Edited version of private advice

Authorisation Number: 1052170055486

Date of advice: 18 October 2023

Ruling

Subject: GST - residential property

Question 1

Are you entitled to an input tax credit for the purchase of a property located at a specified address in Australia (the Property) under section 11-20 of the A New Tax System Goods and Services Tax Act 1999 (GST Act)?

Answer

Yes.

Question 2

Are your sales of the X number of residential units (the residential units) supplies of new residential premises as defined in section 40-75 of the GST Act and therefore taxable supplies?

Answer

Yes.

Question 3

Can the margin scheme be applied to the sale of any of the residential units?

Answer

No.

Question 4

Can you amend your activity statements to reverse:

•         the input tax credit that you have claimed in respect of your acquisition of the Property

•         the input tax credits that you have claimed in respect of the acquisitions relating to the completion and sales of the residential units, and

•         the GST applied on the sales of the residential units, and

for all the GST payments that you have made to date as part of an instalment plan, to be refunded to you in full plus interest for the period between dd/mm/yyyy and the date of this ruling?

Answer

No.

This private ruling applies for the following period:

From dd/mm/yyyy to dd/mm/yyyy

Relevant facts and circumstances

You are a company registered for GST.

The previous vendor of the Property had purchased the Property in or around mm/yyyy.

The Property contained a vacant commercial building comprising a number of floors. The original building was built around 19XXs, consisting mainly of steel support columns and beams, concrete block walls, concrete floors, and timber roof.

The director of the previous vendor appointed your director as the Architect to prepare plans for a conversion of the existing building into the residential units. Design work commenced in mm/yyyy, with planning approval granted in mm/yyyy and full Development Approval in or around mm/yyyy.

X Pty Ltd was engaged as the builder for the project. X Pty Ltd was owned by the director of the previous vendor.

Your director, in their capacity as your director and the Architect, prepared cost estimates for the proposed build in mm/yyyy, including builder's margin fees to be charged for the project. You agreed with the previous vendor to adopt a Cost-Plus style building arrangement, whereby the work is done in accordance with the drawings and with reference to the cost estimate, and for you to present regular progress claims for payment showing all invoices for work done in the period being billed, with the builder's margin added to each claim. This agreement was verbal and was not confirmed in writing.

The nature of the proposed new work included new structural steel support beams and columns added, new floors built, existing floors demolished and lowered, new roof deck constructed, new fire stair, new lift, new car stacker, new plumbing, electrical, fire services and air conditioning to suit the new residential layouts, including new kitchens, laundries and bathrooms. In accordance with the planning legislation, the building use was changed from commercial to residential. These works commenced in mm/yyyy, and were suspended in or around mm/yyyy because X Pty Ltd were experiencing financial difficulties.

As a result, the previous vendor marketed the Property for sale through a real estate agent, with the marketing material describing the project as substantially complete, with only fixtures, fittings and finishing works remaining to be completed.

The auction was held in mm/yyyy. The Property was passed in at auction with no bidders.

You offered to purchase the Property with a view to complete the work and then proceed to sell the residential units.

You provided a copy of the Contract for the Sale and Purchase of Land (non-residential)(the Contract) which was signed on dd/mm/yyyy. The Contract shows the previous owner as the vendor, you as the purchaser and the sale price as $X plus GST of $Y (total price $Z).

The settlement was completed around early mm/yyyy.

The Contract provides that the sale is a taxable supply of real property to which the margin scheme does not apply.

The Contract provides that a specific item in the Schedule to the Contract 'constitutes the written notice to be given by the Vendor pursuant to section 14-255 of Schedule 1 of the TA Act'.

The Contract provides that 'the Purchaser is required to pay the GST Withholding Amount to the Australian Taxation Office in accordance with the TA Act and clause 64 of this contract'.

The previous vendor did not carry out the strata titling of the building into X number of strata units. The property was marketed and eventually sold on one title.

You claimed input tax credits of $Y on the purchase of the Property.

The extent and scope of works completed at the time of your purchase of the Property as at mm/yyyy were as follows:

•         All structural work completed, namely -floors, walls, roof deck, cladding, new windows, wall and ceiling linings.

•         All services were completed to a level of X%, i.e., Plumbing, electrical, air conditioning, fire services.

