Private ruling: Goods and Services Tax (GST) and sales of residential premises with development plans
Date of advice: 12 July 2017
Published: November 2017

Ruling: Q1: Are the sales of residential premises with development plans (subject to Council approval), input taxed supplies for GST purposes? | A1: Yes, the sales of residential premises with development plans (subject to Council approval), are input taxed supplies for GST purposes.

Relevant facts and circumstances: A is a property development business and is registered for GST. The sole director of A is X. A purchased a residential property (Property 1) and rented it out to tenants from the date of settlement. A then purchased the adjacent property to Property 1 (Property 2) and rented this out to residential tenants. B was formed for the sole purpose of purchasing a residential property adjacent to Property 1 and Property 2. The sole director of B is also X. B is registered for GST. On x date B purchased the residential property adjacent to Property 1 and Property 2 (Property 3). B renovated this property before renting it out to residential tenants. A and B jointly applied for development approval for Property 1, Property 2 and Property 3. On y date A entered into a contract of sale with C, an unrelated entity, for the sale of Property 1 and Property 2. The sale is subject to: ● A (in conjunction with B) obtaining a Development Approval at A’s cost, by a certain date; and ● C as the buyer, accepts the terms and conditions of the Development Approval. On z date B also entered into a contract of sale with C, an unrelated party, for the sale of Property 3. The sale is also subject to the same conditions as above, such as: ● B (in conjunction with A) obtaining a Development Approval at B’s cost, by certain date; and ● C as the buyer, accepts the terms and conditions of the Development Approval. C is not registered for GST.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

Reasons for decision: Summary: Subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a sale of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation. Paragraph 10 of the Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) states that: 10. The requirement for residential premises to be used predominantly for residential accomodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accomodation (for example, where the premises are used as a business office) Paragraphs 12 and 13 of the GSTR 2012/5 then provide an example of a purchaser’s intention not to use premises for residential accomodation. 12. John carries on an enterprise which involves leasing a house on property which he owns. Based on the physical characteristics of the house it is residential premises to be used predominantly for residential accommodation. The area in which the house is located has recently been rezoned by the local Council to permit higher density residential apartments. Following the rezoning, a developer, Knock Them Down Co, approaches John and offers to purchase his property. Knock Them Down Co intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments. 13. The fact that Knock Them Down Co does not intend to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. Knock Them Down Co’s intention is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accomodation. The sale of the house by John to Knock Them Down Co is an input taxed supply under section 40-65. In this case the residential properties, Property 1, 2 and 3 have been rented out to residential tenants and thus are residential premises used predominantly for residential accommodation. When A and B entered into the contracts for sale with C, the properties were occupied by residential tenants as residential premises. The facts that the properties are being sold with residential development plans subject to Council approval and conditional upon C accepting the terms and conditions of the Development Approval are not relevant factors in determining the characters of the premises. Based on their physical characteristics, Property 1, 2 and 3 are residential premises used predominantly for residential accomodation. Hence, the sales of these properties by A and B to C are input taxed supplies under section 40-65 of the GST Act.