Edited version of your written advice

Authorisation Number: 1051492634880

Date of advice: 8 March 2019

Ruling

Subject: GST and mixed supply of property

Question

Will the supply of the property located in Australia be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, in part. The supply will be a mixed supply. The non-residential structures will be taxable. The residential units will be input taxed. You can use any reasonable method to calculate the value of the taxable component of the supply.

Relevant facts and circumstances

You, are registered for GST.

You have owned the Property from ddmmyyyy.

Since that time you have used the Property for the provision of leasing accommodation in low cost housing to members of the community who are of pensionable age. Pensionable age varied over the years so that even if a younger person was on a pension, for example from an accident/health reasons, they were also taken into consideration.

The Property comprises x self-contained residential units and additional non-residential structures.

You entered into a Contract of Sale for the Property.

The Property had been leased or licensed to various individuals who used the residential units as their principal places of residence. The residents lived in the residential units on their own and you did not provide care to the residents. The Property is now vacant.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80

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

Reasons for decision

In this reasoning:

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

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

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

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if:

● you make the supply for consideration

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

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

● 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.

You are registered for GST and will be making a supply of the Property in Australia for consideration in the course or furtherance of your leasing enterprise. Further, the supply of the Property will not be GST-free. Therefore, the supply of the Property will be a taxable supply except to the extent that it is input taxed.

Under section 40-65, a sale of real property is input taxed but only to the extent the property is residential premises to be used predominantly for residential accommodation and the property is not commercial residential or new residential premises.

In your case the Property is not commercial residential premises or new residential premises. Therefore we need to consider what portion of the Property is residential premises and the balance will be a taxable supply of real property that is not residential premises.

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises provides the following commentary on residential premises at paragraphs 10 and 11:

10. 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).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

In addition it provides the following commentary in relation to garage spaces:

16. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area located within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation.^… This is still the outcome where the garage, car-parking space, or storage space is separately titled from the residential apartment, but is physically located within the same building complex.

It also provides the following commentary in relation to land included with a building:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

The residential units meet the definition of residential premises. The portion of the land that can be enjoyed in conjunction with each residential unit, that is, their associated car ports, footpaths and gardens immediately surrounding the residential units will also form part of the residential premises. The supply of this portion of the Property will be input taxed.

The non-residential structures and the portion of the land associated with them do not meet the definition of residential premises as set out above.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts provides guidance on whether a supply is a mixed supply or a composite supply.

Paragraph 16 of GSTR 2001/8 explains that the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

Paragraph 17 explains that the term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing.

In your case the non-residential structures are separately identifiable from the non-taxable residential units and are not integral, ancillary or incidental to the supply of the residential premises.

Accordingly the supply of your Property will be a mixed supply of input taxed residential premises and taxable non-residential property.

Apportionment

Section 9-80 provides that, where a supply is partly taxable and partly input taxed, the value of the supply is to be apportioned between the taxable and non-taxable (that is, input taxed) parts of the supply.

A supply which contains both taxable and non-taxable parts is referred to as a mixed supply.

GSTR 2001/8 provides guidance on the GST treatment of mixed supplies, and in particular, provides methods and examples that you may use to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts.

What constitutes reasonable methods of apportionment is discussed at paragraphs 92 to 113 of GSTR 2001/8.

The general principle provided in the ruling is that an entity can use any reasonable method of apportionment that is supportable under the circumstances. Records must be retained to support the method of apportionment that you have used.

Paragraphs 106 to 108A consider apportionment in relation to the sale of real property and are reproduced below for your convenience:

Relative floor area in a supply of property

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 - commercial and residential premises

107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts.

108A. The taxable proportion is therefore 50%. Applying the formula in section 9-80, the taxable value of the actual supply is calculated as ($ 2000 x 10 )/( 10 + 0.5). The value of the taxable part is $952.38 and the GST payable is $95.23.