Edited version of private advice

Authorisation Number: 1052308278980

Date of advice: 20 September 2024

Ruling

Subject: GST and sale of renovated residential property

Question

Will the sale of your property located at [location] (Property) be a supply of 'new residential premises' as defined in paragraph 40-75(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

If the sale of the Property is a taxable supply, is the margin scheme applicable on the supply of the Property?

Answer

No, the margin scheme will not be applicable as the sale of the Property will be input taxed.

This ruling applies for the following period:

1 July 2024 to 30 June 2025

The scheme commence on:

1 July 2024

Relevant facts and circumstances

The [entity] (you) is an investment trust.

You are registered for GST and have been registered since ddmmyyyy.

In the past, you have purchased residential properties to lease out. Some residential properties were subdivided to allow for the construction of a second property. You would then lease out the properties and eventually sell them.

The Property is a residential property located at [location].

The Property was purchased on ddmmyyyy and settled on ddmmyyyy for the sum of [$sum] (inclusive of stamp duty).

The supply of the Property from the vendor to you was input taxed; not a taxable supply. The vendor did not apply the margin scheme.

The Property was rented out from ddmmyyyy to ddmmyyyy.

On or around ddmmyyyy, you commenced renovations on the Property.

The renovations were completed on or around ddmmyyyy at a cost of approximately [$sum].

Prior to the renovations, the Property was a 3-bedroom, 1 bathroom building.

Post renovations, the Property is now a 4-bedroom, 2 bathroom building.

The Property has been listed for sale in ddmmyyyyfor an estimated price of [$sum].

The following structural and non-structural work was undertaken to the existing dwelling and on the property:

•         Laundry and Kitchen were moved and in its place a 4th bedroom was created

•         Existing kitchen facilities (oven, sink, counter tops/cupboards and pantry) were removed

•         The door between the dining and living area was removed

•         The Property changed from being a 3-bedroom, 1 bathroom to 4-bedroom, 2 bathroom

•         Bedroom 3 became Bedroom 1 with an ensuite, and walk-in robe built

•         Bedroom 3 had a door installed (for entry to a dressing room, ensuite and built-in-robe constructed in the existing living room area), the existing walls were not altered

•         Built in robes were built for the other 3 bedrooms (now bedroom 1, 2 and 4)

•         Bedroom 1 and Bedroom 2 had built-in-robes installed, and the walls were not altered or moved

•         The area in which the previous kitchen and dining was located, has now been converted to a lounge room

•         The existing bathroom was reconfigured (the toilet was removed, vanity replaced and repositioned)

•         The external wall of the existing bathroom was moved inwards by approximately 400mm

•         A dressing room, ensuite and built-in-robes were created in the existing living room with access to Bedroom 3 (now Bedroom 1) via the door installed as previously mentioned in point 6.

•         A laundry and powder room were also installed (in the existing living room).

•         House area increased.

•         Ceiling was lifted in the new living and dining area.

•         Shed at the back was removed and replaced with grass. A small section of the Alfresco now sits where the shed was removed.

The following characteristics of the house were not altered:

•         the existing roof.

•         the floors.

•         the external windows and doors.

•         the external walls (except for the existing bathroom wall being moved approximately 400mm as previously mentioned in point 11)

•         Front of house and veranda remained unchanged and only painted.

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 40-65

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

Does IVA apply to this private ruling?

No.

Reasons for decision

Input taxed supply

Under subsection 40-65(1), the 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). In this case, the Property is residential premises to be used predominantly for residential accommodation.

If a supply is input taxed, then no GST is payable on the supply, and there is no entitlement to an input tax credit for anything acquired to make the supply.

However, under subsection 40-65(2) the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. The Property is not commercial residential premises.

Section 195-1 of the GST Act provides that real property includes any interest in or right over land or a personal right to call for or be granted any interest in or right over land, or a licence to occupy land or any other contractual right exercisable over or in relation to land.

