Edited version of private advice

Authorisation Number: 1052351350099

Date of advice: 17 January 2025

Ruling

Subject: GST - residential premises

Question 1

Will the sale of Unit X at a specified address, be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No.

Question 2

Will the sale of Unit X, at a specified address, be a taxable supply pursuant to section 9-5 of the GST Act?

Answer 2

No.

Question 3

Will you, in relation to each of Unit X and Unit X, be required to give written notice under section 14-255 of Schedule 1 to the Tax Administration Act 1953 (TAA 1953) to the purchaser, advising that they must make a payment under section 14-250 of Schedule 1 to the TAA 1953?

Answer 3

Yes, you will be required to give a notification to the purchaser; however, the notification can simply state that the purchaser is not required to make a payment.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

You are not registered for GST.

You purchased the Property on a specified date.

The Property was purchased as an investment.

The Property consists of:

•                a house with a kitchen, living/dining area, laundry, bedrooms, bathroom and a garage, and,

•                an attached self-contained unit.

You have leased the Property as two separate dwellings.

You have made improvements to the Property.

You lodged a subdivision application on a specified date.

The Property was approved for subdivision.

You own one other rental property.

You are contemplating selling one or both of the units.

Relevant legislative provisions

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

Reasons for decision

Question 1 and Question 2

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

•                you make the supply for consideration;

•                the supply is made in the course or furtherance of an enterprise that you carry on;

•                the supply is connected with the indirect tax zone (Australia); and

•                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.

On the facts of this case there are no provisions in the GST Act to make the sale of the Units GST-free. We will consider if the supply of the units will be input taxed or a taxable supply.

The sale of Unit X and Unit X (the Units) will be made for consideration, in the course or furtherance of the leasing enterprise that you carry on, and the sale is connected with the indirect tax zone. However, you are not registered for GST.

A sale of residential property is not GST-free under any provisions of the GST Act or any other legislation. Therefore, it should be determined whether the sale of the Units will be input-taxed, and if you are required to be registered for GST if the supplies are not input taxed.

Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) provides that the sale of real property 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.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides guidance in determining whether particular premises are commercial residential premises by describing the features of commercial residential premises such as a hotel, motel, inn, hostel or boarding house.

Based on the information that you provided, the Property does not display the features of commercial residential premises. As such, your supply of the Units is not a supply of commercial residential premises.

Section 40-75 defines the term 'new residential premises' and includes residential premises that:

•                have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

•                have been created through substantial renovations of a building; or

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

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) explains when real propertyis new residential premisespursuant to section 40-75.

Paragraphs 42 to 43 of GSTR 2003/3 contain guidance on the subdivision of apartments into strata title units.

42. A building may comprise flats or units for which no separate title exists. Title refers to the registered ownership of the relevant land and improvements as a whole. The owner of the apartments may decide to obtain permission for a strata title subdivision so that each flat or unit can be sold separately. Approval for the subdivision may be subject to building works being undertaken. For example, approval may be conditional on the construction of a firewall or modifications to the entrance and exit of the building.

43. The process of strata titling an apartment block does not, by itself, create new residential premises under paragraph 40-75(1)(a). When the newly strata titled units are subsequently sold, the supplies of those units are not sales of new residential premises, if the land and the building together have previously been sold as residential premises, or been the subject of a long-term lease. Physically, the combination of land and the building as residential premises remains basically the same. It is only the nature of the legal interest which has changed. If the process of strata titling is accompanied by works on the building, it is then a question of whether the works constitute substantial renovations (see discussion at paragraphs 53 to 83).

To this extent, subdividing the Units did not create new residential premises under paragraph 40-75(1)(a).

GSTR 2003/3 discusses the circumstances in which residential premises are new residential premises created through substantial renovations.

The term 'substantial renovations' is defined in section 195-1:

substantial renovations of a building are 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.

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:

55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner.

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'. 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'. 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.

59. A building comprises a number of components, which can be termed either structural (i.e. the foundations, external walls, interior supporting walls, floors, roof, etc) or non-structural (including fixtures, fittings, plumbing, mechanical, fire systems, electrical, lifts, air conditioning, etc.

The criteria for substantial renovations is discussed at paragraphs 60 to 62 of GSTR 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:

•                the renovations need to affect the building as a whole; and

•                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.