•         All built in works completed, namely, kitchens, laundry nooks, built in cupboards.

•         Lift shaft structure completed, with all associated base works comprising structure, cabling, electrical supply. The lift itself was X% paid and sitting in the lift company's warehouse, awaiting installation

•         The car stacker was pre-purchased, to a level of X%, with the actual unit in storage in another State awaiting shipping for installation.

You provided several photographs showing what the Property looked like at the time of your purchase.

In or around mm/yyyy, you proceeded to carry out the following works to complete the building:

•         Second fix carpentry - install doors and door hardware, skirtings.

•         Supply and install sanitary ware - toilets, basins, showers, taps, and all accessories

•         Supply and install all kitchen appliances.

•         Supply and install all floor coverings - carpet and laminate flooring.

•         Paint all areas internally

•         Install lift

•         Install car stacker

•         Supply and install garage door

•         Construct entry canopy

•         Commission all services, i.e., Plumber connect gas to appliances, check all hot and cold supply, electrician final wiring and testing of all electrical services including new switchboard and all sub-boards, air conditioning install controllers and test system, lift commissioned, car stacker commissioned.

•         Fire services commissioned and tested by SAMFS. Modifications carried out to ensure compliance.

•         Cleaning and styling of all units for marketing.

•         Ongoing cleaning throughout the marketing period.

The above works were completed in or around mm/yyyy.

You appointed a real estate agent to market the residential units for sale. The residential units were sold over a specified number of weeks. Settlements were effected throughout the month of mm/yyyy.

Certificates of Occupancy for the residential units were issued in mm/yyyy prior to the settlement of sales.

You provided copies of the unexecuted contacts for the sales of the residential units. According to the contracts, the sale of all the residential units were treated as taxable supplies and GST was included in the price. Except for the contract for sale of one of the units, the contracts provided that the margin scheme did not apply.

Despite the contract of sale of one of the units providing that margin scheme applied, you stated that you did not apply the margin scheme on the sale of any of the residential units.

You also provided copies of the Final Settlement Statements for the residential units.

GST was not withheld at settlement of the sales of any of the units. However, you stated that you have declared the sales of the residential units in your activity statement as taxable supplies with the GST payable being an amount equal to 1/11 of the considerations received for the sales of the residential units.

You have claimed input tax credits on acquisitions relating to completion and sales of the residential units.

Your contentions

You submitted that:

•         The works undertaken by the previous vendor constituted substantial renovations and as a result the sale of the Property to you was a sale of new residential premises.

•         There is a contradiction between paragraph 12 of 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) which states:

Residential premises constructed by a builder or developer, who is registered for GST purposes or required to be registered, are subject to GST upon first sale. Where a developer purchases a commercial building, demolishes it and builds an apartment block, a supply of the apartment block or strata titled units in that block is treated as a sale of new residential premises and is subject to GST.

and the ATO publication GST at settlement | Australian Taxation Office (ato.gov.au) stating:

Excluded property transactions

Some property transactions are excluded from the withholding obligation. Withholding doesn't apply to:

new residential premises created through substantial renovations

commercial residential premises (for example, hotels, boarding houses, caravan parks).

•         The works undertaken by you are not defined as substantial renovations and the works completed by you are not defined as new residential premises, as a result, you should not have to pay GST on the sales of the residential units.

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 11-5

A New Tax System Goods and Services Tax Act 1999 section 11-15

A New Tax System Goods and Services Tax Act 1999 section 11-20

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

A New Tax System Goods and Services Tax Act 1999 section 75-5

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

Reasons for decision

Question 1

Are you entitled to an input tax credit for the purchase of the Property under section 11-20 of the GST Act?

Summary

You are entitled to an input tax credit for the purchase of the Property under section 11-20 of the GST Act as you made a creditable acquisition when you purchased the Property and the margin scheme was not applied on the supply of the Property to you.

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered.

(* Denotes a term defined in section 195-1 of the GST Act)

Section 195-1 of the GST Act provides that, in relation to the acquisition of a thing, the phrase 'creditable purpose' has the meaning given by section 11-15 of the GST Act.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Subsection 11-15(2) of the GST Act provides, however you do not acquire a thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

In your case, the acquisition of the Property meets the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act. This is because you acquired the Property solely for a creditable purpose as you acquired it to complete the works, strata title and sell the residential units, you provided consideration for the supply, and you were registered for GST at the time of the acquisition.

