Edited version of private advice

Authorisation Number: 1051932505406

Date of advice: 10 December 2021

Ruling

Subject: GST and sale of residential premises with approved planning permit

Question 1

Will MIP A, as one of the mortgagees in possession for the premises and land located at <address> that has an approved planning permit, be liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 for the sale of this property to the Purchaser?

Answer

With respect to Lots 1, 2, 3 and 4 - no.

With respect to Lot 5 - yes.

Question 2

Is the Purchaser entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 for its purchase of the premises and land located at <address> that has an approved planning permit?

Answer

With respect to Lots 1, 2, 3 and 4 - no.

With respect to Lot 5 - yes, to the extent that Lot 5 was acquired in carrying on its enterprise.

Relevant facts and circumstances

The Parties

MIP A was one of three mortgagees in possession of <property address> (the Property) which exercised their power of sale over the Property and sold it to the Purchaser on <date>. MIP A has been registered for GST since <date>.

The owner and mortgagor of the Property (the Debtor) at the time of the sale was incorporated on <date> and registered for GST from the same date and continues to be registered.

The Purchaser was incorporated on <date> as a special purpose vehicle to purchase the Property. The Purchaser is a <occupation>. The Purchaser was registered for GST from the same date and continues to be registered.

The Property

The Debtor purchased the Property on <date> for $x.

General description

The Property has a total site area of x square metres and contains existing premises.

The Property is subdivided into five allotments (Lots 1 to 5) with separate certificates of title for each.

The following services are available and connected to the Property:

•         mains water supply

•         reticulated sewerage

•         electricity.

The Debtor leased all five Lots to tenants since it took ownership of the Property up until the sale of the Property to the Purchaser. The Debtor did not collect GST on the rent as the Debtor considered the leases were input taxed.

Evidence of the general condition of the Property

A valuation report of the Property was prepared by <name> for the Debtor on <date> (the Valuation Report). The Valuation Report was prepared before the sale of the Property to the Purchaser.

The Valuation Report relevantly notes that the Property provides very modest standard of common lobbies, and hallways, with some imperfections/moderate damage to ground floor hallway skirtings. The Valuation Report also notes that the document is a valuation report and not a structural survey, and the valuer not a building construction or structural expert and is therefore unable to certify the structural soundness of the improvements.

A Building Safety Report from <name> dated <date> (Building Safety Report) and a Structural Assessment from <name> dated <date> (Structural Assessment Report) has been supplied with respect to the Property.

Both the Building Safety Report and the Structural Assessment Report were prepared and provided.

The Building Safety Report examines the common areas of the Property only (the interior of Lots 1 to 5 were not inspected) and identified the following major defects and safety hazards:

•         Mould and rising damp

•         Asbestos

•         Unsafe staircase treads

•         Concrete cancer

The major defects and safety hazards in both Reports were considered repairable or capable of remediation (although potentially at significant cost). The author of the Building Safety Report considers the Property is a 'condemned building', and the author of the Structural Assessment Report considers the Property 'uninhabitable'.

Lots 1 to 4

A description and photographs of Lots 1 to 4 (also known as Units 1 to 4) taken from the Valuation Report was provided. The following is a summary of the description of Lots 1 to 4:

•         Lot 1 comprises of two bedrooms (one with ensuite), one main bathroom and open plan lounge, dining and kitchen area. Total area is x square metres

•         Lot 2 comprises of three bedrooms (one with ensuite), one main bathroom and open plan lounge, dining and kitchen area. Total area is x square metres

•         Lot 3 comprises of two bedrooms (one with ensuite), one main bathroom and open plan lounge, dining and kitchen area. Total area is x square metres

•         Lot 4 comprises of three bedrooms (one with ensuite), one main bathroom and open plan lounge, dining and kitchen area. Total area is x square metres.

Documents titled 'residential tenancy agreement' for both Lot 2 and Lot 3 have been supplied. No residential tenancy agreements have been provided for Lots 1 and 4.

