Sunchen Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 159 of 2010)
Judgment date: 8 December 2010
Date published: 21 February 2011
Decision outcome: Taxpayer's appeal dismissed

Summary of decision:

Overview of facts:
The taxpayer purchased a property located at 117 Bridge Street, Port Macquarie, pursuant to a contract for the sale of land exchanged on 8 August 2006. The completion date was 20 September 2006. | At the time of settlement a single storey house with carport was located on the property and the property was being occupied by a tenant pursuant to a residential tenancy agreement. The contract provided that the sale to the taxpayer was subject to the existing tenancy. The tenancy continued until at least 29 November 2006. | The property was also the subject of a development approval allowing the construction of a five-storey residential building with strata sub-division. The benefit of the vendor's interest in the development approval was assigned to the taxpayer under the contract of sale. The taxpayer gave evidence that at the time of settlement the taxpayer intended to develop the property in accordance with that development approval. | Issues decided by the court | The Court held that the phrase 'to be used predominantly for residential accommodation' in subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 is only concerned with the attributes of the property at the time it is supplied, and to what use those attributes or characteristics are suited. Given this, it was concluded that in determining whether a property is 'residential premises to be used predominantly for residential accommodation' the intention of the future owner is irrelevant. In so concluding the Court clarified that the approach adopted in the decision in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83, which involved a prediction as to future use which could include consideration of subjective intention, is not correct. | In reaching its decision, the Court considered whether the use of 'intended to be occupied' in the definition of residential premises or the use of 'to be used' in subsection 40-65(1) meant that the subjective intention of the purchaser was relevant. The Court concluded that 'intended to be occupied' and 'to be used' were, in the context, synonymous and both were used in the sense of suitable or apt and hence were directed at determining the characteristics of the property rather than the subjective intention of any party.

Issues decided:
The Court held that the phrase 'to be used predominantly for residential accommodation' in subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 is only concerned with the attributes of the property at the time it is supplied, and to what use those attributes or characteristics are suited. Given this, it was concluded that in determining whether a property is 'residential premises to be used predominantly for residential accommodation' the intention of the future owner is irrelevant. In so concluding the Court clarified that the approach adopted in the decision in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83, which involved a prediction as to future use which could include consideration of subjective intention, is not correct. In reaching its decision, the Court considered whether the use of 'intended to be occupied' in the definition of residential premises or the use of 'to be used' in subsection 40-65(1) meant that the subjective intention of the purchaser was relevant. The Court concluded that 'intended to be occupied' and 'to be used' were, in the context, synonymous and both were used in the sense of suitable or apt and hence were directed at determining the characteristics of the property rather than the subjective intention of any party.

ATO view of decision:
The decision confirms the long-held ATO view that subsection 40-65(1) requires an objective assessment of the nature of the premises rather than a prediction of future use or consideration of the subjective intention of the future owner.

Administrative treatment:
As the decision confirms the ATO view, there will be no changes to ATO administrative practice as a result of the decision. | Implications on current Public Rulings & Determinations | Reference to the decision will be included in GSTR 2000/20 as part of the current review of that Ruling. No other implications for Public Rulings or Determinations have been identified.

Legislative references: Income Tax Assessment Act 1936 A New Tax System (Goods and Services Tax) Act 1999 (Cth) 40-65(1)
Case references: Hamilton Island Enterprises Pty Ltd v Federal Commissioner of Taxation 82 ATC 4302 13 ATR 220 Kearney v Federal Commissioner of Taxation (1984) 68 FLR 316 15 ATR 564 84 ATC 4295 Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307 141 FCR 299 2004 ATC 5068 57 ATR 521 Smith (W) v Federal Commissioner of Taxation (1982) 41 ALR 315 13 ATR 115 82 ATC 4240 Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 197 FLR 74 2006 ATC 4160 62 ATR 73 Transport Accident Commission v Ball [1999] 1 VR 64
Subject references: goods and services tax (GST) meaning of 'residential premises' whether property was residential premises 'to be used predominately for residential accommodation' whether the test is to be determined by reference to the use to which the purchaser intends to put the property, or the characteristics of the property at the time of the supply
Other references: A New Tax System (Goods and Services Tax) Bill 1998 (Cth) Explanatory Memorandum