Private ruling: GST and the sale of a residential property
Date of advice: 30 March 2021
Published: June 2021
Ruling period: 7 October 20xx to 30 June 20XX
Date scheme commenced: 7 October 20XX

Ruling: Q1: Will the proposed sale of the property be a taxable supply for the purposes of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999? | A1: No. The sale will not be a taxable supply.

Relevant facts and circumstances: The Property known as Lot ### on Deposited Plan held under Certificate of Title Volume #### Folio ### (#3 EE Street, ASUBURB), is registered in the names of AA and BB as tenants in common in equal shares. The Property was formerly known as "Lot Y". AA and BB are in a partnership which has been registered for GST from 20XX. Your enterprise is leasing of commercial and residential premises. You acquired the Property in or around 19XX. At that time there was a residence on the Property and the land was zoned rural. The residence was leased out as a residential premise, for the domestic use of the tenant. Originally the Property had a land area of XX,XXX square metres, but part of the land was compulsorily resumed in 19XX by the State Town Planning Department. You acquired the Property for investment purposes with no specific plans for its development. The Property was shown as an asset on the balance sheet of your partnership. Initially, there was a boundary fence around the Property of ring lock and barbed wire to contain cattle which were grazing on the property. Adjoining neighbours who had developed their land later replaced these fences. There are no other fences or other forms of demarcation around the house. The only improvement that has been carried out at the Property was to remove peat and replace it with sand. The land was low lying and there was a dampness problem. A Council engineer was consulted, and he advised that the peat be removed down to solid sand before any sandfill was placed on the land. Over a period of several years, commencing in the late 19XXs, the peat was removed from the Property. Large earthmoving equipment was needed for the final stages of this activity. The sandfill continued over a number of years and ceased in about 19XX. The Property was last tenanted in 20XX, at which time all the utilities were still connected and it had functioning basis living facilities (such as kitchen appliances, bathing and washing facilities). Specifically, water and electricity were connected and in working order, the kitchen had a functional sink and oven/stove, the bathroom shower, laundry trough and the toilet were all in working order. The Property contained three bedrooms with timber floors in good condition. The front yard had a garden with roses and the back yard had a garden and concrete entertainment area. As a result of the commencement of road widening works in 20XX and the fear that the house was to be demolished sometime in the future, the last tenant moved out of the house. The Property was still fit for human habitation and it could have been leased out at this time, but this did not occur due to all the disruption caused by the Council at the time. On 200Y authorities resumed a portion of the frontage of the Property being XXXsqm of land (equivalent to approximately X.Xm of frontage of the Property). As a result of the resumption, the distance between the first step to the front verandah of the Property and the limestone front fence (which is on government land) was reduced to approximately Xm. Because of the continuous limestone wall installed by council contractors, the garage at the Property became no longer accessible and was blocked off by the wall. At the same time, the new limestone boundary wall removed all visitor's onsite carparking facilities which were available prior to the resumption of approximately X.Xm. This made the Property unappealing to potential renters and, as such, difficult to rent. After the last tenant vacated the Property in 20XX, the property sat vacant and was not used for any other purpose falling into disrepair until a demolition Notice from the City Council was issued. On DD MM YY, the City Council gave Notice that it considered the residence to be unfit for human habitation under the Health (Miscellaneous Provisions) Act 1911. The City Council provided a Notice to Demolish requiring the registered owners to take down and remove the residence within 60 days. The defects in the building, set out in the Second Schedule to the Notice to Demolish, show that it was run down. There was no scheme water or electricity. Windows and doors had been damaged and were not in working order, rendering the Property not weatherproof. The kitchen area was not equipped with a stove, oven or sink. The Property adjoins the property known as #1 EE Street, ASUBURB is registered in the names of AA, BB and CC as Executors of the Will of Mr DD who died in 200X (Executors of the Estate). There is a long-standing understanding between the three siblings AA, BB and CC, that if the two properties, #1 EE Street, ASUBURB and the Property, were to be sold at some point (after their Dad died in 200X), they would be sold together at the one time and not separately. CC a part-owner of #1 EE Street, ASUBURB, has had no desire or need to sell #1 EE Street, ASUBURB during the period 200X to 20YY. Because of the long-standing "understanding" between the brothers #1 EE Street, ASUBURB and the Property were not be sold in the period 20XX to 20YY. An Invitation to Treat, dated DD MM 20XX, ABC Limited offered to purchase the Property and #1 EE Street, ASUBURB from their respective registered owners for the total purchase price of $XX,XXX,XXX, exclusive of GST. The Invitation to Treat is conditional on the registered owners of both #1 EE Street, ASUBURB and the Property (ie the Sellers) obtaining a Private Ruling on the GST consequences of the sale of the Property and #1 EE Street, ASUBURB from the Australian Taxation Office (ATO). The Invitation to Treat states: " GST This offer is exclusive of GST, on the basis that the Sellers are not registered for GST and therefore GST is not applicable for the sale of the Properties." The Invitation to Treat was accepted by registered owners of both the Property and #1 EE Street, ASUBURB on DD MM 20YY. In YYYY, FFFFF & Associates made application to ATO for a private ruling on whether the sale of The Property and #1 EE Street, ASUBURB would be subject to GST. The ATO ruled that that sale of the Property would be an input taxed supply. The ATO reached this conclusion on the basis that section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a sale of real property is input taxed, but only to the extent the property is residential premises to be used predominantly for residential accommodation. The previous residential leasing enterprise was the only enterprise that had been conducted in connection with the Property which would have liked to have been continued had the residence not be demolished.

Relevant legislative provisions: Section 9-5 of The New Tax System (Goods and Services Tax) Act 1999. | Subsection 9-30(4) of The New Tax System (Goods and Services Tax) Act 1999. | Paragraph 40-35(1)(a) of The New Tax System (Goods and Services Tax) Act 1999.

Reasons for decision: Summary: An entity is only liable for GST if it makes a taxable supply. Section 9-5 provides that an entity makes a taxable supply if certain requirements are satisfied, i.e. the entity makes the supply for consideration, in the course or furtherance of its enterprise it carries on, the supply is connected to the indirect tax zone (Australia) and the supplier is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. In your case, the vacant land to be supplied is located in Australia, you will receive for consideration, the supply will be in the course of your residential leasing enterprise and you are registered for GST. Therefore, your supply of the vacant land will satisfy the requirements of a taxable supply unless your supply is GST-free or input taxed. The GST-free supply provisions do not apply to your supply of the vacant land: therefore, we must consider whether there is any input taxed provision that may apply. Subsection 9-30(4) states: A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies. ATO Interpretive Decision 2009/18: GST and sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies considers the application of subsection 9-30(4). This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies. The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4). In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity: • how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party) • what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and • what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value). It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose. Paragraph 40-35(1)(a) provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises. In this case, you leased out the Property from the time it was acquired until September 20XX. Following this time the Property and dwelling remained vacant leading up to the point that the City Council issued a Notice to Demolish in 20XX. At the point the house had become uninhabitable. Given the facts of this case, we consider that prior to your pending supply of the Property, your use of the Property has been solely in connection with you making input taxed supplies of residential premises pursuant to paragraph 40-35(1)(a). There is no indication that the holding of the Property was for any separate purpose or use not related to the leasing of the Property, therefore, the sale of the vacant land is taken to be an input taxed supply under subsection 9-30(4) and as such, is not a taxable supply. Accordingly, the sale of the vacant Property is not subject to GST.