Edited version of your written advice

Authorisation Number: 1051333974310

Date of advice: 20 February 2018

Ruling

Subject: GST and the acquisition of property which contains a residential premises

Question

Are you entitled to claim input tax credits on the amount of GST included in the price in relation to the purchase of the property?

Answer

You are entitled to claim input tax credits on the amount of GST included in the price in relation to the purchase of the property provided the supply of this property to you was a taxable supply. Please read below our ‘Reasons for Decision’.

Relevant facts and circumstances

You are registered for GST.

You purchased a property (the property) including GST from an unrelated entity that is registered for GST.

The property has characteristics of a training facility of a particular nature.

The property also contains a residential premises that has been used by the personnel of the training facility for accommodation purposes when they visited the property.

The total area pertaining to the residential premises is minimal compared to the full area of the property.

The sale of the property to you has been treated as a fully taxable supply. The property was not farmland. The seller has confirmed that they have not treated the sale of the house located on the property to be an input taxed supply of residential premises.

The sale price of the property was a particular sum and the GST included in the price was exactly 1/11^th of the sale price. The GST payable on the sale price attributable to full area of the land has been passed on to you.

In your opinion, the seller of the property has remitted the GST amount included in the sale contract to the ATO.

The sale of the property was not done under the Margin Scheme.

A tax invoice was issued to you for the sale of the property.

You intend to rent the property under a commercial lease to an entity who will carry on a training enterprise. The house located on the property will be used as an office and a residential facility by the lessee who will run the training facility. You will be treating this lease as a taxable supply and therefore the rent will be inclusive of GST. Given that the main use of the property will be

The expected annual rent will be more than $75,000.

You do not carry on other enterprises.

Relevant legislative provisions

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

Section 142 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

You are entitled to claim input tax credits on creditable acquisitions that you make.

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a creditable acquisition as follows:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

The following is a discussion on whether the acquisition of the property that you made meets the requirements of section 11-5 of the GST Act.

You acquire anything solely or partly for a creditable purpose

A creditable purpose is defined in section 11-15 of the GST Act as follows:

(1) You acquire a thing 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:

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

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

It is evident from the facts that you intend to carry on a leasing enterprise of the property. Accordingly subsection 11-15(1) of the GST Act is satisfied.

As the property contains a house which is a residential premises, it needs to be determined whether you will be using the property to make an input taxed supply of a residential premises for rent. Given the characteristics of the property (that is, it is predominantly a training facility), the lease agreement that you will be entering into will be with an entity who will be using the property as a training facility and the property is marketed for its characteristics as a training facility, we are of the view that the supply of the lease by you is a composite supply of a training facility which contains an incidental residential premises. The supply of the training facility is not an input taxed supply. Accordingly we are of the view that you have acquired the property for a creditable purpose.

The supply of the thing to you is a taxable supply

Taxable supply

A taxable supply is defined in section 9-5 of the GST Act as follows:

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.

Accordingly, if the supply of the property met paragraph 9-5(a) to 9-5(d) of section 9-5 of the GST Act, the supply to you would have been a taxable supply unless it was either an input taxed supply or a GST-free supply.

Input taxed supplies

Relevantly, pursuant to subsection 40-65(1) of the GST Act a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation.

Whilst the characteristics of the house that you have provided indicate that the house on the property was a residential premises, for GST purposes, there are other things that need to be satisfied in order for a residential premises to be an input taxed supply.

For instance, a house that is considered as “new residential premises” is not input taxed. The term “new residential premises” is defined in the GST Act and amongst other things includes things such as premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease. The Commissioners’ views on what new residential premises are provided in Goods and Services Tax Ruling, Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3). This ruling can be accessed on our website www.ato.gov.au.

Given that it is the supplier of a thing who is liable to pay GST to the ATO, we don’t consider it appropriate to provide specific advice to you in regards to the GST treatment of the sale of the property without considering the full circumstances under which the sale of the property was made by the supplier to you.

Where it is considered that the supplier made a mixed supply to you comprising a taxable component and an input taxed component, then you satisfy paragraph 11-15(b) of the GST Act only to the extent of the supply that was a taxable supply to you and therefore technically you are entitled to claim the input tax credits attributable to the taxable component.

Excess GST

However, division 142 of the GST Act provides a mechanism to deal with situations where a supplier has passed to a recipient of a supply an excess GST.

“Excess GST” is an amount of GST that has been taken into account in an entity’s assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142.

Goods and services tax ruling, Goods and Services Tax Ruling, Goods and services tax: the meaning of the terms ‘passed on’ and ‘reimburse’ for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1) provides the Commissioners’ view in relation to this matter.

Paragraph 31 of GSTR 2015/1 states the following:

Some common circumstances in which excess GST may arise include:

● incorrectly treating something which is not a supply as a taxable supply

● miscalculating a GST liability under the GST law

● incorrectly reporting an amount of GST on a GST return

● incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).

In this case, if the supplier has incorrectly treated an input taxed component as being taxable and accordingly attributed a GST amount to a supply that should not have attracted GST and this amount was passed on to you, then this is an excess GST amount.

If the excess GST has been passed on to the recipient, section 142-10 of the GST Act applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient.

Pursuant to the note in section 142-10 of the GST Act, where this section applies, paragraph 11-5(b) is taken to have been satisfied for the corresponding acquisition made by the other entity (for example a recipient).

Accordingly, given that you have advised us that you believe that the supplier has remitted the GST that has been passed on to you on the supply of this property to the ATO and you have not been reimbursed this amount, it is taken as if the excess GST as always having been payable.

Therefore, even though the supply of the property to you may have been a mixed supply, it is our view that the supply can be treated as being a fully taxable supply by way of the operation of section 142-10 of the GST Act.

You provide, or are liable to provide, consideration for the supply

You have paid the sale price as consideration for the sale of the property

You are registered, or required to be registered

You are registered for GST.

Conclusion

Where the supply of the property to you was a taxable supply, you are entitled to claim input tax credits included in the price charged to you by the supplier (including any excess GST).

Please refer to GSTR 2015/1 for further information on excess GST and any adjustments that may be required to be made by the relevant entities if the suppliers decide to reimburse you of any excess GST that they may have passed on to you.