Edited version of private advice

Authorisation Number: 1052321339428

Date of advice: 21 October 2024

Ruling

Subject: Input taxed residential rent

Question

Is entity A able to claim GST credits for the purchase and associated expenses for a residential property that will be rented?

Answer

No. The supply is input taxed under section 40-45 of the A New Tax System (Goods and Services Tax) Act 1999. Therefore, GST credits cannot be claimed on the supply of this residential rental property.

This ruling applies for the following period:

21 October 2024 to 21 October 2028.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A is a registered charity with the Australian Charities and Not for Profit Commission.

Entity A purchased a property within Australia as a new dwelling. The contract for the purchase of the property was entered into in August 2023 with settlement occurring in November 2023.

The Property contains a residential dwelling.

The Property is rented at the 100% of the GST inclusive market rate.

The income from the Property will be used by entity A.

Entity A paid GST on the purchase of the Property.

Entity A paid GST for professional fees paid to a lawyer in relation to the purchase of the property.

Entity A paid GST for insurance cover.

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 9-30

A New Tax System (Goods and Services Tax) Act 1999 section 38-250

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

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

Supply

Section 9-5 provides that 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 the indirect tax zone; 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.

Entity A is making the supply of the rental of the property for consideration at the market rate and satisfy subsection 9-5(a).

By renting the Property, the supply is being made to further the enterprise that entity A is carrying on and satisfies subsection 9-5(b).

The property is located within Australia and therefore satisfies subsection 9-5(c).

Entity A is registered for GST and satisfy subsection 9-5(d).

As all the requirements of section 9-5 are satisfied, entity A's supply is a taxable supply unless the supply is either GST-free or input taxed.

Input taxed

Subsection 40-35(1) states that a supply of premises that is by way of 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)    ...

Where 'residential premises' is defined in section 195-1 as 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;

Paragraphs 9 and 10 of Goods and Services Tax Ruling GSTR 2012/5 Goods and service tax: residential premises (GSTR 2012/5) explain that the requirement in section 40-35 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 even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

Entity A is providing the property for residential accommodation which satisfies subsection 40-35(1)(a). Therefore, the supply is input taxed. As the supply is input taxed, entity A is not required to include GST in the rental income that it receives. Additionally, entity A cannot claim any input tax credits on the GST that has already been paid for the things that are acquired to make the supply. Which means entity A cannot claim any credits for the GST that has already been paid in relation to the purchase of the property.

Conclusion

The supply is input taxed under section 40-45. Therefore, credits cannot be claimed on the supply of this residential rental property.