Private ruling: GST and sale of renovated residential properties
Published: November 2013

Ruling: Q1: Do you have to register for goods and services tax (GST) and pay GST on the sale of your renovated residential properties? Decision As the sales of your renovated residential properties are input taxed you do not have to register for and pay GST.

Relevant facts and circumstances: A few years ago, you renovated and sold a used residential property. The fittings and fixtures in the kitchen and bathrooms were replaced, the house was painted inside and outside and the floorboards were sanded. You made a profit from this property transaction. The profit from the sale was used to meet your family expenses. Because of the success of the above project, you obtained your Australian Business Number (ABN) as a sole trader. You plan to renovate and sell several used residential properties every year. Recently you purchased another used residential property for renovation purposes. You renovated this property by replacing the fittings and fixtures of the kitchen and bathrooms, painting the property inside and outside and sanding the floorboards. This property was sold recently at a substantial profit. The profit will be used to meet your family expenses. You are currently seeking finance to secure your next property for renovation. You will renovate and sell only residential properties. Our records indicate that you are registered for an ABN. However, you are not registered for GST. You will purchase only residential properties that are more than 5 years old for renovation and sale. You have no intention of purchasing commercial residential properties for renovation and sale.

Relevant legislative provisions: 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 - section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 - section 188-15 | A New Tax System (Goods and Services Tax) Act 1999 - section 188-20 Reasons for the decision | Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that: | You make a taxable supply if: | (a) you make the supply for consideration; and | (b) the supply is made in the course or furtherance of an enterprise that you carry on; and | (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. | The sale of each renovated property will be for consideration. The properties are connected with Australia as they are situated in Australia. | You are carrying on an enterprise of renovating and selling used residential properties. You make the supply of your residential properties in the course or furtherance of this enterprise. The sale of renovated residential properties is not a GST-free supply under any provision of the GST Act. You are not registered for GST. | You do not need to remit the GST on input taxed supplies of residential properties. Therefore, in this case it needs to be determined whether your supplies of renovated residential properties are input taxed and whether you are required to be registered. | Section 40-65 of the GST Act provides that: | (1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation. | (2) However, the sale 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. | You have informed that you do not deal with commercial residential premises. | Therefore, it is necessary to establish whether your renovated properties are new residential premises. | Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they: | (a) …. | (b) have been created through substantial renovation of a building; or | (c) …. | Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) refers to when is a sale of real property a sale of new residential premises. The following paragraphs from GSTR 2003/3 have been reproduced to elaborate what the term "substantial renovations" involves. | New residential premises created through substantial renovations - paragraph 40-75(1)(b) | 53. New residential premises may be created through substantial renovations of a building. A sale of new residential premises may be a taxable supply if the requirements for the making of a taxable supply are satisfied (see paragraph 22).… | 54. The term substantial renovations is defined in section 195-1: | 'substantial renovations' of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. | 55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner. | 57. The general usage of the term 'renovate' is 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'. However, the term needs to be considered in the light of the surrounding words in the definition of substantial renovations. | 58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. | 59. A building comprises a number of components, which can be termed either structural (i.e. the foundations, external walls, interior supporting walls, floors, roof, etc) or non-structural (including fixtures, fittings, plumbing, mechanical, fire systems, electrical, lifts, air conditioning, etc. | Criteria for substantial renovations | 60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances. | 61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial: | (i) the renovations need to affect the building as a whole; and | (ii) the renovations need to result in the removal or replacement of all or substantially all of the building. | 62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made. | Substantial renovations need to affect the building as a whole | 63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example, curtilage) and additions to the building. | Building in its entirety | 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. | 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. F23 | 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. | 75. Guidance is provided on what we regard as substantial renovations in Examples 3 to 5 at paragraphs 104 to 114 and Examples 8 to 9 at paragraphs 124 to 130 of this Ruling. For instance, in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations. | 76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient for substantial renovations to have occurred. | 77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes: | · painting; | · sanding floors; | · removing and replacing worn or out of date fittings such as light fittings; | · replacing curtains or carpets. | 78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110. | 79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises. | Renovation work by previous owners | 80. Only renovations by the current owner which are reflected in the building at the time of sale are considered in determining whether new residential premises have been created through substantial renovations. Renovations undertaken by previous owners are disregarded in determining whether new residential premises have been created through substantial renovations by the current owner. | According to the facts provided the renovation work undertaken by you mainly constitutes removal and replacement of fittings and fixtures of the kitchen and bathrooms, repainting inside and outside of the building, sanding of floorboards and other non structural work. Your renovation work does not affect the building as a whole. Your work does not result in the removal or replacement of all or substantially all of the building. | They do not amount to creation of new residential premises through substantial renovations. Accordingly, your sales of renovated residential properties do not amount to the sale of new residential premises. Under subsection 40-65(1) of the GST Act, such sales are input taxed supplies and not subject to GST. Registration for GST | Under section 23-5 of the GST Act, you are required to be registered if you carry on an enterprise and your GST turnover meets the registration turnover threshold. Current registration turnover threshold is $75,000. | We consider that you carry on an enterprise of renovating and selling used residential properties. Under Section 188-15 and 188-20 of the GST Act, your current and projected GST turnover do not include the value of supplies that are input taxed. As your supplies of renovated residential properties are input taxed, the value of such supplies is not included in your GST turnover. Accordingly, you do not meet the GST registration turnover threshold and you are not required to be registered for GST. Therefore, on the sale of a renovated residential property, you will not incur a GST liability. At the same time, you will not be entitled to claim any GST paid on the material and labour costs incurred, as an input tax credit. | Please note that substantial renovations of residential premises depend on what is actually done to the premises and that each case depends on its own facts. This means that you are constantly required to consider whether the renovations done by you on a property amount to substantial renovations and subsequently whether new residential premises have been created through the process of renovating residential premises.