Residential premises is defined under section 195-1 as land or building that is occupied as a residence or for residential accommodation, or is intended to be occupied, and is capable of being occupied, as a residence of for residential accommodation (regardless of the term of the occupation or intended occupation) and includes a floating home.

New Residential premises

Paragraph 40-75(1)(b) of the GST Act provides that residential premises are new residential premises if they have been created through substantial renovations of a building.

The issue to be determined is whether the Property is being created through 'substantial renovations' of a building.

Section 195-1 of the GST Act defines substantial renovations of a building as renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof, or staircases.

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) discusses the circumstances in which residential premises are new residential premises created through substantial renovations.

Paragraphs 56 to 59 of GSTR 2003/3 consider the term 'substantial renovations' as defined in section 195-1 and contain guidance on new residential premises created through substantial renovations:

56. The word 'building' is not defined in the GST Act. 'Building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'.²¹ In the context of the provision, we consider that an individual strata title unit or apartment is a 'building' and its structure is enclosed within the external walls of the unit, rather than the entire complex.

57. The general usage of the term 'renovate' is 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'.²² However, the term needs to be considered in the light of the surrounding words in the definition of substantial renovations.

58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

We consider the house a building.

The criteria for substantial renovations is discussed at paragraphs 60 to 62 of GST 2003/3:

60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances.

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

i.      the renovations need to affect the building as a whole; and

ii.    the renovations need to result in the removal or replacement of all or substantially all of the building.

62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

The works undertaken

You provided the following material facts relating to the renovations which include the following:

•         The removal of the existing kitchen facilities, door and the reconfiguration of the bathroom

•         The existing kitchen facilities were removed and in its place a lounge room was created

•         The bathroom has been redesigned and it has been newly fitted out

•         the existing bathroom wall was moved inwards by approximately 400mm to align with the extension of the building

•         The shed was removed, and, in its place, grass was planted over most of the area where the shed used to be

•         The existing laundry and toilet were moved into the building

•         Built-in-robes were added in bedroom 1 and 2

•         A dressing room, ensuite and built-in-robe were constructed in the existing living room area

•         A door leading to the dressing room was installed in bedroom 3

•         A powder room and laundry were installed.

•         A new kitchen including appliance and facilities were installed in a different position.

•         An extension to the building was created (house area had increased from 125 square meters to 198 square meters), where a living, dining room and an alfresco were added

•         Ceiling was lifted in the new living and dining area.

The following characteristics of the house were not altered:

• the existing roof

•         the floors

• the external windows and doors
• the external walls (except for the existing bathroom wall being moved approximately 400mm)
• Front of house and veranda remained unchanged and only painted.

Application to your circumstances

In order for renovations to be considered substantial renovations, the renovations and work done need to affect the building as a whole.

Based on the information you have provided, it is considered that whilst there are extensive renovation works being undertaken to the building, not all or substantially all of the building has been removed or replaced or that the building has been affected as a whole. It is significant in your circumstances that there are no structural changes being made to any of the supporting internal walls existing building.

We consider the painting to the front of the building and veranda to be cosmetic in nature. Landscaping and beautification of the surrounding land are not renovations of a building, as they do not attribute directly to the building itself. The additions made during renovations are not included in determining whether a building has been substantially renovated. Although these works involve an activity of 'renovation', the installation or addition of the features listed above constitutes neither 'removal' or 'replacement' of any part of the building, as required to meet the criteria for substantial renovations.

We do not consider the renovations to be substantial renovations as defined in section 195-1. In considering the building in its entirety and the works completed, the works will neither result in the removal or replacement of all the building, nor affect most rooms in the building. As such, the sale of the Property will not be a supply of 'new residential premises' as defined in paragraph 40-75(1)(b). The sale of the Property will be input taxed.

Margin Scheme

The margin scheme will not be applicable in this situation as the sale of the Property will be input taxed.