ATO ID 2009/18: GST and sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies
Date of decision: 25 March 2009
Business line: Indirect Tax

Issue
Is the entity, a residential property owner, making an input taxed supply under subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it sells its property as vacant land after demolishing a fire damaged house on the land and where, prior to the fire, it had used the property solely to make input taxed supplies by way of lease?

Decision
Yes, the entity is making an input taxed supply under subsection 9-30(4) of the GST Act when it sells its property as vacant land in these circumstances.

Facts
The entity is a residential property owner and is registered for GST. The entity carries on an enterprise of leasing and selling residential premises, and developing property. As part of its property development activities, it regularly acquires properties to demolish the existing houses and to sell the properties as vacant land (whether subdivided or not) or to construct new houses for sale or lease. The entity owns a property that was residential premises for the purposes of the GST Act when it acquired the property. The house forming the residential premises was damaged by fire such that it was uninhabitable. Prior to the fire, the entity had used the residential premises solely to make supplies by way of lease that are input taxed under section 40-35 of the GST Act. As the house was no longer inhabitable, it could not be used for residential leasing. It was also not cost effective for the entity to renovate the house or to construct a new house on the land for lease. To prepare the land for sale, the entity arranged for the demolition and removal of the fire damaged house as it was a health and safety risk. The entity sells the property as vacant land.

Reasons for decision
Summary: Subsection 9-30(4) of the GST Act states: A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies. In considering the application of subsection 9-30(4) of the GST Act to the supply of the vacant land it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies).This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies. The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121). The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity: It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose. In this case, the entity's enterprise involves activities of property development and activities of making supplies by way of lease. Up to the time when the house was fire damaged the entity had used the property solely in connection with its leasing activities. The entity had not held the property for the purpose of, or as part of, its activities of property development. Since the property was fire damaged the entity has not done anything significant to improve the value of the land or occupied the land in a way to suggest that it commenced to hold the land for a purpose not connected with its input taxed supplies of residential leasing. The fire damaged house was demolished and removed merely to prepare the land for sale, as it was a health and safety risk. In these circumstances where the fire made the house uninhabitable, the demolition should not be regarded as a separate and distinct use of the land, but rather as a consequential step between the end of the leasing activities and the sale of the land. After the fire, the entity has only been carrying out activities and holding the land for the purpose of bringing an end to its leasing of the property, as it was not cost effective to rebuild the house for lease. The entity's only use of the land has been in connection with making input taxed supplies by way of lease of residential premises. Therefore, the sale of the vacant land is taken to be an input taxed supply under subsection 9-30(4) of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4) section 40-35
Case references: Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2003/3
Related ATO interpretative decisions: ATO ID 2009/19 | ATO ID 2009/20
Other references: The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW
Subject references: Goods and services tax GST property & construction GST residential premises GST sale of real property GST supply Input taxed supplies