Private ruling: Substantial renovations and new residential premises
Date of advice: 13 September 2017
Published: January 2018

Ruling: Q1: Is the sale of the Property by A Ltd a supply of residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) which is input taxed pursuant to subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No. | Q2: If the sale of the Property by A Ltd is not input taxed pursuant to subsection 40-65(1) of the GST Act, then: is the sale of the Property a taxable supply of ‘new residential premises’ within the meaning of section 40-75 of the GST Act in respect of which A Ltd can claim input tax credits in full for GST included in the costs of things acquired and used by A Ltd to renovate the Property; and is A Ltd either: entitled to register for GST with effect from the April 2014 tax period in which A Ltd acquired the Property; or entitled to register for GST with effect from June 2017 and make a retrospective claim of input tax credits in full for GST included in the costs of things acquired by A Ltd from April 2014 onwards and used to renovate the Property? | A2: The sale of the Property by A Ltd is a taxable supply of new residential premises. We decline to rule on whether the Commissioner will exercise the discretion to determine that A Ltd is registered for GST with effect from April 2014. Subject to A Ltd successfully applying for registration for GST with effect from April 2014 and holding the relevant tax invoices, A Ltd will be entitled to claim input tax credits for GST included in the cost of things acquired by A Ltd from April 2014 onwards in renovating and selling the Property. | Q3: If the sale of the Property by A Ltd is not input taxed pursuant to subsection 40-65(1) of the GST Act and is a supply of ‘new residential premises’ then: can A Ltd apply the margin scheme in working out the amount of GST payable by A Ltd on the sale of the Property; and if A Ltd can apply the margin scheme, will the amount of GST on the sale of the Property be 1/11 th of the sale price (including GST) less $X (A Ltd’s cost to acquire the Property)? | A3: As A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme A Ltd will be able to apply the margin scheme in working out the amount of GST on a taxable supply of the Property made by A Ltd. As we do not know whether the $X ‘cost to acquire’ stated in Appendix 5 includes settlement adjustments paid by A Ltd we cannot provide a ruling confirming that A Ltd can calculate the margin on the sale of the Property by A Ltd as the sale price (including GST) less $X.

Relevant facts and circumstances: A Ltd: A Ltd is an Australian private company and is not currently registered for GST. Since incorporation A Ltd has not been registered or required to register for GST as A Ltd’s GST turnover has not met the GST registration turnover threshold. A Ltd is wholly owned by B Ltd which is an Australian private company which registered for GST with effect from 1 July 2000. The Property: In April 2014 A Ltd purchased the Property from an unrelated vendor which was not registered or required to be registered for GST at the time of the sale. The Property is zoned single family residential, two stories. A Ltd acquired the Property for the purpose of gaining access to repair a boundary retaining wall between the Property and an adjoining property. B Ltd owned the adjoining property. A Ltd was used as the purchase vehicle for the Property because of liability and potential sale considerations. Since purchasing the Property A Ltd has not used the Property for residential accommodation or rented out the Property because of the indefinite start times for builders. It was intended that B Ltd would rebuild the boundary retaining wall at B Ltd’s cost as the section of wall in disrepair was on the adjoining property. It was also intended that A Ltd would undertake modest renovations to the Property to quickly ready the Property for re-sale. Work undertaken by B Ltd and A Ltd: Between August 2014 and October 2014 B Ltd rebuilt the west section of the wall. It was stated in the ruling request that A Ltd undertook renovations to the Property between February 2015 and December 2016. However the timeline in Appendix 5 to the ruling request states that A Ltd undertook that work between February and December 2015 and that the work was completed in December 2015. Following issue of a draft of this ruling A Ltd’s adviser confirmed that the renovations were undertaken between February 2015 and December 2016 and that the timeline in Appendix 5 is incorrect. Appendix 2 - breakdown of works undertaken A Ltd: Appendix 2 to the ruling request is a breakdown, purportedly in accordance with paragraphs 66 to 74 Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3), of works undertaken by A Ltd: Work that should be disregarded when determining whether substantial renovations have occurred: Curtilage: New driveway; new fence to replace old fence; new service lines in accordance with new regulations; new fence between the Property and the adjoining property; sloping, draining, waterproofing and tiling of external surfaces; replacement of iron east fence with glass panels; removal of external patio; new turntable – these renovations consist of work done on external areas, are not attributable to the building and therefore should be considered as curtilage (paragraph 66 of GSTR 2003/3). Additions: New awning – since a covered rear deck is considered to be an addition undertaken with the renovation, the new awning should be considered an addition rather than a renovation (paragraph 67 of GSTR 2003/3). Cosmetic: Painting of garage and store and painting of external walls – painting is listed as cosmetic work (paragraph 77 of GSTR 2003/3). Repairs to external brick veneer – as the veneer is a decorative layer applied to an existing structure the repairs renewed or refreshed what is already there and should be considered cosmetic work (paragraph 77 of GSTR 2003/3). New finishes and cabinetry; new fit-outs for all downstairs areas excluding the garage and store; new appliances, fittings and furnishings – these involve the removal and replacement of out of date fittings which is considered to be cosmetic work (paragraph 77 of GSR 2003/3). Work that should be considered when determining whether substantial renovations have occurred: Structural: Replacement of brick and stud walls; new ceiling and roof structures – both listed as