Edited version of private advice

Authorisation Number: 1051852953688

Date of advice: 17 June 2021

Ruling

Subject: GST and sale of property

Question

Is the sale of your property a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supply of the property is not a taxable supply pursuant to section 9-5. This is because the supply is input taxed pursuant to section 40-65 of the GST Act.

Relevant facts and circumstances

Individual A & Individual B (You) are registered as a Partnership for GST effective from dd/mm/yyyy.

You carry on an enterprise leasing property.

You own one commercial property. This property is recorded in the accounts (Balance Sheet) of the Partnership.

Income and expenses related to the commercial property are transacted through CBA account number xxxxxxxx.

You also own five residential properties throughout multiple States. These properties are not recorded in the accounts of the Partnership. Income and expenses related to the residential properties are accounted for in the individual tax returns of Individual A & Individual B.

Income and expenses related to the residential properties are also transacted through CBA account number xxxxxxxx.

You do not consider the residential properties to be assets of the Partnership.

In mm/yyyy you purchased one of the above-mentioned residential properties (the Property) as joint tenants.

The Property is approximately x.xx hectares (xx acres) and contains an existing 3 bedroom, 2 bathroom residential dwelling, pool and garage. Approximately 2/3^rd of the perimeter of the Property is fenced (wire). The Property also contains a dam.

The Property is currently zoned as 'Emerging Community'. It is surrounded by other residential properties including a resort-style living complex catering to residents over 50 years of age.

You have leased the Property to a tenant for residential use from the period yyyy to yyyy.

The lease was residential in nature and the Property was not leased for commercial or farming use. You are unable to locate a copy of the lease.

The Property was not used by any other party other than the tenant. No other party had access to, or was granted access to use, any areas of the Property.

In mm/yyyy the Property was listed for sale with two separate real estate agents. At this time the Property was tenanted and used for residential accommodation.

In mm/yyyy the tenant vacated the Property.

You have not used the Property for non-rental activities during the period the Property was vacant.

On dd/mm/yyyy you entered a contract for the sale of the Property to ABC Pty Ltd.

The contract for sale is subject to development application (DA) approval, the terms of settlement being an extended period to allow for sufficient time for the purchaser to submit the DA approval and for the council review and approval process.

Settlement is expected to be mm/yyyy.

Subsequent to entering the contract for sale the Property remained untenanted and the dwelling was vandalised.

Electricity and water connections to the Property were disabled to ensure unnecessary usage did not occur. Utility services are able to be easily reconnected.

You provided photos of the vandalism showing windows throughout the Property were smashed, multiple holes in internal walls, graffiti on outside walls, rubbish and debris littering the Property.

The Property was inspected by a building and construction consultant advising:

'... I have conducted an inspection of the house situated on the above property. I consider the house to be structurally in-tact. As a result of some vandalism repairs will be required before renting the property. There is no evidence that the vandalism damage was so severe that the integrity of the supporting structure was compromised so that the building was unsafe or beyond repair.'

The local Council has not issued demolition or other notices in relation to the Property.

You have decided not to repair the premises prior to settlement on the basis that it is under contract to a developer who intends to demolish the property once settlement occurs.

Relevant legislative provisions

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

Section 9-5

Section 9-40

Section 40-65

Section 195-1

Income Tax Assessment Act 1997

Subsection 995-1(1)

Reasons for decision

In this ruling,

•         unless otherwise stated, 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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The primary issue in this case is whether the sale of the Property is an input taxed supply and if so, to what extent the supply is input taxed.

Section 40-65 provides that the sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent the premises are 'commercial residential premises' or 'new residential premises' (other than those used for residential accommodation before 2 December 1998).

The term 'residential premises' is defined in section 195-1 as land or a building that:

•         is occupied as a residence or for residential accommodation; or

•         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.

Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 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. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

Paragraph 20 of GSTR 2012/5 provides that 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.

In this case the Property consisted of a 3 bedroom, 2 bathroom residential dwelling, pool and garage on approximately 4 hectares of land. The Property was leased to a tenant from yyyy to yyyy with the tenant vacating the Property in mm/yyyy. The Property has remained vacant since this time and was subject to vandalism including broken windows, holes in internal walls, graffiti on outside walls and rubbish and debris littering the Property. Also, following the tenant vacating the Property the utilities were disconnected to ensure unnecessary usage did not occur.

The Property was inspected by a building and construction consultant who advised the dwelling to be structurally in-tact and that there is no evidence that the vandalism damage was so severe that the integrity of the supporting structure was compromised so that the building was unsafe or beyond repair. Furthermore, the local Council has not issued demolition or other notices in relation to the Property.

In this case we consider that although the dwelling has been the subject to vandalism, the extent of the vandalism does not prevent the Property from being occupied as a residence for residential accommodation. Therefore, the Property will satisfy the definition of 'residential premises'. Furthermore, given the facts of this case, the Property is neither 'new residential premises' nor 'commercial residential premises' as defined for GST purposes.

The next issue to consider is to what extent your supply of the Propertyis 'residential premises' to be used predominately for residential accommodation and therefore input taxed for GST purposes.

Land supplied with a building

Paragraph 46 of GSTR 2012/5 states:

'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.'

In the absence of any facts or information to the contrary, we consider the entire xx acres was used and enjoyed in conjunction with the residential dwelling.

Conclusion

The sale of the Property is an input taxed supply pursuant to section 40-65.

The sale of the Property is not a taxable supply as defined by section 9-5.

Other relevant comments

Enterprise

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The leasing of the property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes. The leasing of residential premises and subsequent sale of those residential premises are considered activities done in the course or furtherance of an enterprise that you carry on. This is the case regardless of the fact that proceeds generated from the rental and sale of the residential premises are not subject to GST.

Partnerships

A partnership is defined in section 195-1 by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997:

partnership means:

(a)  an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b)  a limited partnership.

The second limb of paragraph (a) of the above definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. This type of partnership is referred to as a 'tax law partnership' and exists only for tax purposes.

As discussed above, we consider that the rental and sale of residential premises form a part of an enterprise as defined for GST purposes. In this case you are receiving the rental income (from the residential properties and commercial property) jointly.

As such, we would consider that it is you, operating as a 'tax law partnership', that is carrying on the enterprise of leasing both commercial and residential properties with the sale of those properties also being an activity of the 'tax law partnership'.