Lot 2 and Lot 4 were occupied at one point by parties related to a Deregistered Company.

Photographic evidence shows a rubbish bin situated next to the Property with Deregistered Company's name printed on it.

A final inspection of all five Lots was conducted by selling agent TC on 17 May 2021, being after the date of sale of the Property to the Purchaser but before the date of settlement (the Final Inspection). At this inspection, it was observed that:

•         Lot 1 could not be accessed but there was a carpet at the front of the premises,

•         Lots 2, 3 and 4 were accessible and all occupied by residents.

Lot 5

Lot 5 is a single space comprising an area called 'reception area', two areas labelled 'meeting rooms', three areas labelled 'private offices', separate men's and women's toilets with common wash basin, an additional separate bathroom featuring a toilet, shower and wash basin, a kitchen area featuring a small sink, electric stove, oven and exhaust fan. There is also a 'common area' from the front entrance of the Property to the stairs and a passageway that provides access to the reception, meeting rooms and private offices.

A copy of the floorplan and photographs of Lot 5 were provided.

Documents titled 'residential tenancy agreement' for specific rooms located within Lot 5 that have been occupied have been supplied.

At the Final Inspection, Lot 5 was accessible and it was observed that people were living there.

The planned use of the Property

The Debtor's intention was to redevelop the Property into new student accommodation. To that end, the Debtor engaged a consultant to assist the Debtor in preparing a planning permit application for the Property with the Council. A planning permit application was submitted on <date>.

On or around <date>, the Debtor along with another company issued an investment proposal to prospective investors, proposing to redevelop the Property into an eleven-storey student accommodation block. The Debtor's intention was to raise $x million from prospective investors to partly fund the proposed development costs.

On <date> the Council approved the planning permit application, giving approval for the demolition of the Property and construction of an x-storey building for student accommodation.

On <date> the Debtor borrowed money from a group of private lenders (the Mortgagees) to finance the development, using the Property itself as security along with a personal guarantee from one of the Debtor's directors. The mortgages were registered against the title of each of the Lots of the Property. The Mortgagees were as follows:

•         MIP A

•         MIP B

•         MIP C

In late <year> the Debtor abandoned its intention to develop the Property due to funding constraints and unfavourable market conditions. The Debtor engaged selling agent TC to sell the Property in its existing condition with development approval to demolish the Property and develop student accommodation.

Sale of the Property

On or around <date> the Debtor entered into a contract for the sale of the Property to SHH and/or their nominee (the First Contract). The purchase price was $x, inclusive of GST (if any).

The Debtor became insolvent and provisional liquidators were appointed by order of the Supreme Court of Victoria on <date>.

The provisional liquidators confirmed that they had no objection to:

•         the Mortgagees taking possession of the Property pursuant to and subject to any rights under the mortgage security

•         the Mortgagees exercising their power of sale pursuant to the mortgages

•         the Mortgagees terminating the First Contract and entering into a new contract with SHH and/or their nominee pursuant to their power of sale.

The Debtor stopped receiving rental payments from tenants occupying the units in the Property when the liquidator was appointed.

On or around <date> the Mortgagees took possession of the property and entered into a contract for the sale of the Property with SHH and/or their nominee for the purchase price of $x (the Second Contract). As per the Particulars of Sale of the Second Contract, the purchase price was inclusive of GST (if any), and, if GST did apply, the Particulars of Sale did not indicate the parties agreed the sale was a going concern or to use the margin scheme.

The Property was sold by the Mortgagees exercising their power of sale as per clause 17 of the Special Conditions of the Second Contract. Clause 17(n) of the Special Conditions states that the purchaser acknowledges that the Mortgagees do not have any knowledge as to the current occupation or vacancy status of the Property, and that the purchaser must not make any objection, requisition or claim for compensation, or delay completion on the grounds of the Property's occupation or tenancy.

