Edited version of private advice

Authorisation Number: 1051983563683

Date of advice: 1 June 2022

Ruling

Subject: Sale of residential premises

Question

Was the sale of the properties at XX State AA, an input taxed supply of residential premises in accordance with section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) despite the properties being in rundown condition and having development plans in place?

Answer

Yes. The sale of the properties was an input taxed supply of residential premises in accordance with section 40-65 of the GST Act.

This ruling applies for the following period:

From the tax period commencing 1 July 20XX until the tax period ending 30 June 20XX

Relevant facts and circumstances

YY (you) entered into a sale contract as vendor on in 20XX (the sale agreement).

The property sale settled that year.

The buyer is AA (the buyer).

The sale agreement identifies the properties as XX, State AA (the properties).

The sale agreement particularises the present use as 'Residential Dwelling'.

The purchase price is over 'XX million plus GST if applicable.

The sale agreement states that the supply is made as vacant possession.

Under the heading 'GST Withholding Obligations' the sale agreement asks, 'Is the Buyer registered for GST and buying for a creditable purpose?'. Under that a check box marked yes is ticked. Under that the sale agreement states: 'The seller gives notice to the buyer in accordance with section 14-255 (1)(a) of the Withholding Law that' a check box is ticked indicating 'the buyer is not required to make a payment under section 14-250 of the Withholding Law in relation to the supply of the property'.

Settlement of the sale agreement is set at BB days from the contract date.

Clause 2.1 of the terms of the sale agreement sets out the GST treatment of the purchase price. Subclause 2.1(1) states that:

Unless otherwise specified in the contract the purchase price includes any GST payable on the supply of the property to the buyer.

Subclause 2.1(2) states that:

If a party is required to make any other payment or reimbursement under this contract, that payment or reimbursement will be reduced by the amount of any input tax credits to which the other party (or the representative member for a GST group of which it is a member) is entitled.

In support of your private ruling application you provided a copy of a letter from a solicitor for the purchaser in 20XX. The correspondence encloses an email report addressing the habitability of the property. The realtors report sets out the state of the property contemporaneously to the sale. In summary it states that the work required for both blocks was limited to minor repairs inside and out. This included amongst other things cleaning and mould removal paint new flyscreens and smoke alarms, installing a new toilet and replacing a few rotting boards.

The purchaser advised you that the work detailed above by the realtor was concluded in 20XX.

You also provided photos of interior amenities - Kitchen, Bathroom living room, bedrooms of both houses.

You currently carry on an enterprise as a property developer.

You are registered for GST.

You purchased the property consisting of both blocks in 20XX.

You then obtained a development approval to build a retirement village on the property.

Given the state of the property market you chose to sell the property instead of developing it.

The purchaser told you they bought the property with the intention of renting it in the short term and carrying out the development in the longer term.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 40-35.

A New Tax System (Goods and Services Tax) Act 1999, section 40-65.

A New Tax System (Goods and Services Tax) Act 1999, section 195-1.

Reasons for decision

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;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

Additionally, as this case is about the sale of the premises, section 40-65 of the GST Act is also relevant:

40-65 Sales of residential premises

(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).

Subsection 40-65(2) sets out 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.

None of the exceptions in Subsection 40-65(2) apply as they are neither commercial residential nor new residential premises. The facts indicate that the sale agreement related to residential dwellings. Further, the realtor report shows that the properties are not new.

In this case, at the time of sale, the premises were vacant possession. In these circumstances, 195-1(b) definition of residential premises applies. 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.

The principal issue is therefore whether the premises were suitable for occupation. Paragraph 9 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) sets out the correct test under section 40-65 is that the:

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

The test 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. This has particular relevance to the fact that development plans may have issued in relation to these properties.

Premises that may be used for residential premises but do not have the correct physical characteristics are not residential premises. GSTR 2012/5 gives the example at paragraph 11 of a squatter living in a factory. Even if it is used as residential premises, it does not have the appropriate characteristics.

Additionally, example 1 in GSTR 2012/5 gives an example of a developer purchasing a rental house with physical characteristics of a house. It does not matter that the developer intends to demolish the house as the test centres on the physical characteristics.

Paragraph 15 of GSTR 2012/5 provides that 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

Paragraph 20 of GSTR 2012/5 states that for a property to be defined as residential premises, it must be fit for human habitation.

For a property to be considered not fit for human habitation, it must be in a dilapidated condition that prevents it from being occupied for residential accommodation. Paragraph 21 states 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.

The realtor report you provided is contemporaneous to the settlement of the property as settlement occurred only days after the realtor's report. That report, indicates that the properties were not in a dilapidated condition to the point that occupation by a resident was impossible and displayed the physical characteristics of a residence. Further the residential premises were capable of providing basic shelter. Paragraph 76 of GSTR 2012/5 states:

76. In South Steyne 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.

As the premises in question have the applicable basic living facilities, they meet the definition of residential premises under section195-1 of the GST Act.

On the basis of the foregoing, the Commissioner considers that the subjective intention of either the purchaser or the buyer to develop the property into something else such as a retirement village does not impact the finding that the sale of the property was input taxed under section 40-65 of the GST Act. The premises are residential premises as defined as they had the physical characteristics of residential premises. The realtor's report clearly indicates that the premises were not new residential premises and indicates minimal work was required to ensure use by prospective tenants at the time of sale.