What remains to be considered is whether the supply of the Property to you was a taxable supply as required under paragraph 11-5(b) of the GST Act.

Section 9-5 of the GST Act provides that a supplier makes a taxable supply if:

(a) the supplier makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that the supplier carries on

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

(d) the supplier is 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.

Whether a supply is a taxable supply depends on the supplier's circumstances.

Based on the information provided, we are satisfied that the supply of the Property to you is a taxable supply. This is because the supply meets all the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act and the supply is neither GST-free nor input taxed under a provision of the GST Act or under a provision of another Act.

The supply of the Property to you was a taxable supply and therefore the requirements of paragraphs 11-5(b) of the GST act is also met.

As your acquisition of the Property meets all the requirements of section 11-5 of the GST Act, and the margin scheme was not applied on the sale of the Property to you, you were entitled to claim an input tax credit on the purchase of the Property.

Whether the supply of the Property to you was a supply of new residential premises

You contend that the works undertaken by the previous vendor constituted substantial renovations and that, as a result, the sale of the Property to you was a sale of new residential premises.

We disagree.

Paragraph 40-65(1) of the GST Act states:

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).

Paragraph 40-65(2) of the GST Act states:

However, 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 (regardless of the term of occupation) before 2 December 1998.

Section 195-1 of the GST Act defines the terms 'residential premises' and 'new residential premises' as follows:

residential premises means 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 residence or for residential accommodation;

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

new residential premises has the meaning given by section 40-75.

Section 40-75 of the GST Act states:

40-75 Meaning of new residential premises

When premises are new residential premises

(1)  *Residential premises are new residential premises if they:

(a)  have not previously been sold as residential premises...; or

(b)  have been created through *substantial renovations of a building; or

(c)   have been built, or contain a building that has been built, to replace a demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) discusses the meaning of the phrase 'residential premises' for the purposes of the GST Act.

As outlined in paragraphs 20 and 21 of GSTR 2012/5, in order to be classified as residential premises the premises in question must be fit for human habitation. Paragraphs 20 and 21 of GSTR 2012/5 state:

Fit for human habitation

20. 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.

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.

Further, as stated in paragraphs 22 and 81 of GSTR 2012/5, a partially built building is not residential premises until it becomes fit for human habitation. Paragraph 81 of GSTR 2012/05 states:

Conversely, a partially built building is not residential premises until the premises are fit for human habitation. It is a question of fact whether the physical characteristics of the building demonstrate that the premises supplied are suitable for, and capable of, being occupied as a residence or for residential accommodation. An occupancy permit/certificate, a certificate of final inspection, or similar document issued by the relevant authorised person or authority may provide evidence that the premises are fit for human habitation. Where a certificate of final inspection, or similar document, has not been issued for the premises and the premises are supplied, it is still necessary to consider whether the physical characteristics of the premises demonstrate that the premises are suitable for, and capable of, being occupied as residential premises. (Emphasis added)

In your case, the Property, originally contained a commercial building. The previous vendor commenced converting the commercial building into residential units.

When you purchased the Property in mm/yyyy, the units were only partially completed. The units were not fit for human habitation as they were not capable of being occupied as residential premises. The units had no functioning bathroom or kitchen facilities and there was a substantial amount of work required to be carried out throughout the building and the units before they could become suitable for, and capable of, being occupied as residential premises. This included:

• Second fix carpentry - install doors and door hardware, skirtings.

• Supply and install sanitary ware - toilets, basins, showers, taps, and all accessories
• Supply and install all kitchen appliances.
• Supply and install all floor coverings - carpet and laminate flooring.
• Paint all areas internally
• Install lift
• Install car stacker
• Supply and install garage door
• Construct entry canopy
• Commission all services, ie. Plumber connect gas to appliances, check all hot and cold supply, electrician final wiring and testing of all electrical services including new switchboard and all sub-boards, air conditioning install controllers and test system, lift commissioned, car stacker commissioned.
• Fire services commissioned and tested by SAMFS. Modifications carried out to ensure compliance.