On or around <date>, the Purchaser was nominated as the purchaser under the Second Contract.

Settlement of the sale of the Property took place on <date>. The Purchaser has not received any rental payments from any tenants claiming to reside in the Property since the date of settlement.

No development or construction has taken place on the Property.

The Debtor did not give the Mortgagees a notice in writing stating that the supply would not be a taxable supply.

The Mortgagees advised the Purchaser that they considered the sale of the Property was not a taxable supply, without providing detailed reasons. MIP A, as one of the Mortgagees, has requested the Commissioner to rule on whether the sale of the Property to the Purchaser is taxable.

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 9-40

A New Tax System (Goods and services Tax) Act 1999 section 40-65

A New Tax System (Goods and services Tax) Act 1999 section 105-5

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

Reasons for decision

Question 1

Section 9-40 provides GST is payable on taxable supplies. Subsection 105-5(1) provides that you make a taxable supply if:

a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you

b) had the debtor made the supply, the supply would have been a taxable supply.

As per subsection 105-5(2), it does not matter whether you made the supply in the course or furtherance of an enterprise that you carry on, or whether you are registered or required to be registered for GST.

However, subsection 105-5(3) provides that a supply is not a taxable supply if:

a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

b) if you cannot obtain such a notice from the debtor - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

On these facts, the Property was sold by MIP A and the other two Mortgagees exercising their powers of sale pursuant to their registered mortgages, to discharge the loan they made to the Debtor. This satisfies paragraph 105-5(1)(a) mentioned above.

In addition the Debtor did not give MIP A a written notice stating that the supply was not a taxable supply, and MIP A believed the supply was not a taxable supply but did not give reasons for this belief. Therefore subsection 105-3(3) does not apply on these facts.

It therefore needs to be determined whether the Debtor would have made a taxable supply if they sold the Property to the Purchaser, as per paragraph 105-5(1)(b). This will now be examined in detail.

Section 9-5 provides that you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with the indirect tax zone (Australia)

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.

In the Debtor's case:

•         the sale of the Property to the Purchaser for $x is a supply made for consideration

•         the sale of the Property is connected with Australia because the Property is located and sold in Australia

•         the Debtor is registered for GST.

We will now look at whether the sale of the Property would have been in the course or furtherance of the Debtor's enterprise, had the Debtor sold the Property.

Would the sale of the Property be in the course or furtherance of the Debtor's enterprise?

Subsection 9-20(1) provides an enterprise is an activity, or series of activities, done (among other things):

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Based on the facts, we consider that the Debtor was conducting an enterprise in the form of a property development business, and leasing acquired properties prior to their development. The Debtor acquired the Property with the intention of developing it into student accommodation, in the course of this enterprise.

The Property was sold as part of the Debtor terminating its property development and leasing enterprise and going into liquidation. It needs to be determined whether the sale of the Property in those circumstances is a sale in the course or furtherance of the Debtor's enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999. Paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

Paragraph 140 of MT 2006/1 provides the Commissioner's position on whether activities done in terminating an enterprise are in the course or furtherance of that enterprise:

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Based on the position outlined in paragraph 140 of MT 2006/1, we consider the sale of the Property, as part of the Debtor terminating its property development and leasing enterprise, is in the course and furtherance of that enterprise.

Therefore, the requirement that the supply be made in the course or furtherance of the Debtor's enterprise under paragraph 9-5(b) is satisfied.

The sale of the Property is not GST-free, so it remains to be determined whether the sale is input taxed.

Is the sale of the Property input taxed?

Section 40-65 provides that the 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). However the sale will not be input taxed to the extent the residential premises are commercial residential premises or new residential premises.

In this case the Property does not meet the definitions of new residential premises and commercial residential premises under the GST Act.

Section 195-1 of the GST Act defines 'residential premises' 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.

The ATO's position on what constitutes residential premises to be used predominantly for residential accommodation under section 40-65 is set out in the public ruling Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises(GSTR 2012/5).

