GST issues registers

Property and construction

Section 15 - Sale of real property

There have been changes to the law relating to the application of the margin scheme. To view the Tax Laws Amendment (2005 Measures N 2) Bill 2005 refer to the Parliamentary website aph.gov.au

For GST, Luxury Car Tax and Wine Equalisation Tax purposes, from 1 July 2015, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

(a) added, (u) updated, (w) withdrawn

15.1 Margin scheme

15.1.2 What is the distinction between section 19 of the GST Transition Act and Division 75 of the GST Act?

For source of ATO view refer to:

•

paragraphs 15-17 of GSTR 2000/14 - Goods and services tax: transitional valuation of work-in-progress for head contractors in the building or civil engineering industries

•

paragraphs 76-78 of GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000.

ATO position

Section 19 of the Transition Act and Division 75 of the GST Act do not provide alternative methods of valuing property. Section 19 of the Transition Act applies to certain construction agreements which span 1 July 2000, and require a valuation of work and materials permanently affixed to the construction site as at the start of 1 July 2000, or a later date as determined by the Commissioner. This valuation, which does not include land, means the builder will be subject to GST only on the work and materials supplied on the site on and after 1 July 2000. For more information on section 19 of the Transition Act, see GSTR 2000/14, entitled 'Transitional valuation of work-in-progress for head contractors in the building or civil engineering industries'. Under Division 75 of the GST Act, the need for a valuation as at 1 July 2000 or later date only arises where a freehold interest in land, a stratum unit, or a long term lease which is acquired or held before 1 July 2000 is granted or sold on or after that date. The valuation includes the land.

Example

Andrew owns land on which he is developing a block of units. On 15 March 2000, Andrew enters into an agreement with Bob, a builder, under which Bob carries out the construction work. Construction is in progress as at 1 July 2000. Bob may value, under section 19 of the Transition Act, the work and materials that have gone into the building as at 1 July 2000 and he is not liable for GST on that value. Andrew may choose to apply the margin scheme under Division 75 of the GST Act in working out the GST on the subsequent sale of the units. Andrew will have to obtain a valuation as at 1 July 2000 of the freehold interest in the land and the building being constructed. Andrew may engage a professional valuer to determine the valuation, or he may choose the cost of completion method. In either event the value of the land itself is included.

15.1.6 How does the margin scheme affect input tax credits?

For source of ATO view refer to paragraph 71 of GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000.

ATO position

If you purchase real property under the margin scheme, you are not entitled to an input tax credit for the GST payable on the acquisition. However, you may be allowed input tax credits on any costs of improvements subsequently made to the real property, for example, if you are a developer.

15.1.7 Is GST payable if a property is sold on or after 1 July 2000 where there has been no capital gain?

For source of ATO view refer to GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000

ATO position

The GST Act is independent of the Income Tax Assessment Act 1997 Part 3-1 and 3-3 (Capital Gains Tax). In circumstances where the margin scheme is applied to the sale of real property, GST is payable on the amount by which the consideration for the supply exceeds the consideration for your acquisition of the real property. If your original purchase price is more than your sale price, then under the margin scheme, no GST is payable on the sale because there is no positive margin.

15.1.24 How does the margin scheme apply to this series of transactions:

Value of property at 1 July 2000 is $20,000. Improvements of $30,000 are made. Property is sold for $64,000 at the end of 2000. Further improvements of $50,000 are undertaken. Property is sold in 2001 for $163,000.

For source of ATO view refer to GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000.

ATO position

First Sale
Sale Price $64,000
Less Valuation at 1 July 2000 $20,000
Margin $44,000
GST = Margin × 1/11 $4,000

Second Sale
Sale Price $163,000
Less consideration for acquisition $64,000
Margin $99,000
GST = Margin × 1/11 $9,000

15.1.27 Can a mortgagee in possession (a creditor) exercising power of sale in relation to real property apply the margin scheme in relation to the sale?

Non-interpretative - straight application of the law

ATO position

This question deals with the interaction between Division 75 - sale of freehold interest etc of the GST Act and Division 105 - supplies in satisfaction of debts of the GST Act.

If all of the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied, the mortgagee in possession (creditor) may apply the margin scheme in respect of the sale.

Division 105 of the GST Act deals with supplies made by creditors of property belonging to a debtor, where the supply is in satisfaction of a debt owed to the creditor. The supply is a taxable supply if it would have been a taxable supply had the debtor made the supply. The creditor is liable for any GST payable on the supply of the debtor's property.

Under Division 105, the supply is not a taxable supply if the debtor gives written notice to the creditor stating that the supply would not have been a taxable supply had the debtor made it. The notice must contain full reasons why the supply would not have been taxable. Alternatively, if the creditor cannot obtain such a notice, the creditor may reach a belief, on the basis of reasonable information, that the supply would not have been a taxable supply if the debtor were to make it.

It does not matter if the supply is made in the course of the creditor's enterprise, or if the creditor is registered, or required to be registered.

Having regard for the provisions of Division 105 of the GST Act, the creditor (which could either be a receiver manager, mortgagee in possession or a liquidator) is taken to be standing in the shoes of the debtor when the creditor makes the supply or is acting as agent for the debtor. As a result, for the purpose of the creditor applying the margin scheme to the sale, the word 'you' as used in Division 75 is taken to mean the debtor.

15.1.28 Can the representative of an incapacitated entity apply the margin scheme when making a supply of real property which belonged to the incapacitated entity?

ATO position

For the source of ATO view, refer to:

•

paragraphs 134A and 134B of GSTR 2006/7 - Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

•

paragraphs 175A and 175B of GSTR 2006/8 - Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000.

If all the requirements for applying the margin scheme under Division 75 of the GST Act are satisfied when the incapacitated entity is taken to make the supply, the representative of the incapacitated entity may apply the margin scheme in respect of the sale. However, the representative of the incapacitated entity is liable for the GST calculated under the margin scheme.

Division 58 of the GST Act deals with representatives of incapacitated entities. The terms 'representative' and 'incapacitated entity' are both defined in section 195-1 of the GST Act. In general, they refer to insolvency practitioners such as liquidators, receivers and administrators, and the entity they are appointed over.

The key operative provisions provide that a supply, acquisition or importation by a representative, in its capacity as a representative, is taken for GST purposes, to be a supply, acquisition or importation of the incapacitated entity (section 58-5). The provisions ensure that any method the incapacitated entity would have been eligible to use to work out the amount of GST payable on a supply (such as the margin scheme under Division 75) can be used. However, the representative (and not the incapacitated entity) is liable for or entitled to GST consequences that arise from a supply, acquisition or importation or related acts or omissions during the representative's appointment (section 58-10).

In the light of the provisions of this Division, the incapacitated entity is taken to be making the supply. As a result, for the purpose of the representative applying the margin scheme to the sale, the word 'you' as used in Division 75 is taken to mean the incapacitated entity.

15.1.29 What is the meaning of the words 'improvements on the land' for the purposes of subsections 75-10(3) and 75-10(3A) of the GST Act?

Refer to GSTR 2006/6.

15.1.30 What is the meaning of 'the consideration for your acquisition of the interest, unit or lease' referred to in subsection 75-10(2) of the GST Act?

For source of ATO view refer to:

•

GSTD 2006/3 - Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property?

•

paragraph 16 of GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000.

The consideration for your acquisition of the freehold interest, stratum unit or long-term lease is the original purchase price paid in respect of the interest, unit or lease in question. In the case of subdivided land or premises, the consideration for your acquisition is the corresponding proportion of the original purchase price paid in respect of the relevant land or premises (section 75-15 of the GST Act).

The original purchase price of the interest, unit or lease which you have acquired:

•

does not include development costs incurred either prior to or after your acquisition

•

does not include incidental acquisition expenses such as legal fees, stamp duty, registration fees and other transfer costs

•

is the price arrived at after allowing for the usual settlement adjustments provided for in the relevant contract of sale.

15.1.31 What are the record keeping requirements if you make supplies under the margin scheme?

Non-Interpretative - straight application of the law

If you make a taxable supply, you must keep records that record and explain all transactions and other acts you engage in that are relevant to that supply. Records that are relevant to a supply under the margin scheme will include evidence of your choice to use the margin scheme, and when that choice was made. If you are calculating the margin for the supply under subsection 75-10(3), you will also need to keep records that clearly indicate which valuation method has been used.

You must retain your records for at least five years after the supply has been made.

These record keeping requirements are set out in section 382-5 in Schedule 1 to the Taxation Administration Act 1953.

15.1.32 Can you use the margin scheme when you make a supply of premises and the supply is partly taxable and partly input taxed?

For source of ATO view, refer to:

•

paragraphs 101-103 of GSTR 2006/7 - Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

•

paragraphs 133-136 of GSTR 2006/8 - Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000.

If a supply of real property is partly input taxed and partly taxable (a mixed supply), then the margin scheme can apply to the taxable component. A common example of mixed supply is a building that contains areas that are residential and commercial.

If the margin for the supply is calculated under subsection 75-10(2) it is the difference between the consideration for the supply and the consideration for its acquisition. For mixed supplies, the consideration for the supply and the consideration for the acquisition, are the amounts of the consideration that relate to the taxable component of the supply.

Where the margin for the supply is calculated under subsection 75-10(3) it is the difference between the amount of the price that relates to the commercial component of the supply, and an approved valuation of the commercial premises at the relevant valuation date.

If the valuation is obtained for the entire building, then it must be apportioned to ascertain the part of the valuation that relates to the commercial premises.

Note: How to ascertain whether the margin for the supply is calculated under subsection 75-10(2) or 75-10(3) is discussed in more detail at 15-1-4.

