Private ruling: GST and the supply of renovated residential premises
Published: February 2014

Ruling: Q1: Will your supply of the specified house be a taxable supply of new residential premises under paragraph 40-75(1) (b) of the A New Tax System Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes.

Relevant facts and circumstances: You are a partnership and are registered for GST. Your main enterprise activity is to acquire and lease residential and commercial properties. You acquired a property on which two houses were situated. The houses were located on a single title. The vendor charged you GST on the acquisition of the property. You subdivided the property such that each house was on a separate title. One of the houses needed extensive renovations (house 1) and the other was ready to rent (house 2). You then leased house 2 to residential tenants. The house you renovated initially comprised: § X bedrooms § a lounge room § kitchen § laundry § bathroom and § store rooms. You supplied a copy of the plans of the house before and after it was renovated, and details of the renovations are set out below. § Rewiring and replacing plumbing in the whole house § Replacing all windows § Painting external walls § Bedroom one has been modified by the addition of double doors instead of single so that it can be used as a dining area § Most of the cladding on the internal walls was removed and replaced § Bedroom X was converted to the main bathroom with the addition of the relevant bathroom fixtures § The kitchen was converted to a X room. § An ensuite was added to the exterior of the house with a doorway a former room which then became a new bedroom. § Walk in robes were added to the new bedroom and the ensuite which was added to the house was connected to this bedroom via a doorway which replaced the original window. § The laundry and bathroom were converted to another area and external courtyard. § The wall between the store rooms was removed and was modified to become the new kitchen with the associated fixtures § An outside wall was removed and a garage was added to the house § Some internal walls were modified to effect the above changes § A room was modified by the addition of a walk in robe Following these modifications you plan to sell the house.

Relevant legislative provisions: A New Tax system (Goods and Services Tax) Act 1999 section 9-5, | A New Tax system (Goods and Services Tax) Act 1999 section 40-65, | A New Tax system (Goods and Services Tax) Act 1999 section 40-75, | A New Tax system (Goods and Services Tax) Act 1999 Division 75, | A New Tax system (Goods and Services Tax) Act 1999 Division 129 and | A New Tax system (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision: Summary: In this ruling, please note that unless otherwise stated: · all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). · all terms marked with an asterisk are a defined in section 195-1 in the GST Act. You must pay the GST payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with Australia; and (d) you are 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. In your case, you will make a supply of property in Australia for consideration, this supply will be made in the course of your enterprise and you are registered for GST. Therefore you satisfy paragraphs 9-5(a) to (d). Further, the GST-free provisions do not apply in your circumstances. Therefore your supply will be taxable unless it is an input taxed supply. Section 40-65 of the GST Act provides that amongst other things a sale of real property is input taxed to the extent that the property is residential premises to be used for residential accommodation except to the extent that it is new residential premises. Section 195-1 of the GST Act defines residential premises as land or a building that is occupied as a residence or for residential accommodation or is intended to be occupied and is capable of being occupied as a residence or for residential accommodation. Paragraph 40-75 (1) (b) of the GST Act provides that amongst other things residential premises are new residential premises if they have been created through substantial renovations of a building. Section 195-1 defines substantial renovations as: Substantial renovations of a building are renovations in which all of a building is removed or replaced. However the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides at paragraph 64 to 74 the following information in regard to the concept of substantial renovations. 64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. 65. For example, the owner of a large 4 bedroom house removes the wall between two bedrooms for the purpose of creating a large bedroom with ensuite. The former door to one of the bedrooms is removed and replaced with gyprock so that the newly created larger bedroom can only be entered by one doorway. The room is repainted and recarpeted. Although significant, the work does not constitute substantial renovations as only one area of the house is affected. Curtilage 66. Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building. Additions 67. Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added. | Detailed Reasoning - Removal or replacement of all or substantially all of the building: 68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial. 69. This criterion is satisfied where there is a removal or replacement of a substantial part of the: · structural components of the building; or · non-structural components of the building. 70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as: · altering, or replacing of, foundations; · replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior); · lifting or modifying of roofs; · replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door). 71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. 72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced. 73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred. 74. Non-structural building work includes: · replacing electrical wiring; · replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior); · plastering or rendering an entire wall or walls; · plumbing (eg replacing old metal pipes with copper pipes or plastic pipes); · removing or replacing kitchen cupboards, bathroom fixtures, etc; · removing or replacing air-conditioning or security systems. As set out in the facts above there were structural and non-structural changes including: · Removal and replacement of the bathroom, laundry and kitchen fixtures · Replacing most of the wiring and plumbing · Altering and removing some sections of walls · Recladding internal walls · Changing single doors to double doors · Insertion of built in robes and addition of an ensuite Even though the house was not demolished and rebuilt there were structural and non-structural modifications of some sort to every room of the house. Example 5 in paragraphs 111 to 114 provides the following explanation of a scenario which the ATO considers to be one of substantial renovations | Detailed Reasoning - Example 5 - substantial renovations: 111. Mary-Anne, a builder, acquires a dilapidated bungalow that has 3 bedrooms and one bathroom. Mary-Anne intends to renovate and sell the bungalow as part of her enterprise. She lives in the bungalow while she carries out the following renovations. 112. 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 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, and replacing all the fittings in the kitchen and bathroom. 113. The work undertaken by Mary-Anne constitutes substantial renovations. 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 substantial renovations have occurred. 114. 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. Whether or not a person resides in the premises does not alter the analysis. Based on the information you have provided we consider that the renovations you have conducted on your residential premises satisfy the definition of substantial renovations in section 195-1 of the GST Act. We therefore consider the premises will be new residential premises when the renovation project is completed. As the sale of your premises will be a sale of new residential premises as defined in paragraph 40-75(1) (b) your supply will be a taxable supply. | Detailed Reasoning - Additional information: We note that: · As you are not making an input taxed supply of the premises you may be entitled to claim the GST credits on the costs of construction. · If you do claim the GST credits on the cost of construction you may have a Division 129 adjustment if you rent out the property prior to sale. · Where the supply was correctly classified as a taxable supply to you, you may be entitled to GST credits on the acquisition of the property.