Paragraphs 6-8 of GSTR 2012/5provide that:

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.

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

To satisfy the requirements of section 40-65, not only must the Property meet the definition of 'residential premises', but it also needs to be residential premises that is predominantly used for residential accommodation (regardless of the term of occupation). This limb of section 40-65 is a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

Paragraphs 10 and 11 of GSTR 2012/5 look at this aspect of section 40-65 in more detail:

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.

As per paragraph 8 of GSTR 2012/5 above, because the Property consists of five Lots, it will be necessary to examine the characteristics of each of the five Lots to determine whether the Lots satisfy the requirements of section 40-65. The Purchaser has also made submissions in relation to the Property's overall fitness for human habitation and permanent occupation. These arguments put forward by the Purchaser will be discussed first, followed by a discussion of whether Lots 1 to 5 meet the requirements of section 40-65.

The Property's overall fitness for human habitation and permanent occupation

The Commissioner's general position on a premise's fitness for human habitation and shelter, and the degree of permanent occupation required, are set out in paragraphs 14, 15, 20 and 21 of GSTR 2012/5:

Living accommodation provided by shelter and basic living facilities

14. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight 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.

...

Fit for human habitation

20. 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. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

21. Residential premises that are either:

•         in a minor state of disrepair; or

•         subject to a temporary legal prohibition for occupation pending minor repairs;

are still suitable for, and capable of, being occupied as a residence or for residential accommodation.

The defects and safety hazards identified in both the Building Safety Report and Structural Assessment Report point to the Property's condition being more than in a minor state of disrepair. However, the defects and safety hazards identified in the Reports have been described by the Reports' authors as repairable or capable of remediation. Defects that are repairable or capable of remediation do not prevent a premise from being suitable for, and capable of, being occupied as a residence or for residential accommodation under the GST Act - even if the defects and hazards are material. Example 3 contained in paragraphs 23 and 24 of GSTR 2012/5 is relevant:

Example 3 - temporary disruption to occupation

23. Ashlea is registered as a hairdresser and owns and rents residential premises that she formerly resided in at a coastal town in northern Australia. The premises are not new residential premises.

24. A tropical cyclone crosses the coast leading to windows being shattered and damage to the roof. The damage is readily repairable but Ashlea fails to make the repairs resulting in the local Council issuing a notice stating that the premises are not fit for habitation. As a result, the tenant's occupation of the premises is temporarily disrupted. Ashlea sells the premises before making the repairs. Despite the damage to the premises and the action taken by the Council, the physical characteristics of the premises show that it is suitable for, and capable of, being occupied as a residence or for residential accommodation. The sale of the premises is therefore an input taxed supply of residential premises to be used predominately for residential accommodation.

Example 3 demonstrates that even where repairs have failed to be made, and the building is declared to be unfit for human habitation, the premises will still be residential premises to be used predominantly for residential accommodation if the premises is repairable. This is because it is the physical characteristics and design of the premises that determine whether it is residential premises to be used predominantly for residential accommodation. Structural or safety defects that are repairable to do not change the fundamental nature of a premise.

On these facts, even if the Debtor has chosen not to rectify the structural and safety issues, this does not change their characterisation by the authors of the Building Safety and Structural Assessment Reports as repairable defects. Although the author of the Building Safety Report considers the Property is a 'condemned building', and the author of the Structural Assessment Report considers the Property 'uninhabitable', Example 3 of GSTR 2012/5 shows such a conclusion does not change the fundamental nature of the premises if the defects are repairable. It is also noted that no evidence has been provided by either party of the Melbourne City Council declaring the Property as being condemned or uninhabitable and requiring demolition.

The Property's defects and safety hazards identified in the Building Safety Report and Structural Assessment Report do not render the Property unfit for human habitation, as per the principles laid out in GSTR 2012/5. Therefore, they do not prevent Lots 1 to 4 from being suitable for, and capable of, being occupied as a residence or for residential accommodation.

