Edited version of private advice

Authorisation Number: 1051852470711

Date of advice: 18 June 2021

Ruling

Subject: GST and the sale of property

Question

Will the sale of the property be classified as the sale of an existing residential property and hence, input taxed pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the sale of the property is not input taxed as it is the sale of new residential premises and therefore will be a taxable supply where section 9-5 of the GST Act is met.

Relevant facts and circumstances

You entered into a contract for the purchase of the original property in 20XX (Contract date).

The original property was purchased from an individual and was existing residential premises. The Contract was prepared on a GST inclusive basis and the margin scheme did not apply to this sale.

A copy of the contract for the purchase (Contract) has been provided with the private ruling application.

The purchase price under the Contract is $XX.

Settlement under the Contract occurred in March 20XX.

The original property was constructed in or around the 19XXs. It is zoned within a General Residential Zone 1 and there is a proposed amendment to the planning scheme.

Since your acquisition of the property, you have undertaken building and construction work on the residence located on the property.

You engaged XX Pty Ltd to assist with the building works at the property. The contract price for these building works is approximately $XX. No planning permit was required for the works.

You contend that the works have primarily concerned the following:

a)    An addition of a third bedroom in the place of the existing kitchen area;

b)    The removal and movement of the kitchen from the centre to the rear of the property; and

c)    Re-positioning and replacing the existing laundry and main bathroom to the centre of the property where the previous entrance and dining areas are marked.

You have completed the works at the property and a Certificate of Final Inspection has been issued.

You have sold the renovated property in 20XX.

A comparison of the before and after photos and floorplans show the following changes (all references to bedroom numbers are per the "Before" floorplans):

1.    The built-in robe in Bedroom 2 have been removed and a doorway created into Bathroom 1 thus creating an ensuite for Bedroom 2. Two new robes have been built in Bedroom 2. New fixtures and fittings have been installed.

2.    The door from the passageway into Bathroom 1 (now the ensuite) has been walled up and a new doorway created. The ensuite has been completely gutted and refitted with new floor and wall tiles, new vanity, new shower, new toilet and new fixtures and fittings.

3.    The original main entry into the house which was situated next to Bedroom 1 has been walled up and a new entry created just before the Living room at the back of the house.

4.    A new Laundry, Powder room and Family Bathroom have been created where the original entry to the house and Dining room were situated.

5.    The sliding doors in the original Dining room which opened into the side yard have been walled up.

6.    A new bedroom has been created where the original kitchen was situated.

7.    The original Bathroom 2 and original Laundry have been replaced by a new kitchen and a dining area. New large windows have been created against the back wall of this section.

8.    The walls between the Living room and the original Bathroom 2 and original Laundry have been removed. The sliding doors in the Living room have been walled up and replaced with large windows placed high on an extended wall. The original window on the back wall of the Living room has been replaced with a larger window and window seat.

9.    The roof at the rear of the house covering the new kitchen, new dining and the living room has been replaced and lifted at an angle. The wall on one side has been extended to provide space for new elevated windows. The ceiling in this entire section has been replaced with plywood cladding. All fixtures and fittings have been replaced in this area.

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

Subsection 40-65(1) of the GST Act provides that the 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.

Subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

The property is not commercial residential premises. It remains to be determined whether the property is new residential premises at the time of its sale in April 20XX.

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? provides the ATO view of when real property is new residential premises.

Under paragraph 40-75(1)(b) of the GST Act, residential premises are new residential premises where they have been created through substantial renovations.

The term substantial renovations is defined in section 195-1 of the GST Act:

'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.

This definition requires consideration of what work has been done to the building since it was acquired by its current owner.

The general usage of the term 'renovate' is to make new or as if new again, restore to good condition, repair, to reinvigorate, refresh, revive (paragraph 57 of GSTR 2003/3).

The definition of substantial renovations stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. The renovations may but need not involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases (paragraph 58 of GSTR 2003/3).

Whether renovations are substantial is to be determined in the light of all facts and circumstances. Paragraph 61 of GSTR 2003/3 states:

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

                             i.        the renovations need to affect the building as a whole; and

                            ii.        the renovations need to result in the removal or replacement of all or substantially all of the building.

Building as a whole

Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations (paragraph 64 of GSTR 2003/3).

Removal or replacement of all or substantially all of the building

The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial (paragraph 68 of GSTR 2003/3).