The nature of the work required to be carried out by you demonstrates that the partially completed units were not fit for human habitation at the time when you purchased the Property. This is further supported by the certificates of occupancy being issued by the local council once the premises were regarded as being fit for human habitation, in mm/yyyy.

Accordingly, when you purchased the Property, the Property was not 'residential premises' as defined in section 195-1 of the GST Act, and consequently was not new residential premises as defined in section 40-75 of the GST Act.

Whether there is a contradiction between the ATO's published view regarding new residential premises

You submitted that there is a contradiction between paragraph 12 of 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) which states:

Residential premises constructed by a builder or developer, who is registered for GST purposes or required to be registered, are subject to GST upon first sale. Where a developer purchases a commercial building, demolishes it and builds an apartment block, a supply of the apartment block or strata titled units in that block is treated as a sale of new residential premises and is subject to GST.

and the ATO publication GST at settlement | Australian Taxation Office (ato.gov.au) stating:

Excluded property transactions

Some property transactions are excluded from the withholding obligation. Withholding doesn't apply to:

•         new residential premises created through substantial renovations

•         commercial residential premises (for example, hotels, boarding houses, caravan parks)

There is no contradiction between these two ATO publications. Paragraph 12 of GSTR 2003/3 refers to a situation where residential premises are new residential premises under paragraph 40-75(1)(a) of the GST Act. Whereas the ATO publication on GST settlement refers to an exclusion from the withholding obligation on settlement afforded under Schedule 1 to the Taxation Administration Act 1953 (TAA) for residential premises that are new residential premises under paragraph 40-75(1)(b) of the GST Act.

Under section 14-250 the TAA, a purchaser may have a GST withholding obligation for acquisitions of 'new residential premises'.

Subsection 14-250(2) of the TAA states:

This subsection applies to a *supply, by way of sale or long-term lease (within the meaning of the *GST Act), of:

(a)  *new residential premises that:

(i)   have not been created through *substantial renovations of a building; and

(ii)  are not *commercial residential premises; or

Subparagraph 14-250(2)(a)(i) of the TAA excludes new residential premises that have been created through substantial renovations from the withholding obligation. This is to ensure that a purchaser does not have to determine whether renovations are 'substantial renovations' of the property, which may be difficult to assess at the time of purchase. Similarly, commercial residential premises are excluded to make it clear that a withholding obligation does not apply in relation to residential premises that are both 'new residential premises', and 'commercial residential premises'.

However, where the new residential premises are not created through 'substantial renovations' (within the meaning of the GST Act), and are not also 'commercial residential premises', a withholding obligation applies to supplies of the property by way of sale or long-term lease.

It should be noted that subsection 40-75(1) of the GST Act also provides that 'Paragraphs (b) and (c) have effect subject to paragraph (a)'.

Also note that subparagraph 14-250(2)(a)(i) of the TAA excludes new residential premises that have been created through substantial renovations only from the withholding obligation on settlement. GST is still payable on the supply of new residential premises created through substantial renovations where the supply meets all the requirements of section 9-5 of the GST Act.

As explained above, in your case, section 40-75 does not apply to the sale of the Property by the previous vendor to you as the sale was not a sale of residential premises and consequently not a sale of new residential premises.

As discussed under Question 2 below, the sales of the residential units by you were the first sales of the units as residential premises and therefore they were new residential premises under paragraph 40-75(1)(a) of the GST Act.

Consequently, the sales of the residential units were not exempted from the withholding obligation under Subsection 14-250(2) of the TAA.

Question 2

Are your sales of the residential units supplies of new residential premises as defined in section 40-75 of the GST Act and therefore taxable supplies under section 9-5 of the GST Act?

Summary

Your sales of the residential units are supplies of new residential premises under paragraph 40-75(1)(a) of the GST Act as the units had not previously been sold as residential premises.

The sales of the residential units are taxable supplies under section 9-5 of the GST Act and you are liable to pay an amount equal to 1/11 of the sale price of each unit as GST.

Detailed reasoning

You submitted that the works undertaken by you are not defined as substantial renovations and the works completed by you are not defined as new residential premises, as a result, you should not have to pay GST on the sales of the residential units.

We disagree.

