Edited version of your written advice

Authorisation Number: 1051199941842

Date of advice: 13 March 2017

Ruling

Subject: GST and property subdivision

Question 1

What are the GST consequences of selling existing residential premises once renovations are completed?

Answer

The existing residential premises are currently and will continue to be after being renovated residential premises.

The sale of the existing residential premises after the renovations are completed will be an input taxed supply. This is regardless of when the sale occurs and the GST registration status of the owner.

Any GST included in the subdivision costs, renovation costs and selling costs that are related to the existing dwelling cannot be claimed as they relate to the making of input taxed supplies and are therefore not creditable acquisitions.

The subdivision and planning costs should be apportioned over all three dwellings using a reasonable basis.

Question 2

Would the sale of the existing dwelling be considered new residential premises when sold?

Answer

No. The sale of the existing dwelling will not be considered new residential premises after the renovation.

Questions 3 and 4

3. What are the GST consequences of selling/renting the newly constructed units located at the property:

a. If both of the new units are rented for more than five years and then sold

b. If both of the new units are sold on completion.

c. If one of the new units is rented for a period of two years and then sold.

And

4. What are the GST implications where input tax credits have been claimed on the construction of the new units?

Answers

The answers to these questions are dependent on what your intentions are in relation to these properties as evidenced by an objective assessment of your specific facts and circumstances. Your intention should be determined prior to registration to ensure correct treatment of the GST related matters from the beginning.

a. If your intention from the start of the development is to rent the new units for a period of more than five years then you will not be required to register for GST as you will be making input taxed supplies when these units are rented.

In addition, you will not be entitled to claim any input tax credits in relation to the subdivision costs, development costs and any other costs for these units as the costs relate to the making of input taxed supplies and are therefore not creditable acquisitions.

The sale of the units after having been rented for more than five years will not be a sale of new residential premises. No GST is payable on the sale because the sale will be an input taxed supply.

b. If your intention from the start is to sell both of the new units, based on the expected sales prices of the units, you would be required to be registered for GST. The sale of these two units would be taxable supplies as they would be the sale of new residential premises.

You would be entitled to claim input tax credits for the proportion of the subdivision costs relating to the two new units. You would also be entitled to claim input tax credits on the construction costs and selling costs incurred on the two new units.

c. If your intention is to rent one of the units for two years and then sell it, the sale will be a taxable supply as it will still be classed as new residential premises.

However, you will not be entitled to claim any input tax credits upfront relating to the subdivision costs and construction costs for the unit you intend to rent and sell.

Under Division 129 of the GST Act you will be required to work out each year the extent of your creditable purpose and make any necessary adjustment based on actual use.

As a result, when this unit is sold after two years, you can claim a decreasing adjustment under section 129-75 of the GST Act for the unclaimed input tax credits on the costs that you incurred during construction. The formula is in section 129-75 of the GST Act.

Question 5

If the sale of the above mentioned properties are subject to GST, and the property is registered under two names, what should the business structure be registered as for the purposes of the ABN and GST registrations?

Answer

Before you register for GST, you need to determine what your intentions are in relation to the property once the subdivision is complete. This is important so as to ensure correct treatment of the GST related matters from the beginning.

As the property is currently jointly owned and you are in receipt of joint income from the rental income, you are already classed as a tax law partnership.

We cannot advise you as to the best business structure in relation for the business activities that you undertake.

Advice should be sought from your accountant in relation to this matter.

Question 6

If GST registration is required, what reporting periods should you register for?

Answer

Generally, the tax periods that will apply to you will be each period of three months ending on 31 March, 30 June, 30 September and 31 December in any year. (Section 27-5 of the GST Act)

You may make an election to have monthly tax periods by notifying the Commissioner in the approved form. (Subsections 27-10(1) and (2) of the GST Act)

You would not qualify under paragraph 162-5(1)(c) of the GST Act to make an election to pay GST by instalments as you do not have current lodgements of at least 4 months.

