Edited version of private advice

Authorisation Number: 1051898813349

Date of advice: 28 September 2021

Ruling

Subject: GST and residential premises

Question

For the purposes of paragraph 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is the supply of the premises a taxable supply

Answer

No, for the purposes of paragraph 11-5(b) of the GST Act, the supply of the premises was not a taxable supply.

Relevant facts and circumstances

You purchased a property.

The Seller supplied the Property to you on the settlement and a GST amount of $ was paid to the trust account of the solicitor for the Seller.

You advised that the tax agent of the Seller advised on the day of the execution of the Contract that the supply of the Property was a fully taxable supply under the GST Act.

The Seller originally acquired the Property (before 2000) as a commercial property that included a number of buildings.

The Seller subdivided the commercial property into separate lots.

The Property includes residential premises originally constructed before 1980. Those premises have been used at all times to provide accommodation for the lessee of one of the lots.

The Seller has at all times since acquiring the commercial property used the Property in support of the primary commercial activity.

The Seller was registered for GST at the date of the supply.

The Property has been used in support of the commercial purposes of the Seller throughout the period of ownership.

Reasons for decision

Note: All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

Under section 11-20, an entity is entitled to an input tax credit for any creditable acquisition it makes.

Section 11-5 provides the criteria for making a creditable acquisition as follows:

a)    you acquire anything solely or partly for a creditable purpose

b)    the supply of the thing to you is a taxable supply

c)    you provide, or are liable to provide, consideration for the supply, and

d)    you are registered, or required to be registered for GST.

Of relevance to this ruling request is paragraph 11-5(b) and whether the supply of the property to you was a taxable supply.

A supply will be a taxable supply under section 9-5 if:

a)    the supplier makes the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that the supplier carries on

c)    the supply is connected with the indirect tax zone, and

d)    the supplier is registered, or required to be registered, for GST.

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

Relevantly, section 40-65 deals with sales of residential premises and provides:

(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.

Therefore, it needs to be determined whether the property was a supply of residential premises and if so, was it a supply of new residential premises.

The term 'residential premises' is defined in section 195-1 to mean 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 occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the ATO view on the application of Subdivision 40-C (including sections 40-65 and 40-75) to supplies of residential premises.

Paragraphs 9 to 11 of GSTR 2012/5 discuss the requirement for in subsection 40-65(1) that premises are 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)'.

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.

Taking all of the fact into account, it is clear that the Property has the physical characteristics that make it suitable for providing residential accommodation. It does not matter that the Property was used to some extent in connection with the operation of the commercial premises. Accordingly, the Property is considered to be residential premises for the purposes of the GST Act.

Therefore, it needs to be considered whether the Property was new residential premises when acquired by you.

Residential premises are new residential premises, as defined in subsection 40-75(1), 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.

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) provides the ATO view on when real property is new residential premises for the purposes of section 40-75.

You advised that the Seller acquired the Property at a time when the Property was on one lot. The Seller subdivided the original lot into a number of lots.

Paragraphs 32 to 35 of GSTR 2003/3 provide guidance on this as follows:

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.

When the original lot was subdivided, the newly created lot on which the Property sits is still considered to have been previously sold.

Therefore, paragraph 40-75(1)(a) is not satisfied in respect of the Property.

Paragraph 40-75(1)(b) will be satisfied if new residential premises have been created through substantial renovations. The term 'substantial renovations' is defined in section 195-1 as follows:

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.

Paragraphs 53 to 83 of GSTR 2003/3 discuss the application of paragraph 40-75(1)(b). In particular, paragraphs 60 to 62 outline the criteria for substantial renovations as follows:

Criteria for substantial renovations

60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances.

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.

62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

You state that the "residential premises on the Property were substantially renovated.

Paragraph 77 of GSTR 2003/3 discussed cosmetic work as follows:

77. 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. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

•

•         painting;

•         sanding floors;

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

•         replacing curtains or carpets.

Overall, the renovation work that you identify are not enough to satisfy the criteria that they affect the building as a whole and result in the removal or replacement of all or substantially all of the building.

Therefore, new residential premises have not been created through the renovation work undertaken and paragraph 40-75(1)(b) is not satisfied in respect of the Property. Further, paragraph 40-75(1)(c) is not satisfied in respect of the Property as the premises have not been built to replace demolished premises.

Therefore, the Property was not new residential premises and for the purposes of paragraph 11-5(b) of the GST Act not a taxable supply when acquired by you.