structural work (paragraph 70 of GSTR 2003/3). Installation of RSJ underside courtyard/terrace as part of sunroom’s ceiling – involves the alteration of part of a supporting wall and therefore should be structural work (paragraph 70 of GSTR 2003/3). Enlarged store area – involved both alteration of floors and an extension of the building which are both considered to be structural work (paragraphs 70 and 71 of GSTR 22003/3). Non Structural: New electrical wiring; new plumbing; new split system air conditioning; rendering of garage and store; rendering of external walls – all listed as non-structural building work (paragraph 74 of GSTR 2003/3). Automation system for lights and blinds – does not involve the modification of structural or supporting structures and should be in line with installation of air conditioning or the replacement of curtains and blinds (paragraph 74 of GSTR 2003/3). Heated flooring in bathroom, laundry and hallway – should be considered as the installation of a heating system rather than the modification of floors and categorised similarly to installation of air conditioning and therefore non-structural (paragraph 74 of GSTR 2003/3). New sliding doors and windows; new door to enclosed sunroom; new panel garage door replacing roller door; new double glazed windows to replace single pane windows – since these renovations only involved modification of non-supporting structures they should be considered non-structural (paragraphs 70 and 74 of GSTR 2003/3). New lift; change in functional use of three rooms (laundry and bathroom reversed, sitting room to bedroom or study, lift); remake of entry steps and ramp – these changes are non-structural as they do not involve modifications of structural or supporting structures (paragraphs 70 and 74 of GSTR 2003/3). Copper roof and gutter installation – the replacement of concrete tiling with a copper roof as opposed to changing the actual structure of the roof should be non-structural (paragraphs 70 and 74 of GSTR 2003/3). Appendix 3 - survey report: A survey report dated June 2010 undertaken by consulting surveyors and engineers describes the improvements to the Property as a one and two storey brick and timber residence together with other improvements. Appendix 4 - town planning report: A Town Planning Report dated March 2017 to accompany an application to council for a Building Certificate for works carried out on the dwelling on the Property by A Ltd refers to ‘before’ and ‘after’ ground floor and first floor plans of the existing dwelling ‘to enable Council to clearly ascertain the extent of works’ and includes those ‘before’ and ‘after’ plans of both the ground floor and first floor. The ‘before’ ground floor plan indicates that, prior to the works being undertaken, the ground floor comprised a garage which gave access to a lounge and an internal staircase. The lounge gave access to a patio from which there was access to a toilet, a laundry and a bedroom. An external hot water service was located behind the garage. The ‘after’ ground floor plan indicates that, as a result of the works, the patio was enclosed to become a sunroom and laundry, the laundry became a bathroom, the internal staircase was removed and a lift installed, the lounge became a bedroom plus a hallway extending from the garage and the lift to the two bedrooms, sunroom, and bathroom and the former toilet was extended behind the garage to provide a store and accommodate the hot water service. The ‘before’ first floor plan indicates that, prior to the works being undertaken, the first floor comprised two bedrooms, a bathroom, a combined kitchen/dining/living area, the internal staircase and a large terrace. The ‘after’ first floor plan indicates that, as a result of the works, the floor of the kitchen/dining/living was extended and a new tiled patio added and the internal staircase was removed to make room for an island in the kitchen area, one bedroom was removed and the space used to accommodate a new toilet and the lift shaft and the bathroom was converted into an ensuite bathroom for the remaining bedroom. The Town Planning Report describes the state of the dwelling on the Property upon purchase by A Ltd: The following photographs illustrate the significant deteriorated state of the existing dwelling at the time of purchase after wall claddings had been removed and which only then exposed the extent of damage. It can be clearly seen from these photographs that major repairs were necessary as the hostile environment of the beachfront has resulted in significant damage to the structural members of the existing dwelling. Photographs below also clearly illustrate the ingress of dampness as a consequence of inappropriate construction methods and waterproofing carried out at the time of construction of the original dwelling and also over the several decades prior to the purchase of the property by the current owner. The Town Planning Report then describes the completed works: …the works carried out have resulted in a higher standard of structural integrity and a higher standard of liveability and waterproofing to ensure the completed development is sound and is of a high standard of amenity for future occupants…there is no doubt that the structurally compromised components of the dwelling have been removed, repaired and replaced in a tradesman-like manner The Town Planning Report also describes the reasons for the works: The works…have been carried out as a consequence pf the necessity of performing significant structural and weatherproofing works to the existing dwelling. The works occurred as a consequence of endeavouring to expose areas of structural and waterproofing concerns. However, once these areas were exposed it became readily apparent that there was a major termite attack throughout the majority of the internal timber framing of the subject dwelling. Due to the necessity to ensure that structural soundness was maintained, it became critical to that the works carried out were performed in a timely manner. However, these works which resulted in changes to the floor plan were, to a large extent, exempt or complying and only a minority of the subject works required development consent which is clearly acknowledged in the foregoing report. Appendix 5 – timeline/extent of renovations/ schedule of costs: Appendix 5 to the ruling request contains a timeline of events between purchase of the Property by A Ltd in April 2