15.2 Margin scheme examples

15.2.2 Margin scheme example: - A is registered for GST as at 1 July 2000.

A owns existing residential premises (a house) on a large parcel of land, all of which he bought from a builder in 1990. After 1 July 2000, A constructs a new house on part of the land and then subdivides the land. Two new certificates of title are issued. A sells both lots as soon as the new house is completed.

(a)

Must A pay GST on both lots when they are sold?

(b)

Can A use the margin scheme, and if so at what date must the land be valued?

(c)

What must A state on the tax invoice he provides?

For source of ATO view refer to:

•

for part (a), paragraphs 32-37 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

•

for part (b), GSTR 2000/21 - Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000; and paragraphs 101-108 of GSTR 2006/7 - Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

•

for part (c), paragraph 136 of GSTR 2006/7 - Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

ATO position

(a) Must A pay GST on both lots when they are sold?

The sale of the subdivided portion of land with the newly constructed house will be a supply of new residential premises and will be a taxable supply.

The sale of the house that A bought from the builder will be input taxed unless it was substantially renovated (see Issues 15.5.1 and 15.5.2 as to what constitutes 'substantial renovations'). The mere subDivision of the land, such that the house is situated on a smaller part of the original portion of land, does not make the house 'new residential premises' (see Issue 15.4.12(c)).

(b) Can A use the margin scheme to value the land, and if so at what date?

Yes. A may choose to apply the margin scheme to work out the GST payable on the sale of the new house. This is because he had acquired the land before 1 July 2000 (and therefore, not through a taxable supply on which GST was worked out without applying the margin scheme). For more information on the margin scheme please refer to GSTR 2000/21. (See also Issue 15.1.30).

Note: This is the ATO view that will apply up to 16 March 2005. Legislative Amendments to the provisions relating to 'applying the margin scheme' will have effect from 29 June 2005

(c) What must A state on the tax invoice he provides?

A is not required to provide a tax invoice if he applies the margin scheme (section 75-30 of the GST Act).

15.3 Land contracts

15.3.1 Is a deposit paid under a standard land contract subject to Division 99 of the GST Act?

For source of ATO view refer to paragraphs 27-28, 38-47 and 86-87 of GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract.

ATO position

A deposit performs a dual function, acting as both an earnest to bind the contract and forms part payment for the purchase price upon settlement (GSTR 2000/28 at paragraph 14). Where there is a breach of contract and the purchaser is in default, the vendor may claim forfeiture of the deposit without proof of damages. Division 99 of the GST Act states that the giving of a deposit as security does not constitute consideration for a supply until it is forfeited (paragraph 99-5(1)(a) of the GST Act) or applied as part of the consideration (paragraph 99-5(1)(b) of the GST Act). If a vendor defaults under a standard land contract and the deposit is refunded to the purchaser, there are no GST consequences. There is no taxable supply as neither the purchaser nor the supplier has made a supply for consideration, as required by section 9-5(a) of the GST Act. Nor is there a creditable acquisition under section 11-5 of the GST Act.

There may be GST consequences where the purchaser defaults under a standard land contract and the deposit is paid to the vendor. In this case, the vendor has made a supply for consideration and, if the other elements of a taxable supply as defined in section 9-5 of the GST Act are satisfied, the supply will be a taxable supply. GST will be attributable to the tax period during which the deposit is forfeited (paragraph 99-10(1) of the GST Act, GSTR 2000/28 at paragraph 30). This applies whether you account for GST on cash basis or a non cash basis. Where upon the release of the deposit is applied as payment of agent's commission, rather than to the vendor as part payment, the vendor has nevertheless constructively received the money. It is 'in connection with the supply' and therefore will be consideration for the supply (section 9-15 of the GST Act).

Standard land contracts in Victoria - early release of deposit

In Victoria, section 27 of the Sale of Land Act 1962 (Victoria), under certain conditions, permits the release of deposit monies to the vendor prior to completion of the standard land contract. Although the deposit is released to the vendor, the deposit retains its character as a deposit until it is forfeited or applied as consideration. Division 99 of the GST Act still applies to such a deposit (GSTR 2000/28 paragraphs 28, 86-87).

15.3.2 Is a standard land contract an invoice?

For source of ATO view refer to paragraphs 42-57 of GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract.

ATO position

A standard land contract is not an invoice for GST purposes as it does not notify an obligation to make a payment (GSTR 2000/28 paragraph 29). This means that entering into a standard land contract will not trigger attribution of GST payable or input tax credits where you account for GST on a non cash basis. 'Invoice' means a document notifying an obligation to make a payment (section 195-1 of the GST Act). An agreement which is in substance 'subject to contract', or a contract containing a condition or conditions precedent will not satisfy this definition as no legally binding contract is in existence. Condition subsequent contracts are also unlikely to be invoices as the 'obligation to make a payment' is uncertain, as it is determinant upon the satisfaction of the conditions. This occurs, despite the contracts ability to generate a right to damages where the beneficiary party has not made reasonable efforts to satisfy the condition. This can hardly be said to be an 'obligation to make a payment'.

A contract is a legally binding agreement enforceable at law. A contract for the sale of land does not create an immediate debt. The purchaser may sue for specific performance or damages and costs. However, a debt to the settlement amount does not generally arise until the contract has been completed by the execution and acceptance of a conveyance. At that time, the purchaser obtains dispositive power over the property, and the contingency that the sale will not proceed to completion disappears. A presently existing legal 'obligation' to the settlement money does not arise until such time.

15.3.3 How do the GST attribution rules apply to sales of land under standard land contracts?

For source of ATO view refer to GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract.

ATO position

Payment at settlement triggers attribution for sales under standard land contracts.

A standard land contract is a written contract for the sale of land that provides for:

•

the payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement

•

the payment of the balance of the purchase price upon settlement.

When you make a taxable supply of land under a completed standard land contract, you attribute the GST payable to the tax period in which settlement occurs. This applies if you account for GST on a cash basis or if you do not account for GST on a cash basis.

If you hold a tax invoice, you attribute an input tax credit for a creditable acquisition of land under a completed standard land contract to the tax period in which settlement occurs. This applies if you account for GST on a cash basis or if you do not account for GST on a cash basis.

15.4 General

15.4.1 What is the GST treatment of adjustments on property settlements?

For source of ATO view refer to GSTD 2006/3 - Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property?

ATO position

(a) Adjustments for rates or land tax

GST liability will depend in the usual case on whether the sale of the land itself is a taxable supply.

•

Scenario 1: The liability to pay the land tax and/or rates attaches to the vendor (and possibly the land) prior to settlement, and the vendor pays these charges

The adjustments in scenario 1 are regarded as part of the sale price, being the increase or decrease in consideration for the supply of land. There is no second supply.

•

Scenario 2: The liability attaches to the land prior to settlement, the vendor has not paid the charges, and the vendor directs the purchaser to discharge this liability.

The adjustments in scenario 2 are regarded as a mere direction to apply some part of the consideration in discharge of the vendor's liability elsewhere. The amount of consideration is not a second supply.

A

different conclusion would be reached where there is an adjustment in settlement to reflect an identifiable second supply, for example, where the consideration for the sale of land requires the supply of something other than money. This could occur for example where land is exchanged in consideration of the supply of a boat and cash.

•

Scenario 3: The liability arises or attaches to the owner after the date of settlement (that is, the purchaser) and the vendor is therefore obliged to contribute.

The adjustments are regarded as part of the sale price, being the increase or decrease in consideration for the supply of land. There is no second supply.

On settlement of property transactions it is usual that certain adjustments be made between the vendor and the purchaser in relation to such matters as rates and land tax. These adjustments are usually made in accordance with the provisions of the contract. For example, rates may be assessed to and paid by the vendor prior to the date of settlement (scenario 1). In such a scenario, the contract will usually require the purchaser to pay an extra amount to the vendor on settlement in respect of the balance of the period to which the rates relate, corresponding to the purchaser's period of ownership. In this case the purchaser is paying extra consideration for the sale of the land.

Alternatively, rates, having been assessed to the vendor as owner of the land, remain unpaid at the settlement date. In this case the purchaser withholds an amount from the purchase price to meet this outstanding liability and pays a corresponding amount to the municipal authority (scenario 2). In these circumstances there is no adjustment to consideration payable for the land because the purchaser is merely applying part of the agreed consideration to meet the vendor's liability for rates.

In a third scenario, the liability to pay rates may arise only after the date of possession (hence the purchaser is liable to pay these charges). In these circumstances, the terms of the contract require the vendor to make an adjustment in favour of the purchaser, based on an estimate of the future liability. There is a decrease to the consideration payable by the purchaser of the land.

Where settlement adjustments are treated as altering the consideration for the supply of land (as in scenarios 1 and 3), GST will apply to the consideration ultimately arrived at after taking into account the relevant settlement adjustments (if the sale of the land itself is a taxable supply).

However, an adjustment in scenario 2 is a mere direction to apply some part of the consideration to meet the vendor's rates liability. In this circumstance, there is no alteration of consideration for the supply of land. GST will therefore apply to the face value of the consideration payable for the sale of the land (if the sale of the land itself is a taxable supply).

(b) Adjustments for rent

The GST treatment of an adjustment for rent, on settlement of a sale of rental property, is analogous to that of an adjustment for rates or land tax. In other words, a rent adjustment is an adjustment to the consideration paid for the sale of the rental property. It is not consideration for a separate supply. Therefore, GST is applicable only if the sale of the property itself is a taxable supply.

Whether a rent adjustment (where GST applies to the rent payments) should be on a GST-inclusive or a GST-exclusive basis is a contractual matter between the vendor and the purchaser, and is not a matter on which the ATO can offer advice.

