Edited version of private advice

Authorisation Number: 1052055750393

Date of advice: 15 November 2022

Ruling

Subject: GST - sale of vacant land

Question

Is the sale of Property 1 (vacant land) a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answer

No. The sale of the properties by you will not be a taxable supply and therefore you will not be liable for GST.

This ruling applies for the following period:

Income years ending 30 June 20XX

The scheme commences on:

dd/mm/yyyy

Relevant facts and circumstances

X (You) registered for an ABN on dd/mm/yyyy.

You registered for GST from dd/mm/yyyy to dd/mm/yyyy.

You acquired Property 1 and Property 2 on dd/mm/yyyy.

The Property 1 contained a residential dwelling consisting of 2 bedrooms, 1 bathroom and 2 car sheds. The residential dwelling was situated across the front of the two property titles.

The second title (Property 2) also contained a granny flat situated at the rear of the property.

Both properties were being rented out at the time of purchase under a single rental agreement and continued to be rented to the existing tenants.

In early yyyy, there was heavy rainfall and flash flooding and the property suffered damages.

The tenants complained on multiple occasions that the property was damaged.

The tenants completed a Notice to remedy breach (Form 11) (Breach Notice) advising of multiple issues.

Building inspectors were sent out to access the damage.

The building inspector advised that the house was not safe to live in and had to be demolished.

The tenants vacated the premises on dd/mm/yyyy.

Your intention was to demolish the premises, build a new dwelling and rent out again.

In mm/yyyy, you decided to sell the properties due to:

•         issues in obtaining building materials,

•         the increase in costs to re-build the premises, and

•         the time it would have taken for the property to recommence generating residential rental income.

Since the tenants vacated the premises no other activities have been carried on the property other than the demolition of the residential dwelling.

The house was demolished on dd/mm/yyyy.

You entered into a sale contract for Property 1 on dd/mm/yyyy.

Property 1 settled on dd/mm/yyyy.

When preparing the contract for sale, the conveyancer had prepared the contract for GST to be withheld even though at the time of the signing the contract, you were not registered for GST.

An amount of $xx,xxx was withheld from the sale and remitted to the ATO on settlement of the property.

Property 2 was sold to a separate purchaser under a separate sale contract.

You hold multiple residential premises for long term rental.

You were advised by the ATO that to receive the refund of the amount withheld in regard to the sale of Property 1 you needed to re-register for GST and to lodge the BAS in the period when the GST property credit was held.

Due to the advice from the ATO, you re-registered for GST from dd/mm/yyyy.

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 subsection 9-30(4)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

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

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Detailed reasoning

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

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

(a)   you make the supply for consideration; and

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

(c)   the supply is connected with the indirect tax zone; and

(d)   you are 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.

Of relevance in this case is whether your supply of Property 1 is an input taxed supply.

The sale of real property is input taxed under section 40-65, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

Residential premises is defined in section 195-1 to mean land or a building that:

•         is occupied as a residence or for residential accommodations; or

•         is intended to be occupied, and is capable of being occupied, as a residential accommodation;

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

The extent to the which the relevant residential premises are 'to be used predominantly for residential accommodation' is discussed in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises. (GSTR 2012/5)

In this case, the residential dwelling was demolished prior to settlement and as such we consider that the supply of Property 1 was a supply of vacant land.

Paragraph 47 of GSTR 2012/5 states:

Vacant land

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

Paragraph 92 of GSTR 2012/5 provides further clarification stating:

92. Vacant land cannot be residential premises. In Vidler v. Federal Commissioner of Taxation, Sundberg, Bennett and Nicholas JJ stated that 'vacant land is not land that is capable of being occupied as a residence or for residential accommodation'. This is because vacant land, of itself, does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.

Given the above, your supply of Property 1 is not a supply of 'residential premises' and consequently was not input taxed under section 40-65.

However, subsection 9-30(4) states:

A supply is taken to be supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies.

In this case, the property was purchased in mm/yyyy and was tenanted at the time of your acquisition. You continued to rent the property until the tenants vacated in mm/yyyy due to the condition of the property. The residential dwelling was subsequently demolished on dd/mm/yyyy on the advice of building inspectors. You have not used the property for any other purpose since the house was demolished

Section 40-35 provides that the supply of premises by way of lease, hire or licence is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises). However the supply is only input taxed to the extent the premises are to be used predominantly for residential accommodation.

Given the facts of this case, the premises are not commercial residential premises.

Paragraph 10 of GSTR 2012/5 provides that premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are for a purpose other than to provide residential accommodation.

Residential premises provide shelter and basic living facilities. Paragraphs 14 and 15 of GSTR 2012/5 advises:

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 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 use predominantly for residential accommodation

The property at the time of purchase consisted of a residential dwelling and associated structures (carport/garage and shed) used with the residence on the land. The property as described (being the residential dwelling and associated structures on the land) was residential premises in that the property was occupied as a residence for residential accommodation.

The premises had the physical characteristics which provide for sleeping accommodation and allow the occupant to prepare food.

It should be noted that 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. (Paragraph 20 of GSTR 2012/5)

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. (Paragraph 21 of GSTR 2012/5)

ATO Interpretative Decision ATO ID 2009/18 Goods and Services Tax GST and sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies ('ATO ID 2009/18') discusses a similar scenario as in this case in the context of applying subsection 9-30(4).

ATO ID 2009/18 discusses that it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies. It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having separate purpose such as:

•         how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party)

•         what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

•         what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

In this case, subsequent to the premises being damaged, you were still considering holding the premises solely in connection with making input taxed supplies of residential leasing (albeit in a newly constructed house). You however decided to sell the vacant land due to the cost and material supply issues you faced to re-build. No other activities were carried out on the vacant land. The land was sold as soon as practicable, and the property was not being held for a longer period in an attempt to achieve profits through appreciation in capital value.

In this regard, and given the facts of this case, we consider that you had used the premises solely for residential leasing, an input taxed supply pursuant to section 40-35.

The application of the underlying principles for GST purposes would be effectively identical to those addressed by the Commissioner in ATO ID 2009/18 that the undertaking of certain works (demolition of existing dwelling) prepares the land for sale does not necessarily constitute a separate use from the previous leasing activities.

Accordingly, we consider the supply of Property 1 (vacant land) will constitute an input tax supply pursuant to subsection 9-30(4).