Edited version of private advice

Authorisation Number: 1051658703228

Date of advice: 01 May 2020

Ruling

Subject: Goods and services tax and mixed supplies of property

Question 1

Was your supply of each of the properties a taxable supply pursuant to section 9-5 of the A New Tax system (Goods and Service Tax) Act 1999 (GST Act)?

Answer

It is a taxable supply, except to the extent that it is input taxed. You made a mixed supply of vacant land and residential premises. Supply of the vacant land is taxable and the supply of the residential premises portion is an input taxed supply. You need to apportion the consideration for the sale of the properties to the taxable part upon which the GST payable is calculated.

Question 2

If the supply of each property was partly a taxable supply and partly an input taxed supply, is your suggested method of apportionment a reasonable basis on which to value the taxable portion of the supply for the purposes of section 9-80 of the GST Act?

Answer

In your circumstances as the supply of each property was partly a taxable supply and partly an input taxed supply, the Commissioner has reviewed your submission and considers your suggested method of apportionment represents is a reasonable basis on which to value the taxable portion of each supply for the purposes of section 9-80 of the GST Act.

This ruling applies for the following period(s)

Between X to the date of settlement of the properties

The scheme commences on

X

Relevant facts and circumstances

The trustee for the Trust (the Trust), operates an enterprise and has been registered for GST throughout the relevant period. The Trust acquired two adjoining properties (the Properties) pre 2010.

The Trust entered into two separate sale contracts as the vendor for the Properties. Property details for each sale were as follows:

·        Property A. This contract (Contract A) settled with vacant possession

·        Property A included an established residence on the rural property with a land size of (xx ha or xx acres)

·        the established residence on property A was fenced off from the remainder of the property and occupied an area of approximately xx acres out of the xx acres. The residence was not leased to a tenant while it was owned by the Trust

·        Property B. This contract (Contract B) settled subject to a residential tenancy agreement

·        the residential tenancy agreement did not specify the land area the tenant could use. The parties to this agreement did not intend for the whole land area on Property B to be included, only a fenced off area on the property of xx acres

·        Property B was a rural property with a land size of (xx ha or xx acres). It included a residential building. This residence was included in the residential tenancy agreement and fenced off separately in an area of approximately xx acres within the xx acres

·        The remainder of the xx acres subject to the residential tenancy agreement on Property B, included storage buildings

·        the residential building, storage buildings and surrounding land used for the enjoyment of the residence on Property B occupied an area of approximately xx acres out of the xx acres

·        the residences on both of the Properties were capable of habitation at the time of the settlements

·        the remaining land on each of the properties was vacant land, on which various businesses had previously been conducted thereon

The GST sections in the particulars of sale under both Contact A and Contract B provided that the contract price was exclusive of GST and the words 'plus GST (if any)' were added to the contract conditions.

The Trust issued two separate tax invoices for each supply of the Properties.

Both the Trust and the Purchaser were registered for GST.

The Trust has submitted a method of apportioning the consideration received for each of the properties, taking into account, the unique features and aspects of each of them. The Trust submits that this is a reasonable method of apportioning the consideration for a mixed supply in respect of each of the Properties.

Relevant legislative provisions

New Tax System (Goods and Services Tax) Act 1999 section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-B

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70

A New Tax System (Goods and Services Tax) Act 1999 subparagraph 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

Residential premises

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation regardless of the term of occupation.

However, subsection 40-65(2) of the GST Act provides that the sale of real property is not input taxed to the extent that it is commercial residential premises; or new residential premises other than those used for residential accommodation before 2 December 1998.

Subsection 40-75(1) of the GST Act provides that residential premises are 'new residential premises' if they:

(a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Neither of the residences were new residential premises as they were not new buildings and there were no substantial renovations made to any of the established residential premises. Therefore, the sale of the residential premises portion of the real property is input taxed.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) considers how Subdivision 40-B and Subdivision 40-C of the GST Act apply to supplies of residential premises.

Paragraph 9 of GSTR 2012/5 provides that:

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

Paragraphs 46 and 47 of GSTR 2012/5 provide that:

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.

Vacant land

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

In your case, the houses located on both Property A and Property B met the definition of residential premises and the guidelines provided in GSTR 2012/5. The portion of the property that could be enjoyed in conjunction with the house also forms part of the residential premises. The balance of the land does not meet the definition of residential premises as it was vacant land that was supplied in the course or furtherance of an enterprise that you carried on.

Taxable supply

You sold both of the Properties for an agreed sale price so there was consideration for the supply.

Section 195-1 of the GST Act defines indirect tax zone to mean Australia and as the sale of your properties occurred in Australia, this supply was connected with the indirect tax zone.

You were carrying on an enterprise and were registered for GST. You sold the properties you held in furtherance of an enterprise that you carry on.

Therefore, the sale of the properties met all of the criteria of section 9-5 of the GST Act, and was a taxable supply to the extent that it was not GST-free or input taxed. There are no provisions applicable to the facts of this case that would result in the sale of the properties being GST-free. However, the sale of the residential premises, being a part of each of the Properties, was input taxed.

Apportionment, mixed not composite

Paragraph 12 of 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 (GSTR 2001/8) states that where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to identify the taxable part of the supply. Then you can apportion the consideration for the supply and work out the GST payable on the taxable part of the supply.

In differentiating between mixed and composite supplies paragraph 19 of GSTR 2001/8 includes that if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised.

Subsection 40-65(1) of the GST Act deals with the residential portion within the terms of a specific statutory provision. As the residential portion is separately identifiable it cannot be a composite supply.

Paragraphs 26 and 27 of GSTR 2001/8 provide that:

26. Apportionment must be undertaken as a matter of practical common sense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

In your situation the taxable and non-taxable parts will have to be apportioned. The residential premises includes their curtilage which is the grounds or area surrounding the house or other place such as the front, back and side yards belonging to the house.

Question 2

As the supply of each property is a mixed supply, where there is a single consideration for the sale of each property, you will need to apportion the consideration for each supply between the taxable and input taxed components on a fair and reasonable basis. You must keep records on how the calculation was made.

Section 9-80 of the GST Act prescribes a statutory method for calculating the value of a taxable supply that is part of a mixed supply.

Paragraph 26 of GSTR 2001/8 provides that you can use any reasonable method to apportion the consideration for a mixed supply. As explained in paragraph 92 of GSTR 2001/8, where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances. Depending on those circumstances, you may use either a direct or indirect method when apportioning the consideration for a mixed supply.

Paragraph 97 of GSTR 2001/8 states:

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

·        the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

·        the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

·        the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

·        the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling); and

·        the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling).

·        Paragraphs 106-108A discusses the 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.

You have submitted photos identifying each of the residences and the land area surrounding them which was used for the enjoyment of the residence.

You have suggested methods of apportionment for each of these properties taking into consideration the unique features and aspects of each of them, to value the taxable portion of the supply for the purposes of section 9-80 of the GST Act:

On the facts and circumstances of this case, together with the supporting information and evidence provided, the Commissioner considers your suggested method of apportionment for each of the properties represents a fair and reasonable method of apportionment.