The rent adjustment between the vendor and the purchaser does not have any GST implications for the supply of the property to the tenant.

15.4.2 What is the GST treatment of rebates paid by a developer to a purchaser of residential premises?

Eg; $5,000 paid to the purchaser if the purchaser completes landscaping to an agreed value.

How the ATO would view a payment similar to the example given would depend on the terms of the contract between the developer and the purchaser, and the facts of each individual situation. We would consider the nature of the supply being made and whether it is an adjustment event that alters the consideration for a supply. The example given suggests that, rather than being an adjustment event that changes the consideration in relation to the purchase of the residential premises, the supply of landscaping by the purchaser is a separate supply in itself. The purchaser is being paid consideration of $5,000 in exchange for undertaking landscaping of the property to an agreed value. This supply will only be subject to GST if it meets all the requirements of the criteria for a taxable supply.

15.4.3 Is GST applicable to compensation payments resulting from the compulsory acquisition or negotiated purchase of real property by a public authority where the real property in question is acquired on or after 1 July 2000?

Non-interpretative

This issue is currently under revision and has been removed as of 12 December 2003.

15.4.4 A company is a corporate trustee of a family trust.

The trust is registered as it is in receipt of commercial rents in excess of $75,000. It also owns residential property which will be input taxed in relation to rentals received. Is GST applicable to the sale of residential property by the trust?

For source of ATO view refer to GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

GST is payable on taxable supplies - section 9-5 of the GST Act. This section excludes input taxed supplies and GST-free supplies from being taxable supplies. Section 40-65 of the GST Act considers the sale of residential properties. Subsection 40-65(1) of the GST Act states that 'A sale of real property is input taxed, but only to the extent that the property is a residential premise to be used predominantly for residential accommodation'

Subsection 40-65(2) of the GST Act makes an exception that where the sale is of commercial residential premises or 'new residential premises' other than those used for residential accommodation before 2 December 1998 the supply is not input taxed. Under section 40-75 of the GST Act

(1)

Residential premises are 'new residential premises' if:

(a)

have not been previously sold as residential premises and have not previously been the subject of a long term lease; or

(b)

have been created through substantial renovation of a building; or

(c)

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

(2)

However, the premises are not new residential premises if, for the period of at least five years since:

(a)

if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises

(b)

if paragraph (1)(b) applies - the premises were last substantially renovated, or

(c)

if paragraph (1)(c) applies - the premises were last built,

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

'Substantial renovation' is defined in section 195-1 of the GST Act to mean renovations to an existing building in which all or substantially all of the building is removed or replaced, of foundations, external walls, interior supporting walls, floors, roof or staircases. Where the residential property was previously purchased as residential premises, the sale will not be the sale of new residential premises and will be input taxed. Accordingly, the supply will not be a taxable supply and GST will not be applicable. Where the residential premises were constructed or substantially renovated, the sale will be the sale of 'new residential premises'. The supply will be a taxable supply which will attract liability to GST.

15.4.5 A company owns land, which is sold as a component of house and land packages.

A buyer enters into a contract for a specified purchase price and pays a non-refundable deposit.

Settlement does not occur until 6 months after construction of the house is completed. However, as a condition of the sale contract, the company grants the buyer a licence to occupy the property for a set fee in relation to the 6 month period prior to settlement. The licence fees immediately become the property of the seller when they are paid. If the buyer is not in default under the terms of the contract and proceeds to settlement, the licence fees paid are then treated as part payment of the balance of the purchase price of the property. The house and land contracts have a number of elements (contract date, the occupancy date of the property, the settlement date and the dates on which the deposit and licence fees are paid) that span 1 July 2000.

ATO position

Scenario 1 - Pre 1 July 2000

•

Contract is executed before 1 July 2000.

•

Expected settlement date of contract is before 1 July 2000.

•

The buyer occupies the property for a period that ends before 1 July 2000.

•

The buyer fails to settle.

In Scenario 1, if the contract fails to settle and the property is sold under another contract after 30 June 2000, is the sale subject to GST?

Yes, given that the supply (that is, the sale) of the property is made on or after 1 July 2000, it is subject to GST: subsections 6(3) and 7(1) of the Transition Act. Section 40-65 of the GST Act, which provides that a sale of residential premises (to be used predominantly for residential accommodation) is input taxed, does not apply. This is because subsection 40-65(2) of the GST Act specifically provides that the sale of 'new residential premises' is not input taxed. Section 195-1 of the GST Act defines 'new residential premises' as residential premises that have not previously been sold as residential premises and have not previously been subject of a long term lease ('long term' taken to mean 'for at least 50 years'). The property in question satisfies this definition. Despite the fact that the property was the subject of an earlier sale contract, it had not previously been sold because there could be no sale if the earlier contract did not settle.

For source of ATO view refer to paragraphs 22 and 29-31 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

Scenario 2 - Spans 1 July 2000

•

Contract is executed before 1 July 2000.

•

Expected settlement date of contract is after 30 June 2000.

•

Buyer occupies the property for a period that spans 1 July 2000.

(i) In Scenario 2, if the contract doesn't settle, does GST apply to the:

(a)

non-refundable deposit; and

(b)

licence fee?

(a) No, the payment of the non-refundable deposit is consideration for a supply that is the 'entry into an obligation to do anything' (subparagraph 9-10(2)(g)(ii) of the GST Act). This is a supply of something other than goods, services or real property and therefore, the time of the supply is when the thing is performed or done (subsection 6(5) of the Transition Act). Here, the 'thing performed or done' refers to the 'entry into an obligation'. Given that the entry into the house and land contract is before 1 July 2000, the supply is made before 1 July 2000. For this reason, the supply is not subject to GST (subsection 7(1) of the Transition Act).

(Note: This is not a situation where a deposit is 'forfeited'. Given that the deposit becomes property of the seller immediately upon payment and is not refundable in any circumstances, the issue of 'forfeiture' doesn't arise.)

(b) No, the payment of the licence fee is consideration for the supply of residential premises by way of a licence. If the supply is made for a licence period that spans 1 July 2000, it is taken to be made continuously and uniformly throughout that period (section 12 of the Transition Act). That part of the supply that is taken to be made before 1 July 2000 is not subject to GST because of subsection 7(1) of the Transition Act. That part of the supply that is taken to be made after 30 June 2000 is also not subject to GST. This is because section 40-35 of the GST Act specifically provides that a supply of residential premises that is by way of a licence is input taxed.

For source of ATO view, refer to:

•

GSTR 2000/7 - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000

•

paragraphs 9, 123-124 of GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation

•

paragraph 97C of GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract

•

paragraphs 7-8 of GSTR 2000/16 - Goods and services tax: transitional arrangements - GST-free supplies under existing agreements,

•

paragraph 28 of GSTD 2000/9 - Goods and services tax: if you let out a residence do you need to get an ABN for PAYG purposes or register for GST?

(ii) In Scenario 2, if the contract settles as expected, does GST apply to the:

(a)

sale price

(b)

non-refundable deposit, and

(c)

licence fee?

(a) Yes, the sale price is consideration for the supply of real property. The supply is made when the property is made available to the recipient (subsection 6(3) of the Transition Act). We interpret 'made available to the recipient' to be the time of settlement of the sale contract. This is because it's at this time that equitable ownership and possession of the property transfers to the recipient and the recipient has full use and enjoyment of the property. Given that the contract settles after 30 June 2000, the supply of property is made after that date and for that reason, the supply is subject to GST (subsection 7(1) of the Transition Act).

(b) On settlement of the contract, the non-refundable deposit that was initially the consideration for a supply that was the 'entry into an obligation to do anything' now becomes part of the consideration for the supply of the property (that is, the sale price). See the answer to 3(a) above.

(c) No, the licence fee is not subject to GST because it is consideration for an input taxed supply. Similar to the case of the non-refundable deposit above, on settlement of the sale contract, the consideration (the licence fee) for the supply of residential premises that is by way of a licence is now reduced to nil. This is because it now forms part of the consideration for the supply of the property.

For source of ATO view, refer to:

•

paragraph 16 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

•

paragraph 8 of GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation.

(iii) In Scenario 2, if the contract fails to settle and the property is sold under another contract after 30 June 2000, is the sale subject to GST? Yes, the sale is subject to GST. The fact that the property was occupied for a period that spans 1 July 2000 is irrelevant to the definition of 'new residential premises' under section 195-1 of the GST Act.

For source of ATO view, refer to:

•

GSTR 2000/7 - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000

•

paragraphs 9, 123-124 of GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation

•

paragraph 97C of GSTR 2000/28 - Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract

•

paragraphs 7-8 of GSTR 2000/16 - Goods and services tax: transitional arrangements - GST-free supplies under existing agreements,

•

paragraph 28 of GSTD 2000/9 - Goods and services tax: if you let out a residence do you need to get an ABN for PAYG purposes or register for GST?

Scenario 3 - After 30 June 2000

•

The contract is executed after 30 June 2000.

•

The expected settlement date of the contract is after 30 June 2000.

•

The buyer occupies the property for a period that starts after 30 June 2000.

•

The buyer fails to settle.

In Scenario 3, does GST apply to the:

(a)

non-refundable deposit, and

(b)

licence fee?

(a) Yes, in this scenario, the non-refundable deposit is subject to GST because it is consideration for a supply that is made after 30 June 2000 (given that the contract is entered into after that date).

(b) No, the licence fee is consideration for an input taxed supply and therefore, not subject to GST. This is despite the fact that the period for which the property is occupied starts after 30 June 2000.

