Edited version of private advice

Authorisation Number: 1051979122321

Date of advice: 11 May 2022

Ruling

Subject: GST and sale of residential premises

Question 1

Is the sale of property x located in Australia an input taxed supply of residential premises under subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of property x located in Australia is an input taxed supply of residential premises under subsection 40-65(1) of the GST Act.

Question 2

Is the sale of property y located in Australia an input taxed supply of residential premises under subsection 40-65(1) of the GST Act?

Answer

Yes, the sale of property y located in Australia is an input taxed supply of residential premises under subsection 40-65(1) of the GST Act provided the physical characteristics of the premises at settlement remain as described in the facts.

Question 3

Is the sale of property z located in Australia an input taxed supply of residential premises under subsection 40-65(1) of the GST Act?

Answer

Yes, the sale of property z located in Australia is an input taxed supply of residential premises under subsection 40-65(1) of the GST Act provided a functioning shower is installed in the premises prior to settlement and the other physical characteristics of the premises at settlement remain as stated in the facts.

Relevant facts and circumstances

•                You are registered for GST.

•                You are the vendor of three properties in Australia (property x, property y and property z).

•                The purchaser is registered for GST and is not related or associated with the vendor.

Relevant legislative provisions

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

Reasons for decision

Subsection 40-65(1) of the GST Act provides that 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).

However, subsection 40-65(2) of the GST Act provides that 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.

The term 'residential premises' is defined in section 195-1 of the GST Act 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 the occupation or intended occupation) and includes a floating home.

The terms 'commercial residential premises' and 'new residential premises' are also defined in section 195-1 of the GST Act. When defining new residential premises, section 195-1 of the GST Act defines the term by reference to the meaning given for the term in section 40-75 of the GST Act.

Given the facts in your case and the definition of 'commercial residential premises', none of the three premises are commercial residential premises (they are not a hotel, motel, inn, hostel or boarding house, etc. or anything similar to such types of premises). In addition, none of the three premises are new residential premises. All three premises appear to have been used for residential accommodation prior to 2 December 1998 (given the age of the premises).

Further to the above, based on the facts, none of the three premises have been substantially renovated (which according to the meaning of that term in section 195-1 of the GST Act would involve all, or substantially all, of a building being removed or replaced). As such, the exception in subsection 40-65(2) of the GST Act does not apply if the premises are deemed to be residential premises.

Residential premises

Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5), in paragraph 9, provides that the requirement in section 40-65 of the GST Act 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.

Further, paragraph 10 of GSTR 2012/5 provides that 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 the 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.

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 (refer to paragraph 11 of GSTR 2012/5).

Residential premises provide 'living accommodation'; which includes lodging, sleeping or overnight accommodation. 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 (refer to paragraphs 14 and 15 of GSTR 2012/5).

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 (refer to paragraph 20 of GSTR 2012/5).

However, paragraph 21 of GSTR 2012/5 provides that 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.

In the context of the definition of residential premises and section 40-65 of the GST Act, suitability refers to the suitability of the premises by reference to their physical characteristics. Premises are suitable for, and capable of, occupation as a residence or for residential accommodation if they possess the necessary features to provide residential accommodation and are able to be occupied as residential premises. The physical characteristics of premises may be altered after the premises are first designed and built. In each case, it is necessary to determine the suitability of premises by reference to their physical characteristics at the time when the relevant supply is made (refer to paragraphs 71 and 72 of GSTR 2012/5).

Paragraph 76 of GSTR 2012/6 provides that in South Steyne [2009] FCA 13 it was held that only the elements of shelter and basic living facilities are necessary for premises to satisfy the definition of residential premises. This includes, for example, shelter and basic living facilities provided by a bedroom and bathroom. However, premises may provide shelter and basic living facilities without necessarily having a conventional bedroom or bathroom.

Premises that lack the features of shelter and basic living facilities are not however residential premises (refer to paragraph 77 of GSTR 2012/5).

Application of the above to the facts in your case

As such, both the premises at property x and property y are residential premises to be used predominantly for residential accommodation and based on the facts will remain that way when the sales of the properties settle.

In relation to property z, the premises were also built as a house. However, the premises were modified when they began to be used for business purposes by the lessee.

Prior to settlement, the premises at property z will be modified further, such that they will then become residential premises to be used predominantly for residential accommodation. They will then remain that way when the sale of the property settles (the settlement date and the relevant date).

As such, all three properties will, at the relevant date, be residential premises to be used predominantly for residential accommodation.

Thus, all three premises, when supplied as part of the property sale which is to settle in the near future, will be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act.