Edited version of private advice

Authorisation Number: 1051561840301

Date of advice: 6 August 2019

Ruling

Subject: GST and substantial renovations

Question

Was the sale of each of the subdivided units an input taxed supply pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

You are a partnership not registered for GST.

The partners are Entity A and Entity B.

On ddmmyyyy three siblings Entity A, Entity B and Entity C (the siblings) inherited the Property comprised of X residential unit in X buildings.

In ddmmyyyy, the siblings agreed to subdivide the Property and obtained initial bank funding of $X (later extended to $X and to $X) for the subdivision and refurbishment of the units.

A family dispute arose on various matters including the Property resulting in tribunal proceedings. The dispute was settled.

Following the dispute Entity C's share was transferred to Entity A and Entity B such that on or about ddmmyyyy Entity A and Entity B owned in equal shares the Property.

From around mmyyyy some initial work was carried out on X of the units however that work ceased on ddmmyyyy when a stop order was served by the council. The stop order was served because the works had been carried out without the required building permit.

After Entity C's share was transferred to Entity A and Entity B the funding of the refurbishment and subdivision was under control of the partnership.

The units were renovated at various times in the period between mmyyyy and mmyyyy. The Property was originally on x titles and was subdivided into the X. On ddmmyyyy the subdivision was registered.

The units were sold from around the end of mmyyyy with the last sale completed in mmyyyy.

You have provided a picture of the Property.

You have provided floor plans of the Property showing the X units.

Each unit was modernised with new bathrooms and kitchens. There were no changes to the area or configuration of any of the units. No internal walls were removed or structurally altered. There was plaster patching. The original floors and windows were retained.

The following renovations were undertaken:

·         Electrical - Old electrical wiring was replaced and upgrades made to switchboards. New light fittings installed. Smoke alarms, power outlets, TV and internet outlets were renewed or installed as required for all units throughout the building to comply with current building/safety regulations.

·         Plumbing - Old metal pipes in each unit and throughout the buildings were replaced with plastic and other modern equivalents. Installation and fit off of all sanitary fixtures, gas appliances and flues in each unit was undertaken as well as general plumbing work throughout the building.

·         Windows - Painted but none required replacement.

·         Fixtures and fittings - Front doors to most units were replaced. The new doors are the same size and construction as the old doors and no other structural alterations to the entrances were required.

·         Split system heating and air conditioning installed (the original open fireplaces in most units have been retained).

·         Living rooms and bedrooms walls - Some patching and repainting of the walls was undertaken but re-plastering was not necessary.

·         Bathrooms - New bathroom fittings were installed in each unit to replace and modernise earlier bathrooms. No demolition or replacement of internal walls or windows. Some tiling was undertaken.

·         Kitchens - Existing dated kitchens were replaced with modern cabinetry and appliances. No demolition or replacement of internal walls. Some tiling was undertaken.

·         Bedrooms - The existing walls were repainted and floors sanded. No other construction works were done (eg no built-in wardrobes were installed).

·         Living room - The existing walls were repainted and floors sanded. No other works required.

·         Floors - None of the timber flooring was replaced. Old tiles laid over timber floors in the kitchens and bathrooms were replaced with new tiles. In all other rooms the existing timber floors was sanded and refinished.

·         Driveway - The original driveway was repaired and new lines painted to indicate each unit's allocated carpark.

·         Fencing - An old low rise brick fence was replaced with a low rise timber fence.

The Property, constructed in the Xs, is subject to a Heritage overlay and consequently no construction works were permitted to the exterior of the building.

Firewalls in the roof areas between some of the units and a fire escape were constructed to comply with modern fire and safety regulations.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

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 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

Under section 40-65, a sale of residential premises is input taxed but, relevantly not to the extent that the residential premises are 'new residential premises '. Residential premises are 'new residential premises' if amongst other things they have been created through substantial renovations of a building.

Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? considers substantial renovations.

The term 'substantial renovation is defined in section 195-1:

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

You have sold all X units in the two building complex. The Commissioner of Taxation considers that each individual strata title unit is a 'building' in its own right and its structure is enclosed within the external walls of the unit, rather than the entire complex.

It is only necessary to consider if there have been substantial renovations if:

·         the renovations affect the building as a whole, and

·         the renovations result in the removal or replacement of all or substantially all of the building.

Paragraphs 63 to 67 of GSTR 2003/3 consider the concept of building as a whole and in summary for renovations to affect the building as a whole they must directly affect most rooms in a building.

Paragraphs 68 to 79 of GSTR 2003/3 consider the extent to which parts of a building are removed or replaced and in summary for renovations to result in the removal or replacement of all or substantially all of the building there must be a removal or replacement of a substantial part of the:

·         structural components of the building, or

·         non-structural components of the building.

Structural work includes:

·         altering, or replacing of, foundations

·         replacing, removing or altering of floors or supporting walls, or parts thereof

·         lifting or modifying of roofs

·         replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door).

Non-structural work includes:

·         replacing electrical wiring

·         replacing, removing or altering non-supporting walls, or parts thereof

·         plastering or rendering an entire wall or walls

·         plumbing (eg replacing old metal pipes with copper pipes or plastic pipes)

·         removing or replacing kitchen cupboards, bathroom fixtures

·         removing or replacing air-conditioning or security systems.

Renovation work that does not impact on the structure of the building and is in the nature of reviewing or refreshing what is there is considered to be cosmetic work and includes:

·         painting

·         sanding floors

·         removing and replacing worn or out of date fittings such as light fittings

·         replacing curtains or carpets.

Whether the renovations are substantial is to be determined in the light of all the facts and circumstances.

Your renovations in each unit did not include any structural work. You have completed a substantial amount of non-structural work in each unit including replacing the wiring and plumbing and the removal and replacement of the kitchen and bathroom. However, the living room and bedrooms in each unit only received cosmetic work, including painting and sanding of the floors.

We do not consider that the renovations in each unit (a 'building') affect the building as a whole and are therefore not substantial renovations as defined in section 195-1. Therefore, the sale of each unit was an input taxed supply pursuant to section 40-65.