Private ruling: GST and the sale or lease of residential premises
Date of advice: 6 August 2015
Published: August 2015

Ruling: Q1: Is GST payable on your sale of the separately titled strata units? | A1: No | Q2: Can the margin scheme be applied if the sale of the strata units is a taxable supply? | A2: Question is not relevant in this case | Q3: Will the lease of the strata units be a taxable supply? | A3: No

Relevant facts and circumstances: You are a GST registered partnership. You acquired the freehold interest in X Units on ddmmyyyy. Settlement occurred in mmyyyy and the sale contract stated that: ..the vendor warrants that it is registered for the purpose of the GST law and undertakes to choose to apply the margin scheme. At this time you also purchased the reception area in the building which had been used by the previous owner and leased another X apartments from unrelated owners. You also acquired the telephone number of the business. Up until ddmmyyyy, you used the Units to supply short term accommodation to guests. At the time of the purchase of the apartments in yyyy you also purchased a designated reception area. However the council advised that they would not allow you to continue to operate the reception area as such and you incorporated the title to this area with the title for unit 1. You then used this area as a laundry and to house the telephone system and wifi for the business you operated. All the Units are located in a single building. The Units had been used by the previous business owner to supply short term accommodation. As the leases have ceased for the Units you leased, you currently only supply short term accommodation in the Units you own. Each apartment is similar and contains a bedroom, bathroom/laundry and a combined kitchen/dining and living area and balcony. You take bookings by phone or through a website. The building has no reception area or common dining area and each apartment has an allocated car bay. You now propose to either sell the Units with vacant possession or lease them to long term tenants.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-5, | A New Tax System (Goods and Services Tax) Act 1999 40-35, | A New Tax System (Goods and Services Tax) Act 1999 40-65 and | A New Tax System (Goods and Services Tax) Act 1999 75-5.

Reasons for decision: Detailed Reasoning - Is GST payable on your sale of 3 separately titled strata units?: 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 indirect tax zone (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. On the facts supplied, when you sell the Units you will meet requirements (a) to (d) and the supply of the Units will not be GST-free. Therefore, your supply will be a taxable supply unless it is input taxed. | Detailed Reasoning - Input taxed supply of real property: Section 40-65 provides that a supply of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation except where the property is commercial residential premises or new residential premises. Section 195-1 provides that residential premises means 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. Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) considers how Subdivision 40-B and Subdivision 40-C of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to supplies of residential premises. Paragraph 15 of GSTR 2012/5 states: 15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation. We consider that the Units meet the definition of residential premises and therefore will be input taxed unless they are commercial residential premises or new residential premises. | Detailed Reasoning - Commercial residential premises.: Commercial residential premises are relevantly defined in section 195-1 to be a hotel, motel or inn or anything similar to these premises. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) considers how sections 9-5, subdivision 40-B and Subdivision 40-C apply to the supplies of commercial residential premises and supplies of accommodation in commercial residential premises. Paragraphs 95 and 98 of GSTR 2012/6 state: 95. In addition to living accommodation areas,8 premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree. 98. A supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. For example, a hotel may be strata titled so that each hotel room and the commercial infrastructure are separate strata units. Where the strata units are individually supplied under multiple sale contracts or leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units. A supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to at paragraph 95 of this Ruling is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises.9 This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises. The only service supplied to residents is the cleaning of the rooms and there is no reception area. Although you have a business name and telephone number we consider that this is not adequate commercial infrastructure for your premises to be commercial residential premises. In addition, when you sell the units, you will not be supplying any of the business infrastructure ie telephone numbers, wifi etc. Therefore, the supply of the individual units will not be a supply of commercial residential premises. | Detailed Reasoning - Conclusion: Based on the facts you have supplied, any future sales of the Units will not be the sale of new residential premises or commercial residential premises. Therefore they will be input taxed supplies of residential premises pursuant to section 40-65. | Detailed Reasoning - Question 2: Can the margin scheme be applied if the sale of the strata units is a taxable supply? The GST law on the margin scheme is found in Division 75. The margin scheme is applicable only to certain taxable supplies. In your case the supplies of the Units will not be taxable supplies and therefore the margin scheme cannot be applied. | Detailed Reasoning - Question 3: Will the lease of the strata units to long term tenants be a taxable supply? When you lease the premises to tenants for long term accommodation you will be leasing residential premises that are not commercial residential premises. Section 40-35 relevantly provides that the supply of premises by way of lease is input taxed if the supply is of residential premises other than a supply of commercial residential premises. Therefore the lease of the premises will be an input taxed supply.