Paragraph 69 of GSTR 2003/3 provides that this criterion is satisfied where there is a removal or replacement of a substantial part of:

•         structural components of the building; or

•         non-structural components of the building.

Structural work

Paragraph 70 of GSTR 2003/3 provides that structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

•         altering, or replacing of, foundations;

•         replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

•         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

Substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected (paragraph 73 of GSTR 2003/3).

Paragraph 74 of GSTR 2003/3 provides non-structural building work to include:

•         replacing electrical wiring;

•         replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);

•         plastering or rendering an entire wall or walls;

•         plumbing (example replacing old metal pipes with copper pipes or plastic pipes);

•         removing or replacing kitchen cupboards, bathroom fixtures, etc;

• removing or replacing air-conditioning or security systems.

Cosmetic work

Paragraph 77 of GSTR 2003/3 provides that as part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. Work of this nature is considered to be to be cosmetic. Cosmetic work includes:

•         painting;

•         sanding floors;

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

•         replacing curtains or carpets.

Cosmetic work by itself does not amount to substantial renovations. However, where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises (paragraph 79 of GSTR 2003/3).

You contend in your submissions that the "lounge, master bedroom, the original bedroom 2 and the smaller bathroom" have not structurally changed since you acquired the property. You further contend that Example 3 of GSTR 2003/3 aligns to your factual scenario as "many aspects of the building have been left largely untouched since the acquisition" by you.

We disagree with your contentions. The lounge/living room has had its roof lifted, large elevated windows installed in the extended wall created by the lifting of the roof, sliding doors to the outside removed, new feature walls created, new built in desk installed, small windows replaced by large windows with indoor and outdoor window seats, clear story windows installed, walls removed to create a new adjacent dining area and a completely new kitchen. The new dining area and the new kitchen replaces the original bathroom and laundry. The entire ceiling in this space has been replaced with a new plywood ceiling and the tile roof has been replaced with Solarspan panels. It has new electrical wiring, new plumbing and new fixtures and fittings. The new kitchen is fitted out with all new appliances and cabinetry.

A new main entrance to the house has been created adjacent to the living room. This would have required the external weatherboards removed in one area and replaced in other areas where the original main entrance and original sliding doors were located.

The master bedroom (bedroom 2 in the "BEFORE" floorplans) is not "untouched" having had a wall altered to create a doorway into Bathroom 1 thus creating an ensuite. The existing built-in robes have been removed and new wardrobes built into the room. New fixtures and fittings have been installed.

The smaller bathroom which is now the ensuite to the master bedroom/bedroom 2 has been completely replaced, removing cabinetry, wall tiles, floor tiles, toilet, shower and replacing these with new wall and floor tiles, new vanity, new toilet and a new shower. It has had the door to the passageway closed off and another separate door created into bedroom 2 on the adjacent wall. All fixtures and fittings have been replaced.

The original kitchen has been removed and replaced with a new bedroom. This has changed the house from a two-bedroom house to a three-bedroom house. All the plumbing work in this area would have been disconnected. The original bathroom 2 has been removed and replaced with a dining area. All sewerage and general plumbing to this area would have been disconnected.

The original entry and dining room has been converted into a new laundry, new powder room and new family bathroom. This entire area would have required new sewerage, new plumbing, and new electrical wiring installed in addition to new fixtures, fittings, cabinetry, tiles, doors, walls etcetera.

Given the above, every room in the house has had some level of structural and/or non-structural work done to it. The only exception to this is possibly Bedroom 1 where the renovations seem to be cosmetic in nature.

The point of difference in your case to that of Example 3 of GSTR 2003/3 is that in Example 3, the building in its entirety has not been substantially renovated as the "4 bedrooms upstairs are untouched with the exception of one room which has become a bathroom". By "untouched" we take this to mean that these rooms have not been improved in any way.

Based on the above, we are satisfied that the work you have undertaken on the house effect the house as a whole. Further, given the level of structural and non-structural work undertaken on the house, we are satisfied that substantial renovations have been made to the house.

As such, the house is new residential premises as it meets the requirements of paragraph 40-75(1)(b) of the GST Act of being created through substantial renovations.

The sale of the property in 20XX will therefore not be an input taxed supply. The sale will be a taxable supply where all requirements of section 9-5 of the GST Act are met.