Edited version of private advice

Authorisation Number: 1052126350116

Date of advice: 15 June 2023

Ruling

Subject: GST and the sale of residential premises

Question

Is your sale of real property (the property), on or about X date, an input taxed sale of residential premises?

Answer

Yes. The sale of the property is a supply of residential premises to be used predominately for residential accommodation and therefore input taxed.

This ruling applies for the following periods:

From the tax period beginning 1 June 2019 to the tax period ending 31 July 2023.

The scheme commenced on:

13 December 2013

Relevant facts and circumstances

•         You sold your principal place of residence, which is situated in Australia (the property).

•         The sale occurred under a commercial contract rather than residential because the property is zoned light industrial. The stated reason for using this type of contract was because the Council required it.

•         You acquired it from the previous owner after 2000 as a freehold sale.

•         You lived in the property for most of the time of your ownership.

•         You have always held out this property as a business address but have never claimed deductions for it.

•         You are not certain when the zoning changed, but you confirmed that you first became aware of it after you moved into the property as a residence and received notice from the relevant council.

•         A search on the property address on the local council website allows access to current and previous development applications made in relation to the property. The records show the previous owners lodged a development request with the council in after 2000. Under this request, they sought approval for a change in zoning to light industrial and for consent to use the property as a truck warehouse. This request was approved prior to their sale to you.

•         You also put a change in use request to the council more than 5 years ago. Under that request you sought consent to build a small truck workshop and garage at the rear of the property. It appears from council records that the request was granted, but based on your statements and photos of the property you decided against doing this.

•         You moved out of the property when you received notice from the council and rented a residence. However, you continued to use the property in your enterprise of furniture removal.

•         After you moved out, you rented the property to a friend who has lived there until it was sold.

•         The property is not new residential premises.

•         The property is not subject to a long term lease.

•         Under the existing permissible use the dwelling on the property is established as a caretaker's accommodation and office.

•         You operated an enterprise from the property.

Relevant legislative provisions

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

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

Reasons for decision

Issue: GST and Residential Premises

Question

Is your sale of real property (the property), on or about X date, an input taxed sale of residential premises?

Summary

Where the premises have the physical characteristics of residential premises such that they were designed to be used for residential accommodation and were used for that purpose, the sale of the property is a sale of residential premises as defined.

Detailed reasoning

Section 195-1 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 the property is neither commercial residential nor new residential premises. The facts indicate that the sale agreement related to a sale of commercial premises. Photographs supplied indicate that the premises are not new residential premises. The primary issue then is whether the sale is of commercial premises or do they meet the definition of residential premises? The consequence of this assessment is that if they are residential premises as defined, the sale is an input taxed supply. If the supply is not residential premises, the sale may be a taxable supply if the requirements of section 9-5 are met.

In this case, at the time of sale, the premises were vacant possession. In these circumstances, the section 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 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.

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, paragraphs 12 to13 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 photos you provided were taken after the settlement of the property. Those photos, indicate that the properties were not in a dilapidated condition to the point that occupation by a resident was impossible and further, 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 section 195-1.

The Commissioner considers that any subjective intention of the purchaser to develop the property into something else 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.

This is reinforced by the fact that the premises in fact had been leased and occupied as a residence during the period you owned the property.

Residential rent is treated as input taxed under section 40-35:

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a)  the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

(b)  the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

...

(2) However:

(a)  the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b)  the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a long-term lease.

On the basis of the foregoing, your sale of the property was an input taxed sale of residential premises. The premises have the physical characteristics of residential premises and have actually been used as residential premises. The premises were designed to be used for residential accommodation and were used for that purpose. As a result your sale of the property is a sale of residential premises as defined.