Does the property have 'permanency'?

Subsection 40-65(1) and the definition of 'residential premises' in section 195-1 both include the words 'regardless of the term of occupation', which means the degree of permanency of occupation is irrelevant. As noted above in paragraph 14 of GSTR 2012/5, premises does not require any degree of permanence in order for it to be characterised as residential premises to be used predominantly for residential accommodation.

The current wording of both subsection 40-65(1) and the definition of 'residential premises' in section 195-1 reflect amendments made to the GST Act in 2006 by the Tax Laws Amendment (2006 Measures No. 3) Act 2006, following the 2004 decision of Marana that the Purchaser has referred to. Paragraph 60 of GSTR 2012/5 explains this further:

60. In Marana the Full Federal Court examined the ordinary meanings of the terms 'reside' and 'residence', and considered that these terms connote a permanent or at least long-term commitment to dwelling in a particular place. However, this interpretation represented a significant departure from the intended GST treatment of certain supplies of real property. To maintain the intended GST treatment of affected premises and give certainty, the GST Act was amended in 2006 with effect from 1 July 2000 (the Marana amendments). The amendment to the definition of 'residential premises' was to confirm that the period of occupation or intended occupation of land or a building is not relevant in determining whether premises are residential premises. Further, the change was to ensure that premises that are occupied or are intended to be occupied for residential accommodation are residential premises and therefore generally subject to input taxed treatment upon sale or rental.

Paragraphs 15.4, 15.7, 15.8 and 15.9 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 3) Bill 2006 explain the Government's policy intent with respect to amending the GST Act in light of Marana:

15.4 The interpretation of the GST Act arising from the Court's judgment represents a significant departure from the intended GST treatment of affected premises. ...

...

15.7 These amendments change the definition of 'residential premises' to confirm that the period of occupation or intended occupation of land or a building is not relevant in determining whether premises are considered to be residential premises. These amendments change the definition to ensure that the occupation or intended occupation of the premises means that it is residential premises and therefore generally subject to input taxed treatment upon sale or rental. ...

15.8 Without these changes, the Marana decision would otherwise suggest that the term residential premises refers only to premises occupied or intended to be occupied for long-term occupation.

15.9 These amendments qualify residential accommodation to ensure that it does not solely refer to long-term accommodation but may include short-term accommodation (ie, it may apply regardless of the term, or intended term, of occupation). ...

The degree of permanency, or lack thereof, is therefore not a relevant consideration as to whether any of the Lots in the Property are residential premises to be used predominantly for residential accommodation under section 40-65.

Lots 1 to 4

The photographs and description of Lots 1 to 4 in the Valuation Report demonstrate that these Lots all demonstrate physical characteristics and design features that evidence their suitability and capability to provide residential accommodation. Lots 1 to 4 are self-contained and each provide at least basic shelter and living facilities in the form of a kitchen, bathroom, toilet, bedrooms and lounge and dining areas. The presence of such living facilities is not by itself determinative of whether premises is residential premises to be used predominantly for residential accommodation. However, when these facilities are looked at together with the design features and physical characteristics of Lots 1 to 4, it is clear that each of these Lots are designed and intended to be occupied as a residence or for residential accommodation.

Applying the principles in paragraphs 6-8, 10 and 11 of GSTR 2012/5 (discussed earlier), Lots 1 to 4 satisfy definition (b) of 'residential premises' in section 195-1, and are residential premises to be used predominantly for residential accommodation under section 40-65.

Does the Intended use of the Property prevent Lots 1 to 4 from being residential premises to be used predominantly for residential accommodation under section 40-65?

