Edited version of private advice

Authorisation Number: 1052110243762

Date of advice: 16 May 2023

Ruling

Subject: GST - sale of real property

Question

Is the sale of the property (the Property) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999?

Answer

No.

Relevant facts

You are in the business of land development.

You are registered for GST.

Year A - purchase of the Property

You purchased the Property for the purpose of developing the land.

You provided the Contract of Sale for the Property which lists the Vendor as Mr and Mrs V. The price is a specific amount. The settlement was in Year B.

The Property is zoned urban growth.

At the time of purchase, the Property was the residence of the Vendor and no GST was paid on the sale to you.

After the settlement, the Property was leased to the Vendor.

The Property

The total land area is several acres and at the time of purchase, it had already been divided into Area 1 and Area B with barbed wire.

• Area A is near the road and contains the single-storey house with a number of bedrooms, a living room, a number of sanitary rooms, a kitchen, a laundry room, an outdoor swimming pool, several small tool rooms for farm tools.
• Area B is grassland and was previously used by the Vendor to graze sheep. However, at the time of purchase, it was vacant meadows, without grazing activities.

The Residential tenancy agreements

Since the purchase of the Property, the entire land had been used for rental purposes. During the period of ownership, you have signed a number of 12-months fixed term Residential Lease agreements. After the initial 12-months period, the rental agreement is monthly periodic tenancy. You advertise the Property for rent when the tenant gives you notice to vacate.

You provided copies of the Residential tenancy agreements listing the Property as the Premises that the landlord lets. The Residential tenancy agreements provide that the tenant must primarily use the premises as a residence.

Year X - sale of sold the Property

You decided to sell the Property because the State Government did not have a plan to develop the area for the time being.

You provided a copy of the Contract of Sale for the Property you signed in Year X. The following information were extracted:

• The Purchaser is LMN Pty Ltd.
• This is a terms contract with the price of a specified amount. The deposit is payable in several of regular instalments and the balance payable at settlement.
• The words 'plus GST' appear in the box.
• At settlement the purchaser is entitled to vacant possession of the Property.
• The property in the goods sold will not pass to the Purchaser until the payment of the balance of the price.
• After the dale of the contract, the Purchaser may apply for all permits and approvals as may be reasonably required by the Purchaser for its proposed development of the Land.

The settlement date was in Year Z. You stated that at settlement, the land and the structures remain unchanged as when you purchased the Property in Year A. Also, at the time of settlement, the last tenant had vacated the Property and the Property was handed over to the Purchaser.

You also stated that the Purchaser does not consider that GST is required. Hence, at settlement, you requested that 10% GST be put on hold in the Purchaser's lawyer trust account pending the issue of the ATO private ruling.

Since you purchased the property, you did not build any new structures on the land. You did some minor repairs to the damaged areas during the rental period.

In an email, your Accountant provided the following additional information:

• During the period of ownership, you claimed input tax credits. These relate to expenses such as accounting fee, subscription fee, legal fee, commission on sales, electricity & gas, postage & courier, and trave & accommodation. You did not claim input tax credits on rental expenses during the rental period.
• The leasing of the Property is under Residential tenancy agreements and was input taxed. Hence, no GST was payable on the rent.
• The Residential tenancy agreements include a clause relating to the ancillary use of the premises. During the period of the Residential tenancy agreements, you, as landlord, have not received any request from the tenant for any ancillary use of the premises. To the best of your knowledge, the tenant does not have any farming activities.
• The buyer's accountant provided advice that no GST should apply to the sale to the buyer of an existing residential property.

You provided an aerial and street view picture of the Property.

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 40-65.

Reasons for decision

Summary

The sale of the property located (the Property) is not a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act). The sale is an input taxed supply of residential premises under section 40-65 of the GST Act.

Detailed reasoning

The sale of real property is a taxable supply if all the requirements of section 9-5 of the GST Act are satisfied.

Section 9-5 of the GST Act 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 Australia; 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.

(*denotes a term defined in the GST Act.)

Based on the information that you provided, the sale of the Property satisfies the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act because:

•         the sale of the Property is consideration,

•         the supply is made in the course or furtherance of your enterprise,

•         the supply is connected with Australia as the Property is located in Australia and

•         you are registered for GST.

The sale of the Property, in the circumstances described is not GST-free under any provision of the GST Act or under a provision of another Act. It remains to be determined whether the sale of the Property is input taxed.

Sale of residential premises

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, paragraph 40-65(2)(a) provides that the supply is not input taxed to the extent that the residential premises are either 'commercial residential premises' or 'new residential premises'.

The definition of 'residential premises' in section 195-1 of the GST Act refers to land or a building that is occupied as a residence or is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

Goods and Services Tax Ruling GSTR 2012/5 provides guidance on the application of GST to supply of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement in sections 40-35, 40-65 and 40-70 of the GST Act that premises be 'residential premises to be used predominately 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. Further, paragraph 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Paragraph 20 of GSTR 2012/5 further explains that the premises must be fit for human habitation in order to be suitable for, or capable of, being occupied as a residence or for residential accommodation.

Paragraph 46 of GSTR 2012/5 provides the following discussion about land supplied with a building:

Land supplied with a building

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.

In this case, the Property has a total land area of several acres. It is divided into Area A and Area B with barbed wire. Area A contains the residence and outdoor tool rooms while Area B is grassland which is vacant and used in conjunction with the residence. The Property contains premises that provide shelter and basic living facilities. The Property has been used for residential rental purposes since you acquired the Property in Year A. Hence, the Property contains residential premises to be used predominantly for residential accommodation.

The residential premises are neither commercial residential premises nor new residential premises as defined in the GST Act.

Therefore, the sale of the Property is an input taxed supply of residential premises under section 40-65 of the GST Act.

Other information

In relation to the statement that you have claimed input taxed credits during the ownership period, please refer to the following information and take appropriate action accordingly.

An entity that is registered for GST is entitled to input tax credits for creditable acquisitions made in carrying on its enterprise.

The amount of the input tax credit to which an entity is entitled depends on the extent to which the acquisition is for a creditable purpose. The Commissioner's view is that the creditable purpose tests in sections 11-15 focus on an entity's intended use of an acquisition or, in other words, an entity's planned use. After an acquisition is made, the extent to which it is actually applied or used for a creditable purpose may be different from the intended use. Adjustments for changes in the extent of creditable purpose are provided for in Division 129 of the GST Act.

For further information refer to the following ATO publications:

• 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?
• Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.