After purchasing the Property in mm/yyyy, you carried out the following works:

•         Second fix carpentry - install doors and door hardware, skirtings.

•         Supply and install sanitary ware - toilets, basins, showers, taps, and all accessories

•         Supply and install all kitchen appliances.

•         Supply and install all floor coverings - carpet and laminate flooring.

•         Paint all areas internally

•         Install lift

•         Install car stacker

•         Supply and install garage door

•         Construct entry canopy

•         Commission all services, ie. Plumber connect gas to appliances, check all hot and cold supply, electrician final wiring and testing of all electrical services including new switchboard and all sub-boards, air conditioning install controllers and test system, lift commissioned, car stacker commissioned.

•         Fire services commissioned and tested by SAMFS. Modifications carried out to ensure compliance.

•         Cleaning and styling of all units for marketing.

•         Ongoing cleaning throughout the marketing period.

We consider the above works were essential in order to make the residential units suitable for, and capable of, being occupied as residential premises.

The above works were completed in or around mm/yyyy. The certificates of occupancy for the residential units were issued is mm/yyyy prior to settlement of the sales.

We consider that your sales of the residential units were sales of 'residential premises' for the purposes of the GST Act as the units were fit for human habitation at the time of sale.

Further, the sales of the residential units were sales of 'new residential premises' under paragraph 40-75(1)(a) of the GST Act as they had not previously been sold as residential premises and had not previously been the subject of a long-term lease.

Therefore, your sales of the residential units are taxable supplies as they meet all the requirements of section 9-5 of the GST Act.

You are liable to pay an amount equal to 1/11 of the sale price of each of the residential units as GST.

Question 3

Can the margin scheme be applied to the sales of any of the residential units?

Summary

You cannot apply the margin scheme to the sale of any of the residential units as the sales were ineligible for the margin scheme. This is because the supply of the Property to you was a taxable supply on which GST was worked out without applying the margin scheme.

Detailed reasoning

Section 75-5 of the GST Act sets out the circumstances in which the margin scheme may be applied to a taxable supply of freehold interest in land.

Subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act lists the circumstances in which you acquire the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Relevantly, paragraph 75-5(3)(a) of the GST Act provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

As the supply of the Property to you was a taxable supply on which the GST was worked out without applying the margin scheme, you were not eligible to apply the margin scheme on the sales of the residential units.

Whilst the contract for the sale of one of the units provides that the sale of the unit was a taxable supply to which the margin scheme applied, you stated that you did not apply the margin scheme to the sale of any of the residential units.

In that regard, we consider that you were correct not to apply the margin scheme on the sales of the residential units as the sales were ineligible for the margin scheme under paragraph 75-5(3)(a) of the GST Act and excluded by subsection 75-5(2) of the GST Act.

Question 4

Can you amend your activity statements to reverse:

•         the input tax credit that you have claimed in respect of your acquisition of the Property

•         the input tax credits that you have claimed in respect of the acquisitions relating to the completion and sales of the residential units, and

•         the GST applied on the sales of the residential units, and

for all the GST payments that you have made to date as part of an instalment plan, to be refunded to you in full plus interest for the period between 29 April 2022 and the date of this ruling?

Summary

You cannot amend your activity statements to reverse the GST applied on the sales of the residential units, as the sales were taxable supplies. You are not required to reverse the input tax credits that you have claimed on the purchase of the Property and purchases relating to the completion and sales of the residential units as they were creditable acquisitions.

Detailed reasoning

You cannot amend your activity statements to reverse the GST treatment of the sales of the residential units, and are not required to reverse the input tax credits that you have claimed. This is because:

• Your sales of the residential units are sales of new residential premises under paragraph 40-75(1)(a) of the GST Act and taxable supplies under section 9-5 of the GST Act. As a result, you are liable to pay an amount equal to 1/11 of the sale price of each unit as GST.
• You are entitled to an input tax credit on the acquisition of the Property under section 11-20 of the GST Act as the acquisition is a creditable acquisition under section 11-5 of the GST Act.
• You are entitled to input tax credits under section 11-20 of the GST Act for acquisitions relating to the completion and sales of the residential units as they are creditable acquisitions.

As you are liable to pay GST on the sale of the residential units, the GST payments that you have made to date as part of an instalment plan cannot be refunded.