Edited version of private advice

Authorisation Number: 1051910677476

Date of advice: 28 October 2021

Ruling

Subject: GST and sale of property

Question 1

Would any part of the sale of the property be a taxable supply under section 9-5 of the GST Act?

Answer

No

Question 2

If the proposed property purchase does not go ahead is the granting of an option to purchase the property, for a non-refundable option fee payment be consideration for a taxable supply under the GST Act?

Answer

No

Question 3

Would the tenant payment made to the vendor by the purchaser/assignee of the property be consideration for a taxable supply under the GST Act?

Answer

No

This ruling applies for the following period:

Financial year ending 20XX

Relevant facts and circumstances

•                    You purchased a residential rental property on XX XX XXXX.

•                    The property is a X-acre block with a residential premise situated on it.

•                    Since the property was purchased it has only been leased as a residential rental property, with some tenants owning a few horses that grazed on the property.

•                    There have been no substantial renovations or improvements on the property.

•                    The current tenant has been leasing the property for approximately X years.

•                    You hold an Australian Business Number (ABN) and are registered for goods and services tax (GST) as you own other property.

•                    On XX XX XXXX, you received a conditional offer from a third party to purchase the property.

•                    There were various clauses to the contract including an option to purchase, a non-refundable payment should the option not be taken up and payments to be made to the current tenant.

•                    While the property has only been used as a residential rental property from XX XX XXXX to the present, you have been advised by the local Council that the property is now zoned XXXX commercial which allows the property to be used for various commercial uses.

•                    You have been advised that the third party may wish to use the property for a commercial purpose if they purchase it.

Relevant legislative provisions

Section 40-65 of a New Tax System (Goods and Services Act) Act 1999

Section 9-5 of a New Tax System (Goods and Services Act) Act 1999

Reasons for decision

Section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

1.            is made for consideration; and

2.            is made in the course or furtherance of an enterprise that you carry on; and

3.            is connected with the indirect tax zone; and

4.            is made by a supplier who is 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.

Subsection 40-65(1) of the GST Act states that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately to be used for residential accommodation (regardless of the term of occupation)

Subsection 40-65(2) of the GST Act provides that the sale will not be input taxed to the extent that the residential premises are:

(a)          Commercial residential; or

(b)          New residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

In this case, if the property were to be sold, the supply would consist of a property located in an indirect tax zone, would be for consideration, would be made in the course or furtherance of an enterprise being carried on and it would be made by a supplier that is registered for GST. However, because this property is a real property that is predominately used for residential accommodation and is not new residential premises or commercial residential premises, the supply would be input taxed.

The property is a residential premise that has been used for residential accommodation and continues to be used for residential accommodation. Therefore, the sale of this property, provided it remains in its current form as a residential premise, will be an input tax supply when sold.

The fact that the property has been rezoned to be commercial, and the proposed purchaser of the property may be intending to use it for a commercial purpose, does not change the characteristics of the property in your hands.

The property from the time you purchased it has been used solely for residential purposes. Therefore, when you sell this property, provided it is still being used for residential purposes up until the day of settlement, it will be input taxed and not subject to GST.

In relation to both the option fee of $X and the tenancy fee of $X, as these supplies form part of the contract of sale in relation to the sale of a residential property, these are also not subject to GST. They are input taxed supplies as they are related to a sale of a residential premise that has been predominantly used for residential purposes.