You would not be eligible to elect to have annual tax periods under section 151-5 of the GST Act as that option is available only if you are not required to be registered.

Advice should be sought from your accountant in relation to this matter.

Question 7

If all dwellings are rented out post subdivision and then sold to an investor who is registered for GST, will these sales constitute a sale of a going concern?

Answer

Yes, the supply will be a GST-free supply of a going concern provided the provisions of section 38-325 of the GST Act are met.

Question 8

Will you be required to charge GST on the rent for the residential premises or is this supply input taxed regardless of your GST registration status?

Answer

No. The supply of residential premises for rent is an input taxed supply under section 40-35 of the GST Act. The status of this supply remains the same regardless of your GST registration status.

Question 9

There was no GST in the original purchase of the property. Can you use the margin scheme when the properties are sold?

Answer

Yes. You can apply the margin scheme to the sale of the two new units provided you and the recipient of the supply agreed in writing prior to the sale that the margin scheme is to apply.

If you wished to use the margin scheme on the sale of the two units, you need to apportion the original purchase price of the property over all three dwellings using a reasonable basis to work out the consideration of your acquisition of the two units.

You are unable to use the margin scheme in relation to the sale of the existing dwelling as this sale will not be a taxable supply.

Relevant facts and circumstances

● You are spouses.

● You purchased a residential property (the property) as tenants in common in 2016.

● The purchase price of the property did not include GST as it was an input taxed supply.

● The property was zoned as 'General Residential 1' at the time you acquired it and remains the same.

● The existing dwelling (dwelling 1) has a tenant in place and you are in receipt of joint rental income for the above property.

● As you are in receipt of joint rental income, you are considered to be a tax law partnership.

● You intend to subdivide the property, leaving the existing dwelling in place and build 2 additional units on the property. At this stage, your intention is to sell the existing dwelling and one of the new units and to retain and rent out the 2nd new unit for approximately 2 years and then sell this unit as well.

● The subdivision costs, including fees to council, contractors and service providers will be funded using equity in an existing property.

● The construction of the project will be funded by a bank loan.

● You have provided details of the associated construction costs.

● You are planning on doing minor renovations to the existing dwelling prior to selling. This may include renovating the existing bathrooms, kitchen and flooring but does not include major structural works.

● You are planning on doing the development yourself and engaging qualified trades when required.

● You expect all 3 of the dwellings to be available for sale or rent in 2017.

● You or any related entities have not been involved in subdivision activities or in the business of land development.

Relevant legislative provisions

Section 9-5 of the GST Act

Section 11-15 of the GST Act

Section 27-5 of the GST Act

Subsection 27-10(1) of the GST Act

Subsection 27-10(2) of the GST Act

Section 38-325 of the GST Act

Section 40-35 of the GST Act

Section 40-65 of the GST Act

Section 75-15 of the GST Act

Section 129-75 of the GST Act

Section 151-5 of the GST Act

Paragraph 162-5(1)(c) of the GST Act

Reasons for decision

Question 1

Input taxed supplies

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

a. You make the supply for *consideration; and

b. The supply is made in the course or furtherance of an *enterprise that you *carry on; and

c. The supply is *connected with the indirect tax zone; and

d. You are *registered, or required to be registered.

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

Section 40-65 of the GST Act provides that the 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).

[Terms with an asterisk are defined in the GST Act.]

Entitlement to claim input tax credits

You are entitled to claim input tax credits for your creditable acquisitions provided they are for a creditable purpose.

Section 11-15 of the GST Act provides what is meant by creditable purpose.

Subsection 11-15(2) of the GST Act provides that you do not acquire an acquisition for a creditable purpose to the extent that the acquisition relates to the making of supplies that would be input taxed or of a private or domestic nature.

Therefore, any acquisitions that you make in relation to the existing dwelling will not be a creditable acquisition as it is not for a creditable purpose at the time the acquisition is made and you will not be entitled to claim input tax credits on these acquisitions.

