ATO Interpretative Decision

ATO ID 2008/136

Goods and Services Tax

GST and motel apartments
FOI status: may be released

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Issue

Is the entity, a property owner, making an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it sells a strata titled unit that has not been previously sold and has only been used for making supplies of commercial accommodation before 2 December 1998?

Decision

No, the entity is not making an input taxed supply under section 40-65 of the GST Act when it sells a strata titled unit that has not been previously sold, and has only been used for making supplies of commercial accommodation before 2 December 1998.

Facts

The entity is a property owner which is carrying on an enterprise. The entity is registered for GST.

Prior to 2 December 1998 the entity constructed a unit complex containing multiple units. The unit complex was commercial residential premises as defined under section 195-1 of the GST Act.

Subsequent to 1 July 2000 the entity strata titled one of the units and the strata titled unit was subsequently sold.

The strata titled unit was used to provide commercial accommodation, as defined in section 87-15 of the GST Act, as part of commercial residential premises from the time construction of the unit complex was completed. The strata titled unit continued to be used to provide commercial accommodation as part of commercial residential premises from before 2 December 1998 up until the time it was sold.

The strata titled unit was not previously sold individually or as part of a commercial residential premises.

The strata titled unit was not substantially renovated between construction and sale.

Reasons for Decision

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

However, subsection 40-65(2) of the GST Act provides that the sale of real property 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 (regardless of the term of occupation) before 2 December 1998.

The sale of the strata tilted unit is not a sale of commercial residential premises even though it has been used to provide commercial accommodation as part of commercial residential premises. As explained in Goods and Services Tax Ruling GSTR 2000/20 at paragraphs 51 to 54, a strata titled unit cannot, by itself, exhibit the characteristics of commercial residential premises.

It is therefore necessary to determine whether the strata titled unit is 'new residential premises, other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998'.

Subsection 40-75(1) of the GST Act states that residential premises are new residential premises if they:

(a)
have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or
(b)
have been created through substantial renovations of a building; or
(c)
have been built, or contain a building that has been built, to replace demolished premises on the same land.

The strata titled unit satisfies paragraph 40-75(1)(a) of the GST Act as they have not previously been sold as residential premises nor been the subject of a long-term lease.

Subsection 40-75(2) of the GST Act provides an exclusion to subsection 40-75(1). It states that residential premises are not new residential premises if the premises have only been used for making input taxed supplies under paragraph 40-35(1)(a) of the GST Act by way of residential rent for a period of at least five years. Subsection 40-75(2) of the GST Act does not apply as the strata titled unit has not been used for making input taxed supplies under paragraph 40-35(1)(a) of the GST Act.

While the strata titled unit is considered to be new residential premises under section 40-75 of the GST Act, it still needs to be determined whether the supply of accommodation in the strata titled unit is nonetheless input taxed under paragraph 40-65(2)(b) of the GST Act. This provides that supplies of new residential premises that were used for residential accommodation (regardless of the term of occupation) before 2 December 1998 will be input taxed.

Unlike commercial accommodation, residential accommodation is not defined in the GST Act.

The reference to prior use for residential accommodation in subsection 40-65(2) of the GST Act does not encompass the prior use of providing commercial accommodation as part of commercial residential premises. The strata titled unit was only used as part of commercial residential premises from the time of construction, up until the time of sale. Therefore the strata title unit was not used for residential accommodation before 2 December 1998.

The view that the reference to prior use for residential accommodation in paragraph 40-65(2)(b) of the GST Act does not encompass prior use as part of commercial residential premises is supported by extrinsic materials pertaining to the GST Act.

Paragraph 11.21 of the of the Revised Explanatory Memorandum to the Indirect Tax Legislation Amendment Bill 2000, in discussing the amendment to subsection 40-65(2) of the GST Act stated that 'it was not intended that supplies of existing housing stock which may have been used for many years by the original owners for residential accommodation (either rental income production or for owner occupation) would be subject to GST as new residential premises when first supplied after 1 July 2000'. The reference to 'housing stock' would not indicate that prior use of commercial residential premises is intended to fall within the scope of paragraph 40-65(2)(b) of the GST Act.

Further, the Explanatory Memorandum to Tax Laws Amendments (2006 Measures No. 3) Bill 2006 ('the EM') provides the following example:

Example 15.4

Camille Enterprises purchases a motel in August 1996 and operates it for 10 years as a motel. In August 2006, Camille Enterprises ceases operation of the motel, strata titles the motel and sells one of the strata titled units as residential premises to Sebastien.
Although the motel was sold as commercial residential premises in August 1996, the sale of the strata titled unit to Sebastien in August 2006 is a sale of new residential premises. This reflects the position that a prior sale as commercial residential premises does not preclude a later sale of residential premises from being a sale of new residential premises. The previous supplies of accommodation in the motel, being supplies of accommodation in commercial residential premises provided to an individual by an entity that owns the commercial residential premises, were not input taxed supplies; thus, subsection 40-75(2) has no operation.
The later sale to Sebastien is subject to GST.

The later sale in example 15.4 of the EM could not be a taxable supply if the reference to prior use for residential accommodation in paragraph 40-65(2)(b) of the GST Act was to be read as encompassing prior use as part of commercial residential premises.

As the strata titled unit was not used for residential accommodation before 2 December 1998, it remains new residential premises at the time of sale under paragraph 40-65(2)(b) of the GST Act. The sale of the strata titled unit is therefore not an input taxed supply under section 40-65 of the GST Act.

Note: where an entity is making a taxable supply of real property, it is liable for one-eleventh of the GST-inclusive sale price. However, the entity may be able to apply the margin scheme where the requirements of Division 75 of the GST Act are met.

Date of decision:  25 September 2008

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   paragraph 40-35(1)(a)
   section 40-65
   subsection 40-65(1)
   subsection 40-65(2)
   paragraph 40-65(2)(b)
   subsection 40-75(1)
   paragraph 40-75(1)(a)
   subsection 40-75(2)
   Division 75
   section 87-15
   section 195-1

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/20

Other References:
Revised Explanatory Memorandum to the Indirect Tax Legislation Amendment Bill 2000
Explanatory Memorandum to the Tax Laws Amendments (2006 Measures No. 3) Bill 2006

Keywords
Goods and services tax
GST property & construction
GST new residential premises
GST residential premises
GST commercial residential premises
GST sale of real property
GST supplies & acquisitions
Taxable supply
Input taxed supplies

Siebel/TDMS Reference Number:  5992726

Business Line:  Indirect Tax

Date of publication:  10 October 2008

ISSN: 1445-2782