Edited version of private advice

Authorisation Number: 1051885950619

Date of advice: 17 August 2021

Ruling

Subject: GST and property

Question

Can you claim an input tax credit for the purchase of a new residential premises and any subsequent property renovation costs?

Answer

No

Relevant facts and circumstances

You are registered for GST and have actively purchased, sold, renovated and/or leased properties before. The properties include a mixture of new build commercial, existing residential and existing commercial.

You purchased a new residential townhouse (property) off plan for the purpose of owning, renovating and adding market value then selling the property in the future for a profit. The contract included GST and specified that the transaction was for creditable purposes.

New GST rules for withholding tax applied and paid to the ATO on behalf of the vendor. The vendor provided a Tax Invoice.

Taxable Supply

•                 The residential property was sold as a taxable supply by the vendor and stated in the property contract indicating it was a new residential property and the price included GST

•                 Withholding tax was remitted during conveyance processes

•                 Vendor is registered for GST and provided a Tax Invoice

Creditable Acquisition

•                 You are registered for GST and completed tax returns each year.

•                 You have purchased and sold the several properties for the primary purpose of carrying on a business for a profit.

•                 The residential property in question is a new residential property with title granted.

•                 The property was acquired during usual business activities for the primary purpose of renovating the property in preparation for sale and therefore making a profit for the business. This property will not be leased.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

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

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

Reasons for decision

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.

In your case, the sale of the property was a taxable supply. You provided consideration for that supply and you are registered for GST.

The issue for consideration is whether you acquired the property for a creditable purpose.

Section 11-15 Meaning of creditable purpose

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in * carrying on your * enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a)             the acquisition relates to making supplies that would be * input taxed; or

(b)             the acquisition is of a private or domestic nature.

Your acquisition of the property relates to the future supply of that property. If that future supply is input taxed, then your acquisition will not be a creditable acquisition under section 11-15.

Subsection 40-65(1) contains provisions that deem the sale of particular residential premises to be an input taxed supply.

If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

However, subsection 40-65(2) has the effect that the sale is not input taxed to the extent that the residential premises are either commercial residential premises or new residential premises (other than those used for residential accommodation before 2 December 1998).

Subsection 40-75(1) states that *residential premises are new residential premises if they:

(a)             have not previously been sold as residential premises (other than *commercial 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.

The property you purchased has already been sold as residential premises and will not be demolished prior to being resold by you. Therefore, the issue to be determined is whether the property, when sold, will be created through 'substantial renovations' of a building.

We have made the assumption that the property you have acquired for the purpose of owning, renovating and adding market value then selling will not be created through 'substantial renovations' of a building. This is because you have purchased the property as new. There is no evidence that any renovations made prior to your future sale will be anything more than cosmetic. Further information on the definition of 'substantial renovations' is provided below.

Your acquisition of the property is not for a creditable purpose because the future sale of the property will not be of a new residential premises for the purpose of subsection 40-75(1). Therefore, your future sale of the property will be an input taxed supply of residential premises according to subsection 40-65(1).

As stated previously, an input tax supply means that no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply. In your case, the acquisition of the property as well as other acquisitions you make in relation to making the supply of the property (i.e. renovation costs) all relate to an input taxed supply. You are not entitled to GST credits for the purchase of the property as well as any other acquisitions that you made relate to the sale of the property.

Information relating to substantial renovations

Guidance on substantial renovations (refer to paragraph 40-75(1)(b)) is provided in the following relevant paragraphs from the 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? (GSTR 2003/3):

54. The term substantial renovations is defined in section 195-1:

'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.

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