The intended future use of residential premises is not a relevant factor when determining whether residential premises is predominantly used for residential accommodation under section 40-65. Example 1 in paragraphs 12 and 13 of GSTR 2012/5 demonstrates this principle in relation to residential premises that has development approval for it to be demolished and replaced with higher density residential apartments:

Example 1 - purchaser's intention not to use premises for residential accommodation

12. John carries on an enterprise which involves leasing a house on property which he owns. Based on the physical characteristics of the house it is residential premises to be used predominantly for residential accommodation. The area in which the house is located has recently been rezoned by the local Council to permit higher density residential apartments. Following the rezoning, a developer, Knock Them Down Co, approaches John and offers to purchase his property. Knock Them Down Co intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments.

13. The fact that Knock Them Down Co does not intend to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. Knock Them Down Co's intention is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accommodation. The sale of the house by John to Knock Them Down Co is an input taxed supply under section 40-65.

The intended use to demolish the Property and construct student accommodation do not prevent Lots 1 to 4 from being residential premises to be used predominantly for residential accommodation under section 40-65.

Conclusion

Lots 1 to 4 are residential premises to be used predominantly for residential accommodation.

GST is not payable on the sale of Lots 1 to 4 under section 9-40.

Lot 5

Based on the floor plan and photographs supplied of Lot 5, we consider the following design and physical elements of Lot 5 point towards it being residential premises to be used predominantly for residential accommodation:

•         the presence of a kitchen area containing an electric stovetop, oven and exhaust fan - which is a typical design feature of residential premises

•         the presence of a bathroom containing a shower, toilet and wash basin - also a typical design feature of residential premises.

We consider the following design and physical elements of Lot 5 point towards it not being residential premises to be used predominantly for residential accommodation:

•         the presence of a single space comprising of two self-contained toilets (described as 'man' and 'woman' on the floor plan) with a communal wash basin - this is uncharacteristic of residential premises

•         Lot 5 does not appear to have a door or physical front entrance between the staircase in the common area of the Property, and the 'reception' area of Lot 5, meaning any resident of the Property may gain access to Lot 5, and residents of Lot 5 cannot exclude the access of other residents of the Property - this is also uncharacteristic of residential premises.

On balance we consider the facts pointing towards Lot 5 not being residential premises outweigh the points that do point towards it being residential premises. It is a hallmark of residential premises to have a front entrance of some kind that enables the resident to have exclusive access to the premises, and restrict non-residents from entering. The floor plan showing a lack of a physical front entrance on Lot 5 is therefore a significant consideration. The lack of a physical front entrance creates an open space between the common area, the 'reception', and the two 'meeting rooms'. These design characteristics are more representative of an office reception area, rather than residential premises being used predominantly for residential accommodation.

The single space with the self-contained toilets and communal wash basin is also a design characteristic that is not a typical feature of residential premises, but is common in offices and other commercial premises.

While Lot 5 possesses some basic living facilities, not all premises that have such facilities will be residential premises that are used predominantly for residential accommodation. Paragraph 25 and Example 4 in paragraphs 26 and 27 of GSTR 2012/5 explain this concept in further detail:

25. Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.

Example 4 - office building

26. Commercial Place is a five storey building. The ground floor has a foyer and reception area. All floors have been constructed with large open spaces for staff cubicles and desks, smaller office spaces, meeting rooms and areas for storage of documents. Each floor also contains a kitchen, amenities area and toilets. The ground floor also has showers provided with the toilet facilities.

27. While the office building provides shelter and basic living facilities including kitchens, toilets and shower facilities, the physical characteristics of the premises indicate that they are not residential premises to be used predominantly for residential accommodation. The physical characteristics indicate that the premises are a place for office workers to undertake tasks associated with a business. A supply of the premises would not be input taxed under Division 40.

On these facts, we consider the bathroom and the kitchen facilities in Lot 5 are ancillary to the premises' prevailing function - which we do not think is residential in nature.

Therefore, Lot 5 is not residential premises to be used predominantly for residential accommodation, and so is not input taxed under section 40-65.

MIP A, as one of the mortgagees in possession of Lot 5, made a taxable supply under section 105-5 when it sold Lot 5 to the Purchaser. GST is payable on the sale of Lot 5 under section 9-40.

