Edited version of private advice

Authorisation Number: 1051656406155

Date of advice: 07 April 2020

Ruling

Subject: GST and the purchase of residential property

Question

Are you required to pay an amount to the Commissioner under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 when you purchase the property from the mortgagee?

Answer

No, you are not required to pay an amount to the Commissioner when you purchase the property as the sale is not a taxable supply, nor is it a sale of new residential premises or potential residential land.

This ruling applies for the following period:

This ruling relates to the period in which the sale of the property is settled.

Relevant facts and circumstances

You have entered into a contract for the purchase of the property.

The vendor is an entity as mortgagee exercising its power of sale pursuant to a mortgage it holds over the property. The registered owner has an ABN but is not registered for GST.

The property is a residential block and contains a house that is in disrepair. The marketing material provided at the time of the sale described the property as having three bedrooms, a kitchen, formal dining room and bathroom.

The contract of sale states that both the vendor and purchaser agree and acknowledge that the building situated on the property is 'dilapidated'.

You received an inspection report on the property which concludes that the property is in solid condition with no defects found in the structure of the building and that the property requires minor repair work to make it more liveable.

You intend to renovate the property and reside there with your family.

Assumptions

It is assumed that the mortgagee is mortgagee in possession in relation to the sale of the property.

It is assumed that the property was either not an asset held by the legal owner for use in an enterprise or that the property was a capital asset of an enterprise that it was held for use in.

It is assumed that the mortgagee does not treat the sale as a taxable supply and pass-on the GST on the sale of the property to you.

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 Division 105.

A New Tax System (Goods and Services Tax) Act 1999 Division 142.

Taxation Administration Act 1953 section 14-250 of Schedule 1.

Reasons for decision

Residential premises

Generally, the sale of real property is a taxable supply (and subject to GST) unless it is residential premises to be used predominantly for residential accommodation under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). 'Residential premises' is defined by section 195-1 of the GST Act as:

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;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

The Goods and Services Tax Ruling, Goods and services tax: residential premises (GSTR 2012/5) explains when residential premises 'is capable of being occupied as a residence or for residential accommodation and states:

76. In South Steyne it was held that only the elements of shelter and basic living facilities are necessary for premises to satisfy the definition of residential premises. This includes, for example, shelter and basic living facilities provided by a bedroom and bathroom. However, premises may provide shelter and basic living facilities without necessarily having a conventional bedroom or bathroom.

...

80. The condition of the premises supplied is relevant in deciding whether they are suitable for, and capable of, being occupied as a residence or for residential accommodation. To be residential premises as defined, premises must be fit for human habitation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Premises are not suitable for, or capable of, human habitation if they are dilapidated to the extent that their condition prevents occupation for residential accommodation (as may be evidenced by a demolition order issued by a relevant authority because of the premises' condition). In these circumstances, the condition of the premises indicates that the premises are no longer suitable for, or capable of, providing shelter and the basic living facilities. However, residential premises that are either:

·   in a minor state of disrepair; or

·   subject to a temporary legal prohibition for occupation pending minor repairs;

are still suitable for, and capable of, being occupied as a residence or for residential accommodation.

The premises has all of the characteristics of a premises that is capable of being occupied as a residence. Although much of the premises is in need of some sort of renovation, the renovations required have been described as minor. The general structure of the premises is sound and the property is currently inhabitable. As the property is not in such a state of disrepair that is no longer capable of providing basic shelter and living facilities, the premises remains residential premises under the GST Act.

Sale by a mortgagee in possession

Division 105 of the GST Act deals with certain supplies of a debtor's property made by a creditor in satisfaction of the debt. Section 105-5 of the GST Act provides that the supply made by a creditor (such as a mortgagee in possession) is only a taxable supply if it would have been taxable had it been made by the debtor. For a supply to be a taxable supply (under section 9-5 of the GST Act), the supplier must be registered or required to be registered for GST. Therefore, a supply made by a creditor will only be a taxable supply under section 105-5 of the GST Act if the debtor was registered or required to be registered for GST.

The property owner has an ABN which indicates that they are carrying on an enterprise. However, as they are not registered for GST, they will only be required to be registered if the property was not a capital asset of an enterprise that carries on (pursuant to section 188-25 of the GST Act). Generally, the creditor will hold further information about the debtor which would allow it to make a decision based on reasonable information that it holds of whether the property was a non-capital asset relating to an enterprise that the creditor operates. In this case, it is assumed that the owner is not carrying on an enterprise in relation to the property and therefore cannot be considered a trading asset.

Consequently, the sale of the property, had it been made by the owner, would not have been made by a supplier that is registered or required to be registered for GST. Therefore, subsection 105-5(3) of the GST Act states that the sale by the mortgagee is not a taxable supply.

GST passed on to the recipient

Division 142 of the GST Act operates to ensure that a windfall gain is not received where a supplier has incorrectly categorised a supply as a taxable supply, whereas in fact it is an input taxed or GST-free supply, or is not a supply at all. Section 142-10 of the GST Act states that the 'excess' GST that has been passed on to the recipient is deemed to be correctly payable and for a taxable supply until the supplier has reimbursed the recipient for that passed-on GST. Therefore, if the mortgagee charges GST on the sale of the property and you pay the GST amount, the supply of the property is deemed to be a taxable supply - even though it is not a taxable supply - until such time that you are reimbursed the GST amount by the mortgagee.

GST and settlement

If the supply of the property is a taxable supply (for example because of the operation of Division 142 of the GST Act), you do not have to pay the GST amount to the Commissioner. The GST amount would remain part of the contract price and would be payable to the mortgagee. This is because section 14-250 of Schedule 1 to the Taxation Administration Act 1953 only applies to supplies of residential premises that are either:

·   new residential premises that:

·   have not been created through substantial renovations of a building; and

·   are not commercial residential premises; or

·   potential residential land that:

·   is included in a property subdivision plan; and

·   does not contain any building that is in use for a commercial purpose;

The property is not new residential premises (as it has been sold as residential premises previously) and is not potential residential land (as it has not been created through a subdivision). Consequently, if the supply is a taxable supply, you are not required to pay the GST amount to the Commissioner separately from the amount that you pay the supplier. If the contract provides for the GST to be paid in addition to the contract price, then that amount will be payable to the supplier.