For source of ATO view, refer to:

•

paragraph 16 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

•

paragraph 8 of GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation

•

paragraph 28 of GSTD 2000/9 - Goods and services tax: if you let out a residence do you need to get an ABN for PAYG purposes or register for GST?

•

paragraph 10 of GSTR 2000/7 - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000.

15.4.6 What are the GST implications on the sale of residential premises (previously occupied by a deceased person as a residence for many years) by an executor of a deceased estate to a purchaser neither of whom are registered for GST?

Non-Interpretative - straight application of the law

ATO position

The supply of the residential premises by the executor will be an input taxed supply.

15.4.7 Is the sale of a residential dwelling located on a large parcel of land and which is suitable for subdivision, a taxable supply?

The vendors have used the dwelling as their principal residence for over twenty years. The property is zoned for unit development. The vendors are elderly and do not intend to undertake any development themselves. They plan to sell the property with settlement in January 2001. There are currently no development plans before council. It is likely that the purchaser will develop the property in the future. The vendors are retired and not registered for GST.

Non-Interpretative - straight application of the law

ATO position

No, the sale is not in the course of an enterprise carried on by the vendors and they are not required to be registered for GST.

15.4.8 Do residential premises which have been substantially renovated (or built to replace demolished premises on the same) land, and sold as a taxable supply continue to be 'new residential premises' and subject to GST if subsequently sold by a registered entity?

Non-Interpretative - straight application of the law

ATO position

No. A subsequent sale of the premises will be input taxed unless the premises are again substantially renovated, or demolished and rebuilt, and the supplier is registered or required to be registered.

15.4.9 Where an enterprise acquires a property for a creditable purpose, and the use of that property changes to a partly private/domestic purpose, will an adjustment event occur under Division 129 of the GST Act resulting in the owner having to repay the previously claimed input tax credits?

For source of ATO view, refer to:

•

GSTR 2000/24 - Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose

•

GSTR 2009/4 - Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.

ATO position

The ATO position is set out in GSTR 2000/24. An enterprise acquires property for a creditable purpose if that property is used in carrying on the enterprise. If an enterprise acquires a property for a creditable purpose, Division 11 of the GST Act states that it will be entitled to claim the input tax credits associated with the creditable acquisition. However, if the property for which full input tax credits were claimed is subsequently applied partly to private or domestic purposes, an increasing adjustment will be required under Division 129 of the GST Act. The amount of the increasing adjustment will be calculated using the following equation:

•

Increasing adjustment = Full input tax credits × (Intended or former application minus Actual application)

•

The actual application and intended or former application are to be expressed as percentages.

Example: A property which has not been used for carrying on a farming business previously is purchased for use as a farm. The GST-inclusive price of the property is $330,000. The purchaser (if registered for GST) would be entitled to an input tax credit of $30,000. The purchaser subsequently uses 20% of the property as a paddock for the family pony. An increasing adjustment would be necessary.

Increasing Adjustment = $30,000 × (100% - 80%) = $6,000


15.4.10 Where an entity acquires a property for a creditable purpose, and the use of that property changes to a solely private/domestic purpose, will an adjustment event occur under Division 130 of the GST Act resulting in the owner having to repay the previously claimed input tax credits?

For source of ATO view, refer to:

•

GSTR 2000/24 - Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose

•

GSTR 2009/4 - Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.

ATO position

The acquisition of the property may involve a number of acquisitions by the entity. The entity may acquire vacant land and then make separate acquisitions of goods or services in constructing premises on the property. Alternatively, the entity may simply acquire real property (with or without premises).

An entity acquires a thing for a creditable purpose if the thing is acquired in carrying on the entity's enterprise. If an entity acquires a thing for a creditable purpose, Division 11 of the GST Act states that the entity will be entitled to the input tax credits associated with the creditable acquisition. However, if the thing acquired solely for a creditable purpose is subsequently applied solely to private or domestic purposes, adjustments need to be considered.

If the entity has made an acquisition of goods in relation to the property, an increasing adjustment will be required under Division 130 of the GST Act. The amount of the increasing adjustment will be equal to the amount of the input tax credits to which the entity was previously entitled (unless other adjustments have been made). However, if the entity has made an acquisition of services (such as a contract for construction or building services - see paragraph 10 of GSTR 2000/18 - Goods and services tax: construction and building services which span 1 July 2000) or an acquisition of real property, an increasing adjustment will not be required under Division 130 of the GST Act. This is because Division 130 of the GST Act only provides for increasing adjustments in relation to 'goods' applied solely to private or domestic use. 'Goods' is defined in section 195-1 of the GST Act to mean any form of tangible personal property. This does not include acquisitions of services or real property. The entity may, however, have an increasing adjustment in relation to the acquisition of the services or real property under Division 129 of the GST Act. For details on Division 129 of the GST Act refer to GSTR 2000/24 - Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose and GSTR 2009/4 - Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.

For guidance on the GST consequences of a partner in a partnership taking goods held as trading stock for private or domestic use see Draft Goods and Services Tax Determination GSTD 2009/D1 - Goods and services tax: are there GST consequences when a partner in a partnership takes goods held as trading stock for private or domestic use?

15.4.11 Is the sale of rented flats, which have been converted to strata title for sale purposes, an enterprise and therefore subject to GST?

For source of ATO view, refer to:

•

MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number,

•

Paragraphs 42-43 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

Miscellaneous Ruling MT 2006/1 deals with the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (ABN). Section 38 dealing with the definition of an enterprise under the ABN Act is a mirror of section 9-20 of the GST Act. The ruling represents the ATO position on the definition of an 'enterprise'. Paragraph 3 of Goods and Services Tax Determination GSTD 2000/8 states that the meaning of 'enterprise' in the ABN Act, and as discussed in MT 2000/1, is considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes. The conversion of rented flats to strata title for sale purposes is an enterprise under paragraph 9-20(1)(a) of the GST Act and subject to the GST. The definition of business in section 195 of the GST Act is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936. The definition of 'business' for the purposes of the GST legislation will therefore incorporate all the case law developed over the years. The conversion of rented flats to strata title for sale purposes will constitute a business as it is done in a business like-manner requiring a significant capital investment, specialised knowledge, and is performed systematically, with a view to making a profit. This goes beyond the mere realisation of a capital asset. Alternatively, the activity may constitute an enterprise being in the form of an adventure or concern in the nature of trade (pursuant to subsection 9-20(1)(b) of the GST Act).

15.4.12(a) By itself, does the process of strata titling a residential apartment building make the strata titled units 'new residential premises'?

For source of ATO view, refer to paragraph 43 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

No, by itself, the process of strata titling an apartment building does not create 'new residential premises' as defined in subsection 40-75(1) of the GST Act.

Physically (rather than a strict legal interpretation that focuses on legal interest), the combination of land and the building as residential premises remain basically the same.

Whether a sale of the strata titled units is an input taxed supply under section 40-65 of the GST Act depends on the extent to which, at the time of sale, the units are:

•

commercial residential premises, or

•

new residential premises other than those used for residential accommodation before 2 December 1998.

15.4.12(b) Is the sale of individual residential units, after a strata title subDivision of a residential apartment building (purchased on a single property title), an input taxed supply under section 40-65 of the GST Act if the units:
•   are used predominantly for residential accommodation
•   are not commercial residential premises, and
•   have not been substantially renovated nor been built to replace demolished premises on the same land?

For source of ATO view, refer to paragraphs 42-49 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

Yes. This is because subsection 40-65(1) of the GST Act provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. The exceptions in subsection 40-65(2) of the GST Act do not apply.

Subsection 40-65(2) of the GST Act provides that a sale of residential premises 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 before 2 December 1998.

The residential units in question are neither commercial residential premises nor new residential premises. New residential premises is defined in subsection 40-75(1) of the GST Act to mean residential premises that:

•

have not previously been sold as residential premises and have not previously been the subject of a long-term lease

•

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.

In this case, paragraphs (b) and (c) of the definition are clearly not satisfied. Paragraph (a) of the definition is also not satisfied because the land and the building together have been sold previously as residential premises (that is, when the apartment building was purchased). It does not matter that the property has been subdivided into strata title units. This is because physically (rather than a strict legal interpretation that focuses on legal interest) the combination of the land and the building as residential premises remain basically the same.

15.4.12(c) A block of land contains a residential building.

The block of land, together with the residential building, has previously been sold as residential premises. Does the mere subDivision of the block of land into a smaller block of land containing the same residential building make the smaller block of land 'new residential premises'?

For source of ATO view, refer to paragraphs 32-35 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

No. The mere subDivision itself does not make the premises 'new residential premises' as defined in subsection 40-75(1) of the GST Act.

Under subsection 40-75(1) of the GST Act, residential premises are 'new residential premises' only if they:

•

have not previously been sold as residential premises and have not previously been the subject of a long-term lease

•

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.

For the purposes of paragraph 40-75(1)(a), it is the ATO view that the residential premises referred to are the land and the residential building on that land (that is, you look at the land and a building as a 'package'). This is because the definition of 'residential premises' specifically refers to land or a building in the context of residential occupation, and vacant land by itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence.

In deciding whether land and a residential building have previously been sold as residential premises, or been the subject of a long-term lease, or are new residential premises, it is necessary to consider the land and building together. Has that land and that building together previously been sold as residential premises, or been subject to a long-term lease? To do this, it is the ATO view that you look at the land and building as a 'package'. It is necessary to consider whether the building and the land, or part of the land, that you are selling has previously been sold as residential premises, or been subject to a long-term lease.

Where land with a residential building has previously been sold as residential premises, or subject to a long-term lease, and the area of land is reduced in size, it is the ATO view that the sale is not a sale of new residential premises. In this case the smaller block of land containing the original residential building, as a 'package', has previously been sold as residential premises. This is because the 'package' has previously been sold as part of a larger residential premises 'package'.

