ATO ID 2008/136: GST and motel apartments
Date of decision: 25 September 2008
Business line: Indirect Tax

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
Summary: 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: 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: 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: | Detailed Reasoning - Example 15.4: 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.

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 and 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
Subject references: 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