Edited version of private advice

Authorisation Number: 1051895076919

Date of advice: 3 September 2021

Ruling

Subject: GST and sale of property

Question

Is GST payable on the sale of your Y acre property, which is located in Australia?

Answer

No

Relevant facts and circumstances

You are registered for GST.

You operate as a sole trader providing professional services. Historically your turnover was under $75,000 and there was no requirement for you to register for GST. On (date), you became aware that your turnover would likely exceed the $75,000 limit and so you registered for GST.

Your parents owned an X acre property which contained a house on it. The house provides shelter and living facilities and is suitable for human habitation. It contains several bedrooms, two bathrooms and a kitchen. The house has not been substantially renovated. The house was not built, and does not contain a building that was built, to replace premises that were demolished on the same land.

Your parents subdivided the X acre property and gifted the subdivided lots to their children in (month, year).

You were gifted a Y acre property (address in Australia) from this subdivision from your parents on (date). This portion of the property contained the family's principal place of residence (the house referred to above). Your parents also ran a small primary production business on this portion of the property.

Your parents continued to reside at the Y acre property after it was transferred to you. In (month, year), you subsequently moved back to this property and occupied the property as your primary residence until you moved away in (month, year)

From early (year), your parents paid you rent at market value (on a standard residential rental basis) for the Y acre property and they continued to pay rent to you until (month, year).

From (month, year), you continued to rent the entire Y acre property to the new operators of the primary production business at market rates and this leasing arrangement is still in place.

You are now looking to sell the Y acre property.

The following information relates to determining whether the Y acre property should be characterised as farmland or residential premises only.

The following information relates to determining whether the Y acre property should be characterised as farmland or residential premises only:

•         Approximately a very small percentage of the property is under portable shade cloth (and therefore used for farming). The property also contains a shed.

•         There is some wire fencing around the perimeter of the property, but it does not surround the whole property.

•         There are several clusters of trees on the property, predominantly towards the rear boundary and behind the house. The vast majority of the land area is cleared land with grass (not used in any way for farming).

•         There is an XXXXX garden in front of the house and some of the portable greenhouses are located near the house.

•         There is no physical feature creating a border between the house and the farmed area.

•         The zoning of the property is low density residential.

•         There are no pending rezoning requests.

•         The market value of the land indicates that the land is more viable for residential use than as farmland.

•         The buyer will subdivide the land into smaller residential blocks.

•         The sale contract describes the property as Y acres residential.

•         The adjacent properties are not used for farming. It is a residential area.

•         The locality in which the property is located is a very developed area with no farming in the area (apart from the crop farming activity carried on your property). The locality is not a rural area.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

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

Summary

GST will not be payable on your sale of the property in question as it will be an input taxed sale of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which states:

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.

(*Denotes a term defined in section 195-1 of the GST Act)

The indirect tax zone includes mainland Australia and certain other areas.

You meet the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. That is:

•         you are selling the property in question for consideration (the price) (paragraph 9-5(a)); and

•         the sale of the property is connected with the indirect tax zone, as the property is located in the indirect tax zone (paragraph 9-5(c)); and

•         you are registered for GST (paragraph 9-5(d)).

Paragraph 9-20(1)(c) of the GST Act provides that leasing out property on a regular or continuous basis is an enterprise.

You have leased out the property in question on a regular or continuous basis. Therefore, you are carrying on a leasing enterprise. Hence, your sale of the property will be a supply you make in the course or furtherance of your leasing enterprise. Hence, you meet the requirement of paragraph 9-5(b) of the GST Act.

There are no provisions of the GST Act under which your sale of the property in question is GST-free.

Therefore, what remains to be determined is whether the sale of the property is input taxed.

A sale of residential premises may be input taxed under section 40-65 of the GST Act, which states:

(1)             A 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 (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the *residential

premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential

accommodation (regardless of the term of occupation) before 2 December 1998.

Section 40-75 of the GST Act defines new residential premises.

Subsection 40-75(1) of the GST Act states:

*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

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

Paragraphs (b) and (c) have effect subject to paragraph (a).

Subsection 40-75(2) of the GST Act contains an overriding rule under which new residential premises cease to be new residential premises if they have been leased out for 5 years or more

In accordance with section 195-1 of the GST Act, residential premises means 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.

Paragraphs 8 to 11 and 15 of Goods and Services Tax Ruling 2012/5 (GSTR 2012/5) provide the ATOview on what are residential premises to be used predominantly for residential accommodation. They state:

Definition of residential premise

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics

8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.

Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics

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.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

The house in your case contains shelter and basic living facilities. This includes several bedrooms, two bathrooms and kitchen. Therefore, in accordance with paragraphs 7 to 10 and 15 of GSTR 2012/5, your property contains residential premises to be used predominantly for residential accommodation.

The residential premises are not commercial residential premises.

Paragraph 46 of GSTR 2012/5 discusses land supplied with a building. It states

Land supplied with a building

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.

We need to determine whether all of the land in your case forms part of residential premises or whether the land Is farmland or includes farmland.