GST treatment of the Property's car parking spaces

As noted in the facts, the Property contains five allocated car parking spaces. Where car parking spaces and storage areas are supplied together with residential premises, these are used for the better enjoyment of the residential apartment and are not a separate supply. Paragraph 16 of GSTR 2012/5 explains this in more detail:

16. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area located within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation. This is still the outcome where the garage, car-parking space, or storage space is separately titled from the residential apartment, but is physically located within the same building complex.

On these facts the car parking spaces do not have a separate title allocation but instead form part of the title of each unit on the plan of subdivision and they are located within the Property. Therefore they are ancillary or incidental to the dominant component of the supply of each Lot, and do not form a separate supply in themselves.

Question 2

Section 11-20 provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-25 provides that the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable.

Section 11-5 provides that you make a creditable acquisition if:

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

d) you are registered or required to be registered.

In the Purchaser's case:

•         the Purchaser paid, or is liable to pay, the purchase price for the Property as stated in the Second Contract

•         the Purchaser was registered at the time they acquired the Property, being the date of settlement on 23 June 2021

•         the supply of Lots 1 to 4 to the Purchaser is not a taxable supply for the reasons stated in the answer to Question 1

•         the supply of Lot 5 to the Purchaser is a taxable supply for the reasons stated in the answer to Question 1.

Because the supply of Lots 1 to 4 is not a taxable supply, the Purchaser does not satisfy all the elements of section 11-5 with respect to those Lots. Therefore, the Purchaser is not entitled to an input tax credit with respect to Lots 1 to 4 under section 11-20.

It remains to be determined whether the Purchaser's acquisition of Lot 5 was for a creditable purpose, and therefore satisfy all the elements of section 11-5.

Creditable purpose is defined in Section 11-15. Subsection 11-15(1) provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, subsection 11-15(2) provides that you do not acquire a 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.

Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) provides the Commissioner's view on when things are acquired solely or partly for a creditable purpose under section 11-15. In particular, paragraphs 64 and 70 provide the following:

64. Whether something is acquired in carrying on an enterprise requires a connection or link between the thing acquired and the enterprise.

...

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

•         the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

•         the thing acquired is used by the enterprise in making supplies;

•         the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

•         the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

•         the acquisition does not meet the personal needs of individuals such as partners or directors;

•         the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

•         the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.

On these facts, the Purchaser is carrying on an enterprise of <enterprise>. The purchase of Lot 5 will be for a creditable purpose to the extent that the Purchaser acquired it in carrying on this enterprise, and not to make input taxed supplies (such as leasing Lot 5 to tenants).

Apportionment

Because the only taxable supply and creditable acquisition being made is with respect to Lot 5, the consideration paid for the Property needs to be apportioned to determine the amount paid for Lot 5. The input tax credit can then be calculated based on the amount paid for Lot 5.

Paragraphs 89 and 90 of GSTR 2012/5 provide further information on the requirement to apportion mixed supplies of input taxed residential premises and taxable premises that are not residential:

Supplies requiring apportionment

89. In some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. As paragraph 40-35(2)(a), subsection 40-65(1), and paragraph 40-70(1)(a) refer to the extent that the premises or property are to be used predominantly for residential accommodation, it is necessary that the value of the supply of such premises be apportioned.

90. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house. See Examples 8 and 9 at paragraphs 41 to 45 of this Ruling.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides further guidance and suggestions on how to apportion the consideration for a supply that includes taxable and non-taxable parts. Paragraphs 25, 26, 27, 97 are particularly relevant:

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

•         the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

•         the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

•         the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

•         the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling); and

•         the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling).

Any reasonable basis to apportion the consideration for Lot 5 that is agreeable to the parties can be used, including the direct methods outlined in paragraph 97 of GSTR 2001/8 above. The parties should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of the sale of the Property to the Purchaser.