Edited version of private advice

Authorisation Number: 1051615055034

Date of advice: 28 November 2019

Ruling

Subject: GST treatment of a property purchase

Question

Did you make a creditable acquisition of the property when you purchased it as a prospective development site?

Answer

No. The purchase was an acquisition of input taxed residential premises.

This ruling applies for the following periods:

From the tax period commencing 1 April 2018 and following.

Relevant facts and circumstances

·        You are registered for goods and services tax (GST).

·        You account for GST on accrual basis and report quarterly.

·        You previously advised you carry on an enterprise.

·        You purchased real property from the vendor.

·        You claimed a GST credit for the acquisition.

·        Settlement of the property purchase occurred.

·        Our records show that the property is an existing residential property.

·        You advised the ATO previously that the vendor considered that GST is not applicable in this situation.

·        You provided a copy of the sale contract.

·        You provided photos which show that the house is in a state of some disrepair but basic features of a residence are still existent.

·        You advised that you did not even look inside when you bought the property as you had no intention to use the property as a residence.

·        You were told that there had been squatters resident in the house and was not in a state to rent out.

·        The sale contract indicates that the present use of the property was residential

·        The sale contract of the property required the vendor to provide all material relating to the development approval with the sale of the residence.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 11-5

Section 40-65

Section 195-1

Section 11-15

Reasons for decision

Under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

Relevantly, subsection 11-5(b) requires the supply of the thing to you must be a taxable supply for it to be a creditable acquisition.

To determine whether the supply of the property to you is a taxable supply or not, the status of the property at the time of the acquisition needs to be examined as sales of residential premises will be input taxed under section 40-65 of the GST Act.

Sales of residential premises are dealt with in section 40-65 of the GST Act:

(1)   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 occupation)

(2)   However, the sale is not input taxed to the extent that the * residential premises are:

(a)   commercial residential premises; or

(b)   new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Based on section 40-65 of the GST Act, if the sale of the property is a supply of residential premises, it will be input taxed therefore not a taxable supply to you, as such your acquisition will not be a creditable acquisition.

The sale to you under the sale contract was existing residential premises per the contract so no other category of supply such as commercial residential or new residential is applicable to this case. It is therefore important to assess whether the property sold to you meets the legal definition of residential premises.

The term 'residential premises' within the meaning of section 195-1 of the GST Act is defined to mean 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.

In this case, the property is provided with vacant possession and has not been occupied for some time based on the photographs you provided. Therefore, the focus is on paragraph (b) of the definition which deals with the situation where premises are not occupied as a residence or for residential accommodation purposes at the time the premises are supplied. That is, whether the premises is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

'Intended to be occupied'

The Commissioner has long held that the 'intention to be occupied' part of the definition of residential premises is not the subjective intention of any particular party, but rather that the 'intention' is determined by the objective characteristics of the premises and their suitability, in design and construction, for use as a residence or for residential accommodation. In this regard, paragraphs 6 - 11 of Goods and services tax ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) set out this 'characteristics test'.

Importantly in your case, the intention of the buyer or seller is irrelevant.

Accordingly, if the physical characteristics of the premises have the necessary elements of 'shelter and basic living facilities such as are provided by a bedroom and bathroom (South Steyne Hotel Pty Ltd v FCT [2009] FCA 13) and relevant zoning permits the accommodation to be used as a residence, then the second limb of the definition of residential premises will be satisfied, even if it is the actual intention of the parties that the premises will be demolished and redeveloped (Sunchen Pty Ltd as trustee for the Sunchen Family Trust v Commissioner of Taxation [2010] FCA 21 (Sunchen)).

In the Sunchen case the purchaser bought land with a house on it and a development approval for 10 units to be constructed on that land. The purchaser attempted to claim an input tax credit for the purchase of the property, but that was refused by the ATO. The matter was litigated in the Administrative Appeals Tribunal (AAT) where the purchaser did not succeed in arguing that its subjective intention to redevelop the property was a principal factor in determining its entitlement to input tax credits on the purchase. The purchaser appealed to a single judge in the Federal Court at Sydney and again the purchaser appealed to three judges in the Federal Court at Sydney. In all instances the AAT and the Federal Court considered that the interpretation of s 40-65(1) including the definition of 'to be used', and the definition of residential premises under s 195-1 including 'intended to be occupied' and 'capable of being occupied.' It was found unanimously in Sunchen that the sale was a supply of residential property and therefore input taxed.

In your case you provided photographs of the dwelling external and internal. It appeared that the basic characteristics were present of a residence. The photos did not indicate a bathroom, but there are photos of a kitchen and bedroom and externally, the premises appear to be an intact residence. From the documentation provided it is also clear that the residence is on land that has the correct zoning to be residential.

'Capable of being occupied'

The second part of the requirement to determine whether it is residential premises is an assessment of whether the premises are not only intended to be occupied but they must also be capable of occupation.

GSTR 2012/5 from paragraphs 20 - 25 discusses this aspect and at paragraph 20 it says:

Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

Further at paragraph 25, residential premises that are in a minor state of disrepair or subject to a temporary legal prohibition for occupation pending minor repairs will meet the requirement under the definition as they are capable of, being occupied as a residence or for residential accommodation.

Example 3 provided in GSTR 2012/5 confirms that a house with shattered windows and a damaged roof can be a residential premises.

Again referring to the photos you provided it was clear that the premises were run down and perhaps damaged by squatters, but the damage shown was superficial and would only temporarily render the premises not occupiable.

After consideration of all the circumstances and based on our technical analysis above our view is that the property you acquired meets the definition of residential premises. Therefore a supply of the property will be input taxed. As such, your acquisition of the property will not be a creditable acquisition as the supply to you will not be a taxable supply as required by section 11-15.