Property supplied would be GST-free.

The issue is whether the supply of the Property is partly an input taxed supply of residential premises. Input taxed means that GST is not payable on the supply.

The supply of the Property comprised two separate supplies to two separate purchasers being:

● Property A supplied to Entity B

● Property B supplied to Entity C

● Each supply will be considered separately.

Property A

Subsection 40-65(1) provides that 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).

'Residential premises' is defined in section 195-1 as 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 accommodation;

(regardless of the term of the occupation or intended occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises, provides guidance on what is considered to be residential premises to be used predominantly for residential accommodation for the purposes of subsection 40-65(1).

Paragraph 9 of GSTR 2012/5 advises that the requirement in section 40-65 that premises be 'residential premises to be used predominantly for residential accommodation' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises suitability and capability for residential accommodation.

Paragraph 10 clarifies that 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 this case, Property A has two separate buildings which need to be considered as well as the surrounding grounds (garden and parking):

● The Clinic - originally built as a residence and converted for various uses

● The Amenities Building.

Clinic

The house was originally constructed to be residential premises. The premises have since been modified and extended for various uses.

You contend that the section of the Clinic that is the original heritage listed house is still designed predominantly for residential accommodation similar to example 8 at paragraphs 41 to 43 of GSTR 2012/5.

Example 8 provides an example of residential premises partly converted to business. In summary, modifications to part of a house result in part of the premises still designed predominantly for residential accommodation and part of the premises no longer being residential premises to be used predominantly for residential accommodation. The principle established in example 8 does not apply to your circumstances as the premises in question have not been partly converted for business use, they have been extended and modified over time to be, as a whole, a new premises, the Clinic.

In this case, the Clinic must be assessed using the principle outlined in paragraphs 86 to 88 of Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises for assessing the physical characteristics of premises that are not operating.

Paragraphs 86 and 87 of GSTR 2012/6 provide that premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

You have included a list of physical characteristics that the premises had at the time of settlement.

In addition, the physical layout provides formal access into a reception/waiting area, a hallway which provides access to separate wings within the floor plate of the premises.

The former residence has been converted for use as offices, meeting / training rooms, staff kitchen / dining room, male/female bathroom facilities, and various other uses.

The main administrative offices are primarily contained within a portion of the floor plate and incorporate offices, various rooms, and other relevant areas.

These physical characteristics are similar to those outlined in example 5 at paragraphs 28 and 29 of GSTR 2012/5, which state:

Example 5 - private hospital

28. Maxwell Hospital is a privately operated hospital. The hospital contains wards to accommodate 150 patients, an entrance foyer, waiting areas, operating theatres, recovery areas, reception areas, nurses' stations, specialists' suites, storerooms, staff amenities, utility and disposal rooms, and ambulance bays. The design of the premises is based around the needs of patients and medical practitioners in providing medical and surgical treatment.

29. While Maxwell Hospital provides shelter and basic living facilities, its physical characteristics indicate that it is not residential premises to be used predominantly for residential accommodation. The physical characteristics indicate that these premises are a place where the sick or injured are given medical or surgical treatment. A supply of the premises would not be input taxed under Division 40.

Similar to example 5 the physical characteristics indicate that the premises are a place for clinic workers to undertake tasks associated with the Clinic. That is, they are designed for the treatment of patients with a waiting / reception room and treatment rooms. There are various offices/rooms and facilities to support the supply of treatment and the premises as a whole are structured to facilitate the provision of treatment for patients.

Amenities Building

The Amenities Building was not constructed to be residential premises.

The Amenities Building has the physical characteristics of an office and staff amenity with separate toilet and shower facilities.

Paragraph 25 of GSTR 2012/5 provides that not all premises that possess basic living facilities such as a bedroom and bathroom are residential premises to be predominantly used for residential accommodation.

Example 4 at paragraphs 26 and 27 of GSTR 2012/5 provides an example of an office building which contains shelter and basic living facilities but concludes that the physical characteristics are of an office for workers to undertake tasks associated with a business. The amenities building, similar to this example has physical characteristics that indicate that the premises are a place for the clinic workers to undertake tasks associated with the Clinic, that is office work and use of toilet facilities and are therefore not residential premises to be used predominantly for residential accommodation.

Conclusion

Whilst the Clinic may still contain aspects of a heritage listed house, over a long period the original premises have lost the character of residential premises through modifications and extensions to become a commercial building as a whole. The Amenities Building is also a commercial building.

It follows that the supply of Property A was a taxable supply subject to GST.

Property B

Property B contains a single building with surrounding grounds (garden and parking).

The building was originally constructed as living quarters and was subsequently converted to office and consulting rooms.

The building comprises the following physical characteristics:

● Multiple levels with access to the upper level obtained via an open stairwell

● Each floor contains multiple offices / consulting rooms

● Separate shower/toilet amenities have been established on both levels.

● A small kitchenette recessed beneath the open staircase.

Of relevance is whether the physical characteristics of the building when initially constructed were residential premises as they were built as living quarters.

GSTR 2012/6 provides guidance on how to characterise premises as commercial residential premises.

Commercial residential premises are defined, in part, in section 195-1 as:

(a) a hotel, motel, inn, hostel or boarding house, or

(b) …

…

(f) anything similar to residential premises described in paragraphs (a) to (e).

…

As we do not have details of how the supply of accommodation operated we are reliant on the physical characteristics of the premises to determine if the premises are residential premises to be used predominantly for residential accommodation for the purposes of subsection 40-65(1) or commercial residential premises for the purposes of paragraph 40-65(2)(a).

Paragraph 86 of GSTR 2012/6 provides that premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

Of particular relevance in this case is whether the premises are a hostel or something similar to a hostel. As the term 'hostel' is not defined in the GST Act it takes its ordinary meaning with the Macquarie Dictionary 5th Edition providing the following meaning:

a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.

Paragraph 171 of GSTR 2012/6 provides that the physical characteristics of a hostel, or premises similar to a hostel, reflect that the premises are designed to supply accommodation to be provided at a comparatively low cost to the occupants. Physical characteristics may include a commercial kitchen where meals are prepared, a communal area suitable for a dining area for occupants, and a communal laundry.

In this case, the premises are designed to provide multiple accommodation rooms across multiple levels. Each level also contains separate communal amenities.

These physical characteristics indicate that the premises were something similar to a hostel. As such the premises were not originally residential premises.

Conclusion

In summary, the building is not residential premises to be used predominantly for residential accommodation. It follows that the supply of Property B was a taxable supply subject to GST.