Edited version of private advice

Authorisation Number: 1052092609011

Date of advice: 10 March 2023

Ruling

Subject: GST and sale of real property

Question

Will GST be payable on the sale of the identified real property located in Australia pursuant to subsection 7-1(1) and section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the specified period.

The scheme commenced on the specified date.

Relevant facts and circumstances

1.    Entity A is a property developer and is registered for the goods and services tax (GST).

2.    Under relevant contract for the sale and purchase of land Entity A purchased the identified property (the Property), from the Entity B.

3.    The property is located in Australia and included residential dwellings at settlement of the purchase.

4.    The purchase was not subject to GST and the margin scheme was not used as it was not a taxable supply by Entity B. The purchase was an input taxed supply as it was a sale of eligible residential premises by Entity B.

5.    Entity A purchased the property for the purpose of development.

6.    Entity A lodged Development Application (the DA) with the Council, for the staged development of the land to create multiple residential lots, including open space lots, road construction, vegetation management and associated site works at the identified property address.

7.    The DA was approved by the relevant authority.

8.    Entity A had engaged various consultants and incurred holding costs and other costs in obtaining Development Approval through the relevant authority.

9.    On the specified date, Entity A and Entity X entered into a contract for the sale and purchase of the property (the Sale Contract) which comprises land and residential dwellings.

10.  The date for completion and settlement of the sale is to occur at a future time soon.

11.  Entity X is a developer and is registered for GST.

12.  The property is currently not developed. To date, Entity A has not had any development works done to the land and has not engaged any contractors or builders to carry out the development.

13.  In future the property will be developed by Entity X and further sold to individual purchasers when developed.

14.  The property includes multiple residential dwellings but all on the one title.

15.  The dwellings have been leased out previously for residential accommodation. As the property has not been subdivided, the surrounding land has been leased as a whole to the tenants for their enjoyment.

16.  The property was managed by a local agent.

17.  The dwellings were fully functional and occupied by the then existing tenants at settlement, when Entity A purchased the property. The dwellings were wholly tenanted for residential accommodation.

18.  At one of the houses, the shed/garage have been eaten out by termites and started to collapse. Further investigation revealed the presence of asbestos in the garage which would incur high cost to demolish. Due to deterioration and asbestos, Entity A chose to fence off the shed/garage and reduced the tenant's rent as compensation.

19.  Eventually, the tenant decided to vacate due to further deterioration of the house and major disturbances from the construction work from the neighbouring development. While the house was vacated, heavy rains have caused the kitchen ceiling to collapse due to roof waterproofing failure. Entity A considered the damage as not viable for repair. The cost to repair the house was deemed unfeasible.

20.  Entity A considered that the expected rental income would not justify the repair. Entity A did not wish to spend any money in upgrading the property to continue renting it out and decided to leave the house vacant.

21.  The house is currently vacant. The house will be sold as is to Entity X. Entity X can decide to knock it down at its own costs or repair it for future leasing.

22.  Another house on the property is currently tenanted on an expired lease. Entity A is negotiating with the tenant to renew the lease for a further 12 months. Entity X agrees to the terms and conditions in the sale contract regarding this lease renewal and consents to the granting of a new lease for a maximum of 12 months on reasonable commercial terms. The sale is subject to the existing tenancies. However, the vendor does not warrant that the lease will be in force at settlement date.

23.  The property will be sold as is, with the existing houses attached to the land at settlement date.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

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

Reasons for decision

In this reasoning, 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

•         where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1

Subsection 7-1(1) provides that GST is payable on taxable supplies and section 9-40 provides that an entity must pay the GST payable on any taxable supply that it makes.

Where a supply is GST-free or input taxed, no GST is payable.

Taxable supply

An entity makes a taxable supply if it meets the requirements of section 9-5, which states:

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 indirect tax zone; and

(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.

All of the above requirements of a taxable supply under section 9-5 must be met at the time of sale for the sale to be a taxable supply.

On the facts provided, the requirements (a) to (d) above will be met. Therefore, the sale of the property will be a taxable supply unless it is GST-free or input taxed.

Division 38 sets out the supplies that are GST-free and provides that if a supply is GST-free, no GST is payable on the supply. The sale of the property under the given circumstances will not be GST-free.

Division 40 provides that if a supply is input taxed, no GST is payable on the supply.

Input taxed supply

Section 40-65 provides that a sale of real property is input taxed to the extent that the property is residential premises (other than new residential premises or commercial residential premises) to be used predominantly for residential accommodation (regardless of the term of occupation).

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

Goods and Services Tax Ruling GSTR 2012/5: Goods and services tax: residential premises (GSTR 2012/5) provides guidance on how GST applies to supplies of residential premises.

The requirement in section 40-65 that premises be 'residential premises to be used predominantly for residential accommodation' 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.

Based on the physical characteristics of the property, the dwellings are residential premises to be used predominantly for residential accommodation.

Regarding the untenanted house, paragraph 21 of GSTR 2012/5 relevantly states:

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.

Regarding land supplied with a building, paragraph 46 of GSTR 2012/5 states:

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

Goods and Services Tax Ruling GSTR 2003/3: Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides guidance on when real property is new residential premises pursuant to section 40-75 of the GST Act.

Residential premises that have not previously been sold as residential premises and residential premises that have been created through substantial renovations of a building are new residential premises as defined in section 40-75.

Where residential premises have been used only for the purpose of making input taxed supplies (i.e., residential rental) because of paragraph 40-35(1)(a) for a continuous period of at least 5 years since the premises would otherwise have become new residential premises, they are no longer new residential premises.

On the facts provided, the sale of the identified property comprising land and residential dwellings would be a sale of residential premises. These residential premises are not new residential premises.

Consequently, the sale of this property by Entity A will be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act.

Where a supply is input taxed, no GST is payable on the supply.