Question 2

Section 40-75 of the GST Act provides the meaning of new residential premises.

Subsection 40-75(2) of the GST Act states that residential premises are new residential premises if they have been created through *substantial renovation of a building.

The term 'substantial renovations' is a defined term in section 195-1 of the GST Act.

Section 195-1 provides:

'Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or relaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.'

In your case you have indicated that you may renovate the existing bathrooms, kitchen and flooring but no major structural works are planned.

Therefore, based on the information provided, the level of renovations proposed to the existing dwelling would not constitute substantial renovations under the GST Act.

The sale of this dwelling would be an input taxed supply.

Questions 3 and 4

3. The GST treatment for acquisitions made by you in relation to the development of the new units is dependent on your initial intention in relation to these units.

If your intention from the onset is to sell the new units on completion, a proportion of the subdivision costs relating to the new units will be for a creditable purpose and the construction and selling costs will also be for a creditable purpose.

If your intention from the onset is to make them available for rent, then the acquisitions in relation to the subdivision and construction would not be for a creditable purpose and therefore would not be creditable acquisitions at the time of the acquisitions are made and you would not be entitled to claim input tax credits on these acquisitions.

Division 129 of the GST Act makes provision for an adjustment to be made where the extent of creditable purpose under section 11-5 of the GST Act has changed by later events.

Paragraph 12 in Goods and services tax ruling GSTR 2000/24: Division 129 - making adjustments for changes in extent of creditable purpose (GSTR 2000/24) provides:

You may have an adjustment for an acquisition or importation where there is a difference between the actual use and the planned use of a thing for a creditable purpose. An adjustment also arises where there is a difference between the actual use of the thing up to the end of one adjustment period, and the actual use of it up to the end of the previous adjustment period. These adjustments are made in a tax period called an adjustment period.

Adjustment periods are discussed under section 129-20 of the GST Act and are based on the actual cost of the acquisition and the timing of the adjustments.

4. If your initial intention is to sell both newly constructed units and you have claimed up front any input tax credits on the subdivision costs and construction costs for both units, and after completion you changed your intention and rented out these two units, then you will have to make an increasing adjustment under Division 129 of the GST Act to repay to the ATO any input tax credits that you have claimed.

Subdivision 129 C of the GST Act provides for when adjustments for acquisitions and importations arise.

Specifically section 129-40 provides the formula for you to use to work out your increasing or decreasing adjustments under this section of the GST Act.

Questions 5 and 6

No further detailed reasons required

Question 7

A supply of a going concern is a supply under an arrangement under which the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise and the supplier carries on, or will carry on, the enterprise until the day of the supply. (subsection 38-325(2) of the GST Act)

Under subsection 38-325(1) of the GST Act, for a supply to be the GST-free supply of a going concern the following requirements must be met - the supply is for consideration, the recipient of the supply is registered or required to be registered and the supplier and the recipient have agreed in writing that the supply is of a going concern.

It is important to note that under section 135-5 of the GST Act, the recipient of a 'GST-free supply of a going concern' will have an increasing adjustment (which is equivalent to the GST payable on the purchase) where they will be making input taxed supplies.

Question 8

See Reason for Decision under Question 1.

Question 9

If your purchase of the freehold interest in the property was not a taxable supply, you can apply the margin scheme in working out the amount of GST payable.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies to a taxable supply of real property if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act states that the agreement must be made:

a. On or before the making of the supply; or

b. Within such further period as the Commissioner allows.

Section 75-15 of the GST Act requires an apportionment where real property has been subject to subdivision.

In your case, you purchased residential premises and the purchase was not a taxable supply. As such, you can apply the margin scheme if you and the purchaser agree in writing that the margin scheme is to apply.

If you were to apply the margin scheme to the sale of the two new units then you would need to apportion the original purchase price of the property over all three dwellings using a reasonable basis to work out your consideration for the acquisition.