Private ruling: GST and sale of residential property
Date of advice: 27 October 2016
Published: February 2017

Ruling: Q1: Is your sale of a residential property (the property) a taxable supply? | A1: Yes.

Relevant facts and circumstances: You are registered for GST as a sole trader. You buy and sell residential premises. In XXXX, you purchased a residential property. You brought to account the property as trading stock in your business. The property was never used for rental income production or for owner occupation. You have been slowly renovating the property over the years. You have provided a copy of the work which was done to the property. In total, you borrowed $Y to renovate the building and also carried out the extension to the building. The Certificate of final inspection for the property was issued by the Council on YYYY. In ZZZZ you sold the property to an unrelated party at the sale price of $T (GST inclusive).

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

Reasons for decision: Summary: The residential property is new residential premises created through substantial renovation of a building. The property had been treated as trading stock in your business. The property had never been tenanted from your purchase, until the renovation was completed, and was unoccupied when sold. The property is neither used before 2 December 1998, nor rented for five years since the property was last substantially renovated. Hence the sale of the property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11 th of the sale price to the Australian Taxation Office (ATO). | Detailed Reasoning - Detailed: GST is payable where you make a taxable supply. You make a taxable supply, for GST purposes, where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: 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. (* Denotes a term that is defined in section 195-1 of the GST Act). For the sale of the property to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied. From the facts in this case, you are registered for GST, you sold the property in the course of an enterprise that you carry on (the property has been treated as trading stock for your business until the sale), you sold the property for consideration and the property is located in Australia. Therefore, the sale of the property meets the requirements in paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act. What remains to be considered is whether the sale of the property is GST-free or input taxed. | Detailed Reasoning - GST-free and input taxed supply: The sale of a residential property is not GST-free under any provisions of the GST Act or any other legislation. We now consider whether the sale is an input-taxed supply. Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are: a) commercial residential premises, or b) new residential premises other than those used for residential accommodation before 2 December 1998. New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that: a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease, b) have been created through substantial renovation of a building, or c) have been built, or contain a building that has been built, to replace demolished premises on the same land. Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable. | Detailed Reasoning - New residential premises created through substantial renovations - paragraph 40-75(1)(b) of the GST Act: Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au GSTR 2003/3 states: 13. Sales of housing which has been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not subject to GST as new residential premises. The exceptions are where new residential premises are created through substantial renovations or are built to replace demolished premises on the same land. 53. ….Because new residential premises are created for the purposes of paragraph 40-75(1)(b), any previous sale, long-term lease, or use of the residential premises, is not relevant in determining whether the residential premises are new residential premises. 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. 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. You stated you are carrying on a business of house removal and buying and selling residential properties. The property (land and building) have been treated as trading stock in your business, hence the costs associated with buying and renovating the building on the property form part of the cost of your trading stock until the property was sold. The Commissioner of Taxation sets out his views on what comprises a substantial renovation in GSTR 2003/3 paragraphs 58-74. They include: ● The renovation must directly affect most rooms in the building; ● Landscaping is not included in the analysis; ● Additions are not taken into account in determining whether the building has been substantially renovated; ● Both structural (roofs, floors, supporting walls, altering brickwork etc) and non-structural alterations (wiring, non-supporting walls, kitchen cupboards etc) are taken into account; ● Replacing both the kitchen and bathroom in most cases is not, of itself, a substantial renovation; ● Cosmetic work (paining, sanding floors, carpets, etc) is not by itself substantial renovations; and ● Renovations can occur over a number of years You have spent $000 to renovate the building. Your list of work done to the property directly affects most rooms in the building (kitchen, dining and bedrooms) and includes work done to the roof and the wiring connection. On the basis of these facts, the property is new residential premises created through substantial renovation of a building, as defined under subsection 40-75 (1)(b) of the GST Act. The property was never used for rental income production or for owner occupation from the time you bought it until the sale. From the facts provided, the property is residential premises to be used predominantly for residential accommodation. The property had never been tenanted since renovation completed in AAAA, and was unoccupied when sold. The property is neither used before 2 December 1998, nor rented for five years since the property was last substantially renovated. Since the property is new residential premises which was not used for residential accommodation before 2 December 1998, the sale of the property will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act. In summary, the sale of the property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11 th of the sale price to the Australian Taxation Office (ATO). | Detailed Reasoning - Additional Information - Margin scheme: Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which are available on our website at www.ato.gov.au