Paragraphs 63 to 64 and 68 to 69 of GSTR 2003/3 state:

63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example curtilage) and additions to the building.

Building in its entirety

64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is, the building as a whole and not by reference to specific or individual rooms. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

Removal or replacement of all or substantially all of the building

68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial.

69. This criterion is satisfied where there is a removal or replacement of a substantial part of the:

•                structural components of the building; or

•                non-structural components of the building.

Paragraphs 70 to 77 of GSTR 2003/3 state the following:

70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

•                Altering, or replacing of, foundations;

•                Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

•                Lifting or modifying of roofs;

Replacing existing windows and doors such that it is necessary to alter brickwork (for example replacing a single door with a double sliding door).

71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house.

72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced.

73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred.

74. Non-structural building work includes:

•                Replacing electrical wiring;

•                Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);

•                Plastering or rendering an entire wall or walls;

•                Plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes);

•                Removing or replacing kitchen cupboards, bathroom fixtures, etc;

•                Removing or replacing air-conditioning or security system.

77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

•                Painting;

•                Sanding floors;

•                Removing and replacing worn or out of date fittings such as light fittings;

•                Replacing curtains or carpets.

Further paragraphs 78 and 79 of GSTR 2003/3 state:

78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110.

79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises.

Guidance is provided on what we regard as substantial renovations in Example 6 of GSTR 2003/3:

Example 6 - residential premises built, rented, restored and then sold

115. David is a property developer whose enterprise includes the construction of residential rental accommodation, renting those premises for a number of years (never less than 10 years) and the eventual sale of those premises.

116. Normal maintenance of the premises is undertaken while the premises are rented.

117. When the decision is made to sell the premises, work is undertaken to restore the premises to their original condition and to rectify damage done by the tenants. As part of this process a new kitchen, bathroom etc may be installed.

118. Where the restoration work affects most of the rooms in the house, but is largely cosmetic in nature (for example, replastering and repainting) and only the kitchen and bathroom are replaced, we consider there have not been substantial renovations.

119. The residential premises have been continuously used only for making input taxed supplies (i.e. residential rental) for a period of at least 5 years since the premises first became residential premises and there have not been substantial renovations. Therefore, the sale of the premises will be an input taxed supply.

120. However, where the damage done is so severe that it is necessary to replace the damaged plumbing, electrical wiring, most of the interior walls, floors, windows, doors, kitchen and bathroom (including fixtures and fittings), and restore the exterior walls and roof, there would be substantial renovations. The painting of the building inside and out is cosmetic in nature, and not a factor in deciding whether substantial renovations have occurred. In this case, the sale of the premises will be a taxable supply as the premises are new residential premises created through substantial renovations.

The works undertaken

You provided material facts relating to the renovations.

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 was extensive renovation works undertaken to the building, not all or substantially all of the building has been removed or replaced, and the renovations do not affect the building as a whole.

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 neither result in the removal or replacement of all the building, nor affect most rooms in the building. As such, the sale of Unit X and Unit X will not be a supply of 'new residential premises' as defined in paragraph 40-75(1)(b).

The sale of Unit X and Unit X will be input taxed supplies of residential premises.

Question 3

GST withholding at settlement

Paragraph 15 of Law Companion Ruling 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4) lists the circumstances where a vendor is not making a taxable supply. It reads:

A purchaser only has a GST withholding obligation when a vendor is making a taxable supply. A vendor will not be making a taxable supply in situations including:

•                where the vendor is not registered for GST and not required to be registered for GST as the sale is not in the course or furtherance of an enterprise

•                the sale of residential premises is input taxed because they are not 'new residential premises' (refer to paragraph 18 of this Ruling), or

•                the sale is a GST-free supply, for example as part of a GST-free supply of a going concern or GST-free farmland.

Paragraph 58 provides that a vendor of residential premises or potential residential land must give a written notice to the purchaser before making the supply. The notice must state whether the purchaser is required to make a payment under section 14-250 in relation to the supply.

Paragraph 59 of LCR 2018/4 states that if the vendor is not registered or required to be registered for GST, they simply state that the purchaser is not required to make a payment.

Summary

The proposed sale of Unit X and Unit X will be an input taxed supply of residential premises.

You will be required to give notification to the purchaser that no GST needs to be withheld from the purchase price at settlement, as no GST will be payable on the sale.