Paragraph 6.2 of Goods and Services Tax Industry Issues Primary Production Industry Partnership states:

6.2. Some of the indicators that the ATO considers relevant in determining whether the land has the essential characteristics of farmland are:

•                     the area of land used for farm business purposes in relation to the total area of land

•                     the value of the land used for farm business purposes in relation to the total value of the land whether there is a business as opposed to a hobby, recreation or sporting activity.

•                     the size and scale of all of the activities.

•                     whether there is a profit making purpose and prospect of profit.

•                     the commercial purpose and viability of the activities.

•                     is there a business plan?

•                     what is the current zoning of the land and are there any rezoning applications?

•                     is the property financed via a home loan or a business loan?

•                     how is the land treated for accounting purposes?

•                     in some circumstances, details of the ownership as registered on the title deed may be relevant.

•                     does the market value indicate the land is more viable for use as a farm or for other purposes?

•                     has the property been advertised for sale as a farm or for other purposes?

•                     visual appraisal - what would a reasonable person see when they look at the land?

Another relevant factor in determining whether or not section 38-480 of the GST Act may apply is the amount of time that the various areas of the land have been used for farming. It is considered that the land must have had the essential characteristics of farmland for at least the period of 5 years preceding the supply.

None of these indicators are more persuasive than the others. What is required is that these and all other relevant factors be considered to give an overall picture of the use of the land.

The following information relates to determining whether the Y acre property should be characterised as farmland or residential premises only:

•         A crop farming business is carried on the property.

•         Approximately a very small percentage of the property is under portable shade cloth (and therefore used for farming). The property also contains a shed.

•         There is some wire fencing around the perimeter of the property, but it does not surround the whole property.

•         There are several clusters of trees on the property, predominantly towards the rear boundary and behind the house. The vast majority of the land area is cleared land with grass (not used in any way for farming).

•         There is an XXXXX garden in front of the house and some of the portable greenhouses are located near the house.

•         There is no physical feature creating a border between the house and the farmed area.

•         The zoning of the property is low density residential.

•         There are no pending rezoning requests.

•         The market value of the land indicates that the land is more viable for residential use than as farmland.

•         The buyer will subdivide the land into smaller residential blocks.

•         The sale contract describes the property as X acres residential.

•         The adjacent properties are not used for farming. It is a residential area.

•         The locality in which the property is located is a very developed area with no farming in the area (apart from the crop farming activity carried on your property). The locality is not a rural area.

The overall impression from considering the factors in the paragraph immediately above and the physical characteristics of the house is that

•         the property is not, and does not include, farmland; and

•         the physical characteristics of the land and house as a whole indicate that the land is to be enjoyed in conjunction with the house; and

•         all of the land forms part of the residential premises.

We now need to consider whether the residential premises in your case are new residential premises.

In accordance with paragraph 18 of Goods and Services Tax Ruling 2003/3 (GSTR 2003/3), 'Sale of real property', 'sale' and 'sold' are not defined in the GST Act. The ordinary meaning of 'sale' is the transfer, or agreement to transfer, property to a buyer for a price. For the purposes of section 40-65, we consider that 'sale' and 'sold' refer to the disposal of the land held in its entirety for consideration.

Paragraphs 32 to 35 of GSTR 2003/3 state:

Changes in the size of the land

32. Subdivision of land, of itself, does not create new residential premises.

33. In deciding whether land and a building have previously been sold as residential premises or been the subject of a long-term lease, it is necessary to consider the land and building together. Have that land and that building together previously been sold as residential premises, or been the subject of a long-term lease?

34. Where land with a residential building has previously been sold as residential premises, or the subject of a long-term lease, and the area of land is reduced in size, we consider that a subsequent sale of the excised area of land is not a sale of new residential premises. The reduced land area and building, as a 'package', have previously been sold as residential premises, or been the subject of a long-term lease. It is necessary to consider whether a supply of the excised land is a taxable supply in its own right.

35. For example, a house is located in the corner of 1,000 sq m of land. The house and land have previously been sold together as residential premises. A 200 sq m piece of land is subdivided from the existing land and sold. The 'package' of the house and the remaining 800 sq m of land has previously been sold as residential premises and, therefore, is not new residential premises. This is because the remaining 'package' has previously been sold as part of a larger 'package'. The 200 sq m lot is not residential premises.

Your parents purchased the residential premises in your case, so there has been a previous sale of those residential premises.

In accordance with paragraphs 32 to 35 of GSTR 2003/3, your parents' subdivision of the X acre property did not create new residential premises.

Additionally, the residential premises have not been substantially renovated and they were not built, and do not contain a building that was built, to replace demolished premises on the same land.

Therefore, your sale of the property in question will be a sale of residential premises other than new residential premises. Additionally, the premises are to be used predominantly for residential accommodation for the purposes of the GST Act. Therefore, your sale of the property in question is input taxed under section 40-65 of the GST Act. Hence, GST will not be payable on your sale of the property in question.

You need to notify the purchaser in writing that the purchaser is not required to make a GST withholding payment at settlement in relation to the sale of the property.