In this case the newly created block of vacant land (the balance area of land not containing the original residential building) is not residential premises. Vacant land by itself cannot constitute residential premises. It may be necessary to consider whether the sale of the new vacant block of land is a taxable supply under section 9-5. The margin scheme, under Division 75, may also need to be considered to see if it is available to the supplier.

Example

Jo, a property developer, is registered for GST. She bought a house on a large block of land on a single title in February 2002 and subdivided the land into two blocks on separate titles. She built a new house on the second block of land with the intention of reselling it for a profit. She sold both houses in August 2002.

The house that Jo bought in February 2002 is not new residential premises, even though the block of land on which it sits has reduced in size. This is because the house and the land together have previously been sold as residential premises. The sale of this house is an input taxed supply.

The newly built house on the second block of land is new residential premises as the new house and the land together have not previously been sold. The sale of this new house is a taxable supply. Jo is only entitled to claim input tax credits on this taxable supply. As the sale by Jo of the newly built house on the second block of land is a taxable supply she may be entitled to apply the margin scheme to work out the GST payable. For more information about the margin scheme see Goods and Services Tax Ruling GSTR 2000/21.

15.4.12(d) A block of land contains a residential building.

The block of land, together with the residential building, which previously has been sold as residential premises, is now increased in area. Is the sale of the residential building on the increased area of land a sale of new residential premises?

For source of ATO view, refer to paragraphs 36-37 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

It is the ATO view that a different residential premises 'package' is created. In this case only the residential building and part of the land, as the residential premises 'package', have previously been sold or been the subject of a long-term lease. Where there is a subsequent sale of the land by an entity registered for GST, or required to be registered, in the course of its enterprise, an apportionment of the supply will be required.

At the time of the sale there is a different residential premises 'package' to that which originally existed. It is the ATO view that this residential premises 'package' is made up of two parts. One part is the land and residential building that has previously been sold, or been the subject of a long-term lease, as residential premises. This part is input taxed under section 40-65 of the GST Act. The other part is the increased land area that has not previously been sold, or been the subject of a long-term lease, as part of the original residential premises 'package'. This part is excluded from the input taxed treatment of the rest of the property. It will be a taxable supply under section 9-5 of the GST Act.

It is the ATO view that where there is a supply of residential premises that contains both taxable and input taxed parts it is appropriate to apportion the supply. Various acceptable methods of apportionment are discussed in GSTR 2001/8 at paragraphs 97 to 111.

Example

Tony, a property developer, is registered for GST. He bought a house on a block of land with an area of 1,000 square metres in May 2002. The property was on a single title. It was Tony's intention to resell the property at a profit. Tony was later able to purchase an additional 200 square metres of land from a neighbour so that the garden of the house he originally purchased could be expanded. In September 2002 Tony sells the house on the enlarged block.

When Tony sells the property he makes a supply of a residential premises 'package' that is different to that which he purchased. The supply is made up of two parts. One part is the land and residential building that has previously been sold. This part (the house on the original 1,000 square metres of land) is input taxed under section 40-65 of the GST Act.

The other part (the 200 square metres of land added to the original house block) is the increased land area that has not previously been sold as part of the original residential premises 'package'. This part is excluded from the input taxed treatment of the rest of the property. It will be a taxable supply under section 9-5 of the GST Act.

As the supply has both taxable and input taxed parts it will need to be apportioned. Any reasonable method of apportionment will be acceptable. However, the apportionment must be supportable by the particular facts of the case. Various acceptable methods of apportionment are discussed in GSTR 2001/8.

15.4.13 Does 'potential subdivided land' mean that if one residence can be built the definition applies irrespective of the size of the land?

Non-Interpretative - straight application of the law

ATO position

There is no provision relating to 'potential subdivided land' in the GST Act.

'Potential residential' land is referred to in section 38-475 of the GST Act in determining whether a supply of subdivided farm land to an associate of the supplier of the land is GST-free. The sale of subdivided farmland will be GST-free under certain conditions. These are:

•

If the land was used for farming for at least the preceding five years.

•

The sale is made to an associate of the vendor (for example, son or daughter).

•

The price paid by the associate is less than the GST-inclusive market value.

•

It is permissible use for residential purposes and does not contain any buildings that are residential premises.

Size may be relevant if the subdivided land is used predominantly for some other enterprise in addition to residential purposes. In such circumstances the land may not fall within the definition of potential residential land.

15.4.14 When is real property 'made available'?

ATO position

Under section 6(3) of the Transition Act, the time of the supply of real property is when it is made available to the recipient. Real property takes the same meaning in the Transition Act as that given in the GST Act. Section 195-1 of the GST Act defines real property to include:

(a)

any interest in or right over land

(b)

a personal right to call for or be granted any interest in or right over land, or

(c)

a licence to occupy land or any other contractual right exercisable over or in relation to land.

As the definition of real property is very broad, it is necessary to identify the nature of the real property that is being supplied. A contract for the sale of real property may provide for separate supplies of different types of real property.

Below is the ATO position in relation to various supplies of real property.

1. Sale of land or buildings

The real property here is the freehold interest in land. We consider the property to be made available when the freehold interest in the property is made available, that is, at the time of settlement of the sale contract.

2. Sale of house and the right to occupy before settlement.

This involves 2 separate supplies of real property -the sale being a supply of the freehold interest in the land and the right to occupy being a supply of a ' licence to occupy land'. As explained in (1) above, the supply of the freehold interest is made at time of settlement of the sale contract. The supply of the right to occupy is made when the right is made available at the time provided for by the contract. If the contract provides for the supply of the right to occupy for a specified period and that period spans 1 July 2000, section 12 of the Transition Act applies.

3. Sale of land on builder's terms.

Similar to the situation in (2) above, this involves two separate supplies of real property. One supply is the supply of the freehold interest in the land and the supply is made at the time of settlement of the contract. The other supply is the right to access and build on the land. The time of the supply of that right will be at the time provided for in the contract. Whether the supply of the right is made for consideration will depend on the terms of the contract. For the supply to be made for consideration it has to be identified as an amount separate to consideration for the freehold interest in the land.

15.4.15 An enterprise is in the business of buying houses for removal and on-selling them restumped. The roof is sometimes replaced but no other work is performed. Owners arrange their own sub-contractors to connect services.

What are the GST implications of the following:

1.

House is purchased, moved from it's location to another block (having been purchased before it is removed from it's original site).

2.

House is purchased, conveyed to the yard from where it is sold. It is then moved to the purchaser's land and stumped.

3.

Property owner contracts to have their house moved to another location.

4.

House is purchased, moved to own block of land and subsequently sold.

For source of ATO view, refer to paragraph 16 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

1. The purchase of the house may be subject to GST where the supply is a taxable supply. Where the supply was a taxable supply input tax credits are available to the purchaser. Generally, no input tax credits would be available on acquisitions that are not taxable supplies, however, GST special rules state that input tax credits may be available if the house qualifies as a second-hand good.

The sale of the house, as a second-hand good, would be the sale of stock and therefore a taxable supply on which GST is payable.

Section 9-40 of the GST Act provides:

You must pay the GST payable on any taxable supply that you make.

Therefore, GST will be payable on any transaction that is a taxable supply.

Section 9-5 of the GST Act provides:

a taxable supply is:

(a)

a 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 Australia, and

(d)

the supplier is 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.

The supplier is supplying a house which is for consideration as the house is being sold. The supply is in connection with Australia as the house concerned is presumed to be in Australia.

Therefore, where the supplier does not makes such supplies in the course or furtherance of carrying on an enterprise or is not registered, or required to be registered, for GST purposes, the supply is not a taxable supply.

Where the supplier makes such a supply in the course or furtherance of carrying on an enterprise and is registered, or required to be registered, for GST purposes, the supply is a taxable supply unless it is input taxed or GST-free.

Therefore, the issues to be addressed are:

•

Is the supply 'input taxed'?

•

Are input tax credits available to the purchaser/the removal enterprise?

Is the supply an 'input taxed' supply under section 40-65?

Section 40-65 of the GST Act provides:

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).

Section 195-1 of the GST Act provides:

Real property includes:

(b)

any interest in or right over land

(c)

a personal right to call for or be granted any interest in or right over land, or

(d)

a licence to occupy land or any other contractual right exercisable over or in relation to land.

To be input taxed on sale, the house must be real property which requires that the removed house must be affixed to land. The removed house itself comes within the definition of residential premises, but section 40-65 only allows residential premises that are real property, to be input taxed at sale. Supplies of the removed house not sold together with land are not input taxed upon sale.

Are input tax credits available to the purchaser/the removal enterprise?

Where the vendor/supplier made a supply in the course or furtherance of carrying on an enterprise and is registered, or required to be registered, for GST purposes, the purchase of the house is a taxable supply.

Section 11-20 provides:

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 provides:

You make a creditable acquisition if:

(a)

you acquire anything solely or partly for a creditable purpose

(b)

the supply of the thing to you is a taxable supply

(c)

you provide, or are liable to provide, consideration for the supply

(d)

you are registered, or required to be registered

As the supply of the house to the enterprise was a taxable supply and provided the other conditions are satisfied. The enterprise is entitled to an input tax credit for the purchase of the house.

Where the vendor/supplier did not make the supply in the course or furtherance of carrying on an enterprise or is not registered, or required to be registered, for GST purposes, the purchase of the house was not a taxable supply.

Generally, no input tax credits would be available on acquisitions that are not taxable supplies, however, GST special rule section 66 provides that an entity is entitled to a special input tax credit on an acquisition if they:

•

are registered or required to be registered

•

acquire second-hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business

•

subsequently supply those goods in a taxable supply.

However, the entitlement to an input tax credit on the acquisition using this special rule, does not apply if:

•

GST was included in the price of the goods

•

GST was not included because the supply was GST-free

•

the supply of goods was by hire

•

Division 66-B (which relates to the acquisition of second-hand goods that are divided for re-supply), applies, or

•

the entity subsequently supplies the goods as a non-taxable supply. (This is because an input tax credit on the acquisition of goods where GST was included in the price, would be available under the normal rules.)

The amount of the input tax credit available under section 66-10 follows:

If acquisition is more than $300 the amount of the input tax credit for the second-hand goods is the lesser of:

•

one 11th of the consideration for the acquisition, or

•

the amount of the GST payable on the subsequent taxable supply of second-hand goods.

The amount of the input tax credit for a creditable acquisition of consideration is $300 or less is an amount equal to 1/11 of the consideration that you provide, or are liable to provide, for the acquisition.

2.

The answer is the same as above.

3.

The removal and placement of a house under contract would be a normal taxable supply.

4.

Where a house is placed on your own land and the property is sold, the supply would be a taxable supply as it would be a supply of new residential premises. You may choose to apply the margin scheme to the sale.

15.4.16 Purchase, renovation and sale of residential premises. Once or twice a year you purchase 'second-hand houses', renovate the properties and resell them through real estate agents. Typical renovation includes:
•   painting
•   floor polishing
•   a new kitchen
•   bathroom updating
•   minor electricals
•   minor plumbing
•   landscaping

1.

Are you carrying on an enterprise of purchasing, renovating and selling residential property?

2.

Is the sale of renovated residential homes the sale of new residential premises?

3.

Do you have to register to claim input tax credits?

4.

Is GST payable on the items you purchase?

5.

Can you claim the amount of GST you pay as a business expense?

6.

Is GST payable on the purchase of the residential properties?

7.

Do you have to charge GST when you sell the residential properties?

For source of ATO view, refer to:

•

GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

•

GSTR 2006/4 - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

ATO position

1. An enterprise is considered to be carried on.

Section 9-20 provides:

An enterprise is an activity, or series of activities, done:

(a)

in the form of a business

(b)

in the form of an adventure or concern in the nature of trade, or

(c)

on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property;

However, enterprise does not include an activity or series of activities done:

(b)

as a private recreational pursuit or hobby, or

(c)

by an individual…without a reasonable expectation of profit or gain.

GST Determination GSTD 2006/6 further develops the meaning of 'enterprise' for the purposes. The Determination states that the discussion in the ruling, Miscellaneous Taxation Ruling MT 2006/1 dealing with the meaning of the term 'enterprise' as used in A New Tax System (Australian Business Number) Act 1999 is considered to apply equally to the term 'enterprise' as used in and can be relied upon for GST purposes.

The Ruling provides that in order to determine whether or not an entity is carrying on an enterprise, the relevant activities, or series of activities, of the entity need to be identified.

The regular and continuous purchase and renovation of one or two houses each year is generally the carrying on an 'enterprise' as the sale of the houses would generally be an activity being carried on in the form of a business, or an adventure or concern in the nature of trade. Therefore, the supply of the house would generally be in the course of an 'enterprise'.

32. The renovated homes would be new residential premises if they are residential premises that have been created through substantial renovations of the acquired homes. Substantial renovations of a building have been defined in section 195-1 to be renovations in which all, or substantially all of a building is removed or replaced. The renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

Whether the renovations made to any particular home will constitute substantial renovations is a question of fact to be determined in each case.

33. You must be registered for GST to be able to claim input tax credits. However will only be able to claim input tax credits for your acquisitions if you make either taxable or GST-free supplies. If the homes you sell do not constitute new residential premises you will be making input taxed supplies and therefore will not be able to claim input tax credits.

34. GST will be included in the price of things you acquire or import for your business unless they are GST-free or input taxed supplies.

35. Division 27 of ITAA 1997 sets out the effect of the GST on income tax deductions.

The following GST amounts will not be deductible:

1.

amounts corresponding to input tax credits to which a taxpayer is entitled: section 27-5

2.

any decreasing adjustments: section 27-5

3.

if the GST transitional provisions operate to make GST payable on an outgoing incurred before 1 July 2000, an amount equal to the input tax credit entitlement relating to that outgoing: section 27-30, and

4.

GST payments: section 27-15(1).

If you are entitled to claim input tax credits under the GST Act you will only be entitled to a tax deduction based on the GST-exclusive price of your acquisitions.

If you are unable to claim input tax credits (for example if you make input taxed supplies) you will be entitled to claim tax deductions based on the GST-inclusive price of your acquisitions.

*Note that section 27-30 of the ITAA 1997 was repealed on 14 September 2006.

36. Is GST payable on the purchase of the residential properties?

GST will not apply to the sale of residential properties other than premises that are new residential premises that have not been used for residential accommodation before 2 December 1998.

If you do purchase residential properties that are considered 'new residential premises' that have not been used for residential accommodation before 2 December 1998, then GST may be charged on the sale of the property to you. GST will only be payable on the supply of new residential premises if the supply of the premises constitutes a taxable supply. To be a taxable supply the vendor must make the supply in the course or furtherance of an enterprise and must be registered or required to be registered for GST.

37. Do you have to charge GST when you sell the residential properties?

If the renovation you undertake constitutes substantial renovation the supply you would make is a supply of new residential premises. It you make the supply in the course of your enterprise and you are registered or required to be registered for GST then you would be making a taxable supply and will be required to pay GST in respect of the supply.

If the renovations did not constitute substantial renovations you would be making an input taxed supply under subsection 40-65(1) , which means no GST is charged on the sale of the renovated homes and no input tax credits can be claimed for purchases acquired to make the supply, including sale costs.

15.4.17 Will land owned by a business and sold to another business be subject to GST?

For source of ATO view, refer to MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number.

ATO position

If the sale of the land by a business to another business is made in the course or furtherance of an enterprise that the business is carrying on then the sale of the land will be a taxable supply and subject to GST. However if the sale of the land by the business to another business is a mere realisation of an investment or private asset, the sale of the land would generally not be subject to GST. Whether or not the sale of the land is in the course or furtherance of an enterprise that the business is carrying on is a question of fact and degree.

The supply of real property can only be subject to GST if it constitutes a taxable supply.

Taxable supply is defined in section 9-5 of the GST Act. The requirements of a taxable supply are:

(a)

a supply is made

(b)

the supply is made for a consideration

(c)

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

(d)

the supply is connected with Australia

(e)

the supplier is registered or required to be registered

(f)

the supply is not GST-free or input taxed.

If the sale of land is made in the course or furtherance of an enterprise that the business is carrying on, subject to the other criteria of this section being satisfied, then supply of the land would be subject to GST.

In the course or furtherance of an enterprise

The sale of a real property may be done in the course or furtherance of an enterprise. This must be determined from the facts of the case.

Enterprise is defined in subsection 9-20(1) of the GST Act to include an activity, or series of activities, done

(a)

in the form of a business, or

(b)

in the form of an adventure or concern in the nature of trade.

Accordingly, enterprise covers commercial activities that amount to activities in the form of a business.

In the form of

There is no judicial guidance in Australian or United Kingdom case law concerning the phrase 'in the form of'. The ordinary meaning of the phrase, however, is considered to support a view that 'in the form of', in conjunction with 'business' or 'adventure or concern in the nature of trade', includes an activity or series of activities that, if it or they had been done for profit, would satisfy the ordinary concept test of 'business' or 'adventure or concern in the nature of trade'.

Indicators of a business

Section 195-1 of the GST Act defines business to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 discusses the main indicators of carrying on a business and provides examples of the indicators. The indicators are:

•

a significant commercial activity

•

purpose and intention of the taxpayer in engaging in the activity

•

an intention to make a profit from the activity

•

the activity is or will be profitable

•

repetition and regularity of activity

•

activity is carried on in a similar manner to that of the ordinary trade

•

activity organised and carried on in a business-like manner and systematically - records are kept

•

size and scale of the activity

•

not a hobby, recreation or sporting activity

•

a business plan exists

•

commercial sales of product

•

taxpayer has knowledge or skill.

What is an adventure or concern in the nature of trade?

There is no definition of 'trade' and 'concern or adventure in the nature of trade' in the GST Act.

Generally, a business is a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business. This is the view of Jacobs J in AV v. FC of T (1997) 37 ATR 225 at 242 'that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal (McClelland v. FC of T (1970) 120 CLR 487 at 495)'

As a general rule, United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person are more likely to be purchased for investment purposes rather than trading purposes (Johnston v. Heath [1970] 3 ALL ER 915).

Examples of investment assets are rental properties, business plant and machinery, the family home and other private assets. The realisation of investment assets does not amount to trade. Certain types of assets, such as land and shares can be purchased for either investment purposes or trading purposes. However, they cannot be held at the same time for both purposes. They must be one or the other (Simmons (as liquidator of Lionel Simmons Properties) v. IR Commrs [1980] 2 ALL ER 798). The character of an asset can however, change from trade to investment and vice versa.

The following United Kingdom cases have found that there was an adventure or concern in the nature of trade:

In Simmons (as liquidator of Lionel Simmons Properties) v. IR Commrs [1980] 2 ALL ER 798, the taxpayers purchased a complete cotton spinning plant in 1946 with the object of selling it as quickly as possible at a profit. They had no intention of holding it by using it as an income producing asset and it was not purchased for their pleasure or enjoyment. It was eventually sold in five separate lots over a fifteen month period.

In Johnston v. Heath [1970] 3 ALL ER 915, Heath was offered non-income producing land that had planning permission but had not been developed because of drainage difficulties. He had insufficient funds to purchase the land and his intention was to resell the land as soon as possible after acquisition. The lack of funds was not an obstacle to the purchase, as Heath found a buyer for the land before he contracted to buy it from the original owner. The land was purchased and sold.

The above cases show that more than a mere realisation of an investment asset is required and that the character of the activity as a whole needs to be considered. Whether or not there is a trade or an adventure in the nature of trade is a question of fact and degree (Simmons (as liquidator of Lionel Simmons Properties) v. IR Commrs (1980) 2 ALL ER 798). In essence, an adventure or concern in the nature of trade should reflect significant commercial activity. It should have the characteristics of a business deal.

Thus, the sale of land may be in the form of a business or in the form of an adventure or concern in the nature of trade. This will depend on the circumstances surrounding the sale of the land. Generally, if the sale reflects significant commercial activity or has characteristics of a business deal, then the sale of land will be made in the course or furtherance of an enterprise that the seller carries on. However, if it is mere realisation of an investment or private asset, it will not be made in the course or furtherance of an enterprise that the seller carries on. Whether or not the sale is in the form of a business or an adventure in the nature of trade is a question of fact and degree.

The sale of the land will only be subject to GST if it is a taxable supply and satisfies all the criteria of section 9-5 of the GST Act.

Other references

•

AV v FC of T (1997) 37 ATR 225 at 242

•

McLelland v FC of T (1970 )120 CLR 487

•

Johnson v Heath [1997] 3 ALL ER 915.

•

Simmons (as liquidator of Lionel Simmons Properties) v IR Commrs [1980] 2 ALL ER 798.

15.4.18 Where a business, trading company or trust holds land as an investment or as an asset which is used for their enterprise, is the sale subject to GST if they are registered?

For source of ATO view, refer to MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number.

ATO position

The sale of the land by a business, trading company or trust is made in the course or furtherance of an enterprise that the business, trading company or trust is carrying on. The sale of the land will be a taxable supply and subject to GST.

The supply of real property will be subject to GST if it constitutes a taxable supply.

Taxable supply is defined in section 9-5 of the GST Act. The requirements of a taxable supply are:

(a)

the supply is made for a 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 Australia

(d)

the supplier is 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.

There is clearly a supply of real property which is for consideration as the property is being sold. The supply is in connection with Australia as the property concerned is assumed to be in Australia. The supplier is registered.

Therefore, the issues to be addressed are:

•

Is the sale of the land 'in the course or furtherance' of an enterprise?

•

Is the supply input taxed?

Is the sale of the land 'in the course or furtherance' of an enterprise?

A transaction is a supply 'in the course or furtherance' of an enterprise that is carried where the supplies can be considered to be connected to the entity's enterprise.

The term 'in the course or furtherance' is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

As the business, trading company or trust owns the land, and it was held as part of the business structure, the sale is in the course or furtherance of it's enterprise and will be a taxable supply unless it is an input taxed supply.

Is the supply input taxed?

Section 40-65 provides:

(1)

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).

(2)

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 before 2 December 1998.

'Residential Premises' is defined in section 195-1 to mean: Land or a building occupied or intended to be occupied as a residence, and includes a floating home. This definition is explained under GST Ruling GSTR 2012/5 and requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence.

The land to be sold does not have a building affixed to it. Therefore, the sale of the land is not input taxed and will be subject to GST as a taxable supply.

The business may choose to apply the margin scheme in working out the amount of GST on the sale of the land under Division 75 and GST Ruling GSTR 2000/21.

15.4.19 Is the supply of a separately titled residential unit garage (when supplied with the residential unit itself) input taxed as the supply of residential premises within section 40-65 of A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act')?

This issue is now superseded by Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises.

15.4.20 Is the supply of a separately titled residential unit garage (not sold in conjunction with a residential unit) input taxed as a supply of residential premises under section 40-65 of the GST Act?

This issue is now superseded by Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises.

15.4.21 What are the implications of land exchanges having regard for the provisions of A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act')?

C supplies his land (valued at $100,000) to X in exchange for X's land (valued at $80,000) and X pays $20,000 to C for the fair exchange. C and X are registered.

1. What is the GST treatment of this 'land exchange' where both properties are vacant?

2. What if X is not registered?

3. Can the margin scheme be used to calculate the GST payable?

4. If the margin scheme is only used for calculating the GST payable on one of the supplies will this impact on the GST treatment on the other supply?

For source of ATO view, refer to:

•

MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number

•

GSTR 2001/6 - Goods and services tax: non-monetary consideration

•

GSTR 2012/5 - Goods and Services Tax: residential premises.

ATO position

(a) What is the GST treatment of this 'land exchange' where both properties are vacant?

The supply of vacant land is subject to GST under section 9-5 of the GST Act if:

1.

the supplier makes the supply for consideration

2.

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

3.

the supply is connected with Australia

4.

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.

Although the sale of residential premises is input taxed under section 40-65(1) of the GST Act, the supply of vacant land is not input taxed as vacant land does not satisfy the definition of 'residential premises'.

Residential Premises are defined in section 195-1 of the GST Act to mean land or a building that:

(a)

is occupied as a residence, or

(b)

is intended to be occupied, and is capable of being occupied, as a residence, and includes a floating home.

Land that has no buildings attached to it does not fall into this category. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied (see paragraphs 47 of the GST Ruling GSTR 2012/5). Therefore, the supply of the vacant land would be subject to GST if the other requirements of section 9-5 of the GST Act noted above are met.

Two supplies:

Supply A is a taxable supply as:

1.

the supply is for consideration - the consideration for the supply of the land is $100,000 (that is, X's land at $80,000 together with a cash payment of $20,000). Paragraph 9-75(1)(b) of the GST Act provides that the value of a taxable supply where the consideration is not expressed as an amount of money equals the GST-inclusive market value of the consideration

2.

we will assume that the supply is made in the course or furtherance of an enterprise that C carries on (refer to Miscellaneous Taxation Ruling MT 2006/1 for a discussion on 'enterprise' and Taxation Ruling 97/11 for a discussion on 'business')

3.

the land is situated in Australia, and

4.

C is registered.

Therefore, C will have to account for 1/11th of $100,000 (that is, 1/11th of the GST-inclusive market value of C's land) to the ATO.

X is entitled to input tax credits for X's creditable acquisitions. Under section 11-5 of the GST Act, X makes a creditable acquisition if:

1.

X acquires anything solely or partly for a creditable purpose

2.

the supply of the land to X is a taxable supply

3.

X provides or is liable to provide, consideration for the supply, and

4.

X is registered, or required to be registered.

Under subsections 11-15(1) and (2) of the GST Act, X would acquire the land for a creditable purpose to the extent that:

1.

X acquired the land in carrying on X's enterprise

2.

the acquisition did not relate to making supplies that would be input taxed, and

3.

the acquisition was not of a private or domestic nature.

X would be entitled to claim an input tax credit of 1/11th of $100,000.

C would have to account for $9,090.91 GST to the ATO.

X would be entitled to claim an input tax credit of $9,090.91.

Supply B is a taxable supply as:

1.

the supply is for consideration - the consideration for the supply of X's land is $100,000 (that is, the value of C's land)

2.

we will assume that the supply is in the course or furtherance of X's enterprise (refer to the discussion in supply A above)

3.

the land is situated in Australia, and

4.

X is registered.

Therefore, X will have to account for 1/11th of $100,000 to the ATO.

Under subsections 11-15(1) and (2) of the GST Act, C would be entitled to claim the full input tax credits for the acquisition of the land if:

1.

C acquired the land in carrying on C's enterprise

2.

the acquisition did not relate to making supplies that would be input taxed, and

3.

the acquisition was not of a private or domestic nature.

C would be entitled to claim an input tax credit of 1/11th of $100,000.

X would have to account for $9.090.91 GST to the ATO.

C would be entitled to claim an input tax credit of $9,090.91.

(b) What if X is not registered?

In relation to supply A above:

•

C would have to account for $9,090.91 GST to the ATO

•

X will not be entitled to claim any input tax credits - the acquisition is not creditable as the recipient is not registered (section 11-5 of the GST Act).

•

In relation to supply B above:

•

X would not be required to account for GST - the supply is not taxable as the supplier is not registered

•

C would not be entitled to claim any input tax credits - the acquisition is not creditable as the supply is not taxable (section 11-5 of the GST Act).

(c) Can the margin scheme be used to calculate the GST payable?

Yes. The margin scheme will apply in the usual way as if the supplies were standard sales. The margin scheme may be used provided the supplier is making a taxable supply of real property by (section 75-5 of the GST Act):

(a)

selling a freehold interest in land

(b)

selling a stratum unit, or

(c)

granting or selling a long-term lease.

However, the margin scheme may not be used to calculate the GST payable if the freehold interest, stratum unit or long-term lease was originally acquired by the supplier through a taxable supply on which the GST was worked out without applying the margin scheme (subsection 75-5(2) of the GST Act).

Note: This is the ATO view that will apply up to 16 March 2005. Legislative Amendments to the provisions relating to 'applying the margin scheme' will have effect from 29 June 2005.

(d) If the margin scheme is only used for calculating the GST payable on one of the supplies will this impact on the GST treatment on the other supply?

No. The two supplies are quite separate and their GST treatment will be considered as such. Therefore, provided the requirements of section 75-5 of the GST Act are satisfied, the margin scheme may be adopted to calculate the GST payable for either supply regardless of whether the margin scheme is used for the other supply.

15.4.22 An investor, who is registered for GST, purchases new residential premises from a builder who is also registered for GST.

The house has all the usual physical characteristics to enable it to be used for residential accommodation. The investor then supplies the house by way of lease to the builder who intends to use it as a display home.

(1)

Is the investor entitled to claim an input tax credit in relation to his purchase of the house from the builder?

(2)

Is the supply of the house by the investor to the builder by way of lease an input taxed supply, or a taxable supply?

This issue is now superseded by Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises.

15.4.23 Is a supply of a freehold or leasehold interest in a marina berth a supply of 'real property' for GST purposes?

Non-Interpretative - straight application of the law

ATO position Yes. This is because a freehold or leasehold interest in a marina berth includes an interest in or right over the land that forms part of the marina (which includes land above or below the water surface), and therefore, satisfies the definition of 'real property' in section 195-1 of the GST Act.

15.5 New residential premises - substantial renovations

15.5.1 When are new residential premises created through 'substantial renovations' of a building under paragraph 40-75(1)(b) of the GST Act?

For source of ATO view, refer to paragraphs 53-83 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

1. New residential premises are created through 'substantial renovations' when an owner of residential premises does work to it that satisfies the definition of 'substantial renovations' in section 195-1 of the GST Act.

2. The term 'substantial renovations' is defined as: 'renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases'.

3. As stated in the definition, for a renovation to be a 'substantial renovation', it need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

4. For the definition to be satisfied, 2 things must occur:

When do renovations affect the building as a whole?

64. Neither the term 'renovation' nor 'building' is defined in the GST Act, and therefore, take their ordinary meanings. The general usage of the term 'renovate' means '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 light of the surrounding words in the definition of substantial renovation. In the context of the definition, we consider 'renovations' can be categorised as structural, non-structural or cosmetic work.

65. The word 'building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'. For an individual strata title unit that is physically part of an apartment complex, the relevant 'building' is the structure enclosed within the external walls of the unit, rather than the entire complex.

66. For a renovation to affect the building as a whole, work must be done to the whole, or a large part (for example, most of the rooms), of the building itself. For example, if only the kitchen and bathroom of a house are renovated, it would not be a renovation of the whole, or a large part, of the house.

67. Work which is not directly attributable to a building, for example, landscaping of surrounding land or replacement of a boundary fence, are excluded because it is not work to a building.

When does the renovation result in a removal or replacement of a substantial part of the building?

68. This will be when there is a removal or replacement of a substantial part of the:

69. The extent to which these components of a building are removed or replaced will determine whether there is a removal or replacement of a substantial part of the building. This is a matter of fact and degree to be determined in each case.

70. Work on structural components of a building may give rise to a substantial renovation in its own right. Structural work includes work such as:

71. Structural work would also include an extension to a house or adding new bedrooms to a house.

72. Where a substantial part of the structural components of a building are removed or replaced this will often mean that a substantial part of the non-structural components are also removed or replaced. However, a substantial renovation may also occur where a substantial part of the non-structural components are removed or replaced without the structural components being substantially affected.

73. Non-structural building work includes:

74. 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 would consider work of this nature to be cosmetic. Cosmetic work by itself cannot give rise to a substantial renovation. Cosmetic work includes the following:

75. If structural or non-structural work amounts to a substantial renovation that creates new residential premises, any cosmetic work undertaken will form part of the new residential premises.

76. Examples 1, 2 and 3 in Issue 15.5.2 below provide guidance on what we would consider to be substantial renovations or not.

What renovation work is relevant?

77. Only renovations by the current owner which are reflected in the building at the time of sale will be considered to determine whether new residential premises have been created through substantial renovations.

What about renovation work done by previous owners?

78. Renovations undertaken by previous owners are disregarded in determining whether new residential premises have been created through substantial renovations.

How is the 'substantial renovations' test applied when renovations are carried out progressively by the same owner?

79. When renovations are carried out progressively or in stages over a period of time, it is the cumulative effect of the renovations that must be considered in determining whether a substantial renovation of the building has occurred. This is done by comparing the state of the building when first acquired to its state at the time of sale. See Example 4 of Issue 15.5.2 below.

80. If the premises were only used for making input taxed supplies by way of lease, hire or licence, it may also be necessary to determine when the premises were last substantially renovated for the purposes of the five year rule under paragraph 40-75(2)(b) of the GST Act (see paragraph 23 below). In this context, the time at which 'the premises were last substantially renovated', will be when the progressive renovations amount to a substantial renovation.

What about additions undertaken with renovations?

81. Additions that are unconnected with the renovations are excluded in determining whether substantial renovations have occurred, except where that work is done to the existing building to allow the additions. Once it is determined that a building has been substantially renovated and new residential premises are created, all additions form part of the new residential premises.

What about residential premises that have been substantially renovated but have since only been used for making input taxed supplies by way of lease, hire or licence for a period of five years or more?

82. These premises would not be new residential premises (paragraph 40-75(2)(b)).

Does prior use of residential premises for residential accommodation before new residential premises are created through substantial renovations count for the 2 December 1998 date?

83. No. The test for use for residential accommodation is limited to the new residential premises (paragraph 40-65(2)(b)).

What are the GST implications if new residential premises are created through substantial renovations?

84. A sale of the new residential premises created through substantial renovations will be a taxable supply under section 9-5 of the GST Act if:

Unless the above conditions are met, the sale of a person's private residential premises will not be subject to GST, even if the premises are new residential premises.

15.5.2 Examples - substantial renovations

For source of ATO view, refer to paragraphs 53-83 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

Example 1 Not substantial renovation - large part of the building not affected

Indira, a property speculator, acquires a large two storey, four bedroom house with a separate kitchen, living room, music room and bathroom on the ground floor. Indira regularly buys, renovates and sells houses. She employs a builder to undertake the following work.

The old kitchen is refitted with new cupboards, benchtops and cooking appliances. The kitchen walls and ceiling are repainted and the existing floor covering is replaced. A small bathroom that existed off the kitchen is removed and a new bathroom is constructed in one of the upstairs bedrooms. The two walls between the former bathroom and kitchen are removed so that the kitchen is much larger. Indira replaces the door and back window of the kitchen with French doors. The dilapidated slate roof of the house is replaced with a new tile roof. In all of the ground floor rooms, the floorboards, joists and bearers are also replaced.

Although the renovation work is significant we do not consider the renovation to be a substantial renovation. The house in its entirety has not been substantially renovated, as a number of rooms have not been affected. The four bedrooms upstairs are untouched with the exception of one room which has become a bathroom.

When Indira sells the renovated house, she will be making an input taxed supply (section 40-65 of the GST Act).

Example 2 Not substantial renovation - renovation largely cosmetic

Bob, a property speculator, is registered for GST. He acquires Tangalooma, a historic federation style residence in July 2000. Bob does not live in the house and immediately patches some of the walls in all of the bedrooms with gyprock cement, repaints the whole house, inside and out, and replaces the kitchen.

Although Bob has made changes to all the rooms, the work done is largely cosmetic in nature. We do not consider that Bob has substantially renovated Tangalooma. When sold, the property will be input taxed.

Example 3 Substantial renovation

In June 2002, Mary-Anne, an owner-builder who is registered for GST, acquires a dilapidated bungalow that has 3 bedrooms and 1 bathroom. Mary-Anne intends to renovate and sell the bungalow as part of her enterprise, and lives in the bungalow while she does the renovations. She carries out the following renovations.

Mary-Anne adds an upstairs extension which creates a new bedroom and a bathroom. As part of the extension, the roof of the bungalow and all the ceilings on the lower level are replaced. The renovations to the lower level include rewiring, repairing cracked walls by removing and replacing all of the gyprock, and cement rendering the exposed bricks in the combined family room and kitchen. The installation of stairs necessitated the removal of two walls and replacement of the floor in two of the ground floor rooms. Mary-Anne also does some cosmetic work by repainting, polishing floorboards, replacing all the fittings in the kitchen and bathroom. The work undertaken by Mary-Anne constitutes a substantial renovation. All of the rooms in the house are affected by the work and several of the rooms have undergone structural renovation work. A substantial part of the bungalow is removed and replaced in undertaking the renovation work. The cosmetic work has not been taken into account when deciding whether a substantial renovation has occurred.

When Mary-Anne sells the renovated house, she will be making a taxable supply of new residential premises, which includes all the work done (whether structural, non-structural or cosmetic) to the house.

Example 4 Progressive renovations

Jamie, a property speculator who is registered for GST, acquired a 1920's style house in September 2001 with the intention of renting for short-term periods, and to progressively renovate as his work commitments permit. He intends to sell the house within 12 months of completing the renovations.

The renovations were carried out in the following stages:

September to November 2001

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replacement of kitchen (including laying of new floor covering)

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the existing bathroom was removed but for the framework and a new bathroom installed (ie. new toilet, bath, vanity, shower, tap fittings and tiling)

February 2002

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the carpet was removed, floorboards sanded and polished, the house rewired, all light fittings were replaced

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the existing verandah was extended by partly demolishing and enclosing it; and modification of the roofline

March to June 2002

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exterior brickwork rendered

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roof replaced

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all windows and doors (interior and exterior) replaced

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plaster on the walls and ceilings in the lounge room, hallway and all the bedrooms replaced with gyprock

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the house is repainted

Even though the work carried out in 2001 and February 2002 did not constitute substantial renovations on their own, the cumulative work carried out from September 2001 to June 2002 amounts to a substantial renovation of the house. If Jamie sells the house after the renovations are finished, he will be making a taxable supply of new residential premises, which includes all the work done (whether structural, non-structural or cosmetic) to the house

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