Edited version of private advice

Authorisation Number: 1052243564521

Date of advice: 21 May 2024

Ruling

Subject: GST - input taxed supply

Question

Is an Australian entity (you) making an input taxed supply under subsection 9-30(4) of the GST Act when you sell your property as vacant land after the removal of residential premises destroyed in fire, which prior to the fire were used solely to make input taxed supplies by way of lease?

Answer

Yes, you are making an input taxed supplies under subsection 9-30(4) of the GST Act when you sell the property as vacant land.

The scheme commences on:

The date this notice of private ruling issues

Relevant facts and circumstances

You are carrying an enterprise and are registered for GST.

In XXXX, you purchased a real property at a specified location in Australia. The property comprised of two furnished residential duplex units with two titles. The land has a frontage of X feet by depths of X feet and containing an area of X perches.

Initially the property was acquired to provide holiday accommodation for your stakeholders at a nominal rent to cover running expenses. It also served to reward and provide benefits to the stakeholders. However, due to change in circumstances over time, the maintenance of units became unsustainable.

In XXXX, you decided to lease the units. The property was leased until the fire incident in XXXX.

In XXXX, the units burnt down in the fire, and you subsequently received insurance proceeds for the loss of the units.

Subsequently, the burned structure was removed from the land as the fire destroyed the buildings beyond repair. You did not make any improvements to the land.

Due to change in circumstances, the land remained vacant and has not been in use since the fire incident.

With no foreseeable option to develop the site, you are considering of selling the vacant land.

In your application for the private ruling, you submitted that prior to the fire, the units were used as residential premises making input taxed supplies and, as such, the properties would have been considered an input taxed supply on sale. Accordingly, you contend that the eventual sale of the vacant land should be an input-taxed supply due to its prior status.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-25

A New Tax System (Goods and Services Tax) Act 1999 section 9-30

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

Taxable supplies

The sale of the property will be a taxable supply if it satisfies all the elements of section 9-5 of the GST Act. Under section 9-5 of the GST Act you make a taxable supply if:

(a)  you make the supply for consideration

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

(c)   the supply is connected with Australia, 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.

The facts indicate that the sale of the vacant land will satisfy all the requirements under paragraphs 9-5(a), 9-5(b), 9-5(c), and 9-5(d) of the GST Act as:

•         the sale is made for consideration,

•         the sale is made in the course or furtherance of your enterprise as part of your business,

•         the land is located in Australia, and

•         you are registered for GST.

Therefore, the sale of the vacant land will be a taxable supply under section 9-5 of the GST Act, unless the supply is GST-free or input taxed. In your circumstances, there are no provisions in the GST Act that provide for the sale of the land to be GST-free. Thus, the matter that remains to be determined is whether the supply will be input taxed.

Input taxed supply - paragraph 9-30(2)(a)

Paragraph 9-30(2)(a) of the GST Act provides that:

(2)    A supply is input taxed if:

(a)    it is an input taxed under Division 40 or under a provision of another Act; or...

Division 40 of the GST Act provides for supplies that are input taxed. Supplies that are input taxed are not subject to GST.

Under section 40-35 of the GST Act, a supply of residential premises, other than commercial residential premises (such as hotels, motels and boarding houses), by way of lease, hire or licence is an input taxed supply. Furthermore, subsection 40-65(1) of the GST Act provides that:

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).

Residential premises

For the sale of real property (land or building) to be an input taxed supply, the real property must meet the definition of residential premises. Section 195-1 of the GST Act provides that a land or building:

(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.

Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises (GSTR 2012/5) provides guidance on the definition of residential premises used predominantly for residential accommodation regardless of the term of occupation. To qualify as residential premises, it addresses two key criteria:

•         Actual use: to qualify as residential premises under the first limb of section 195-1 of the GST Act, the premises must be used as a residence or for residential accommodation.

•         Intended use: under the second limb of section 195-1 of the GST Act, land or buildings are considered residential premises if they are intended to be occupied and are capable of being occupied as a residence or for residential accommodation. The premises must be designed, built or modified to be suitable for such use. This is demonstrated through a single test based on their physical characteristics.

Paragraph 20 of the GSTR 2012/5 emphasises that:

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.

In your situation, vacant land lacks the necessary physical attributes to be characterised as being suitable for, or capable of being occupied as a residence as it does not provide shelter and basic living facilities. Therefore, it does not fall within the definition of residential premises.

Input taxed - subsection 9-30(4)

Subsection 9-30(4) of the GST Act provides that:

A supply is taken to be a 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.

ATO Interpretative Decision ATO ID 2009/18

ATO ID 2009/18 addresses the GST implications when selling vacant land after removal of a fire-damaged house that had been used solely in connection with input taxed supplies. Specifically, it focuses on the application of subsection 9-30(4) of the GST Act that mandates that vacant land must be exclusively used in connection with the entity's input taxed supplied (other than financial supplies).

This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

• 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).

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 a separate purpose.

In your situation, you have primarily engaged in operating and managing your business and leasing residential premises. Until the units were destroyed by fire, the property was exclusively used for leasing activities and making input taxed supplies. Since the fire rendered the property beyond repair, you have not taken significant steps to enhance its value or occupy it in a manner suggesting a purpose unrelated to residential leasing.

You received insurance proceeds for the damaged units and the remaining burnt structure was subsequently demolished and removed. It is important to recognise where the fire made the units uninhabitable, the demolition should not be regarded as a separate and distinct use of the land, but rather as a consequential step between the end of the leasing activities and the sale of land.

Due to change in circumstances, you opted to retain the land vacant. Given the absence of viable development options, you now consider it appropriate to dispose of the land.

Throughout the ownership, your sole use of the land has been connected to input taxed supplies through residential leasing. Consequently, the sale of vacant land is taken to be an input taxed supply under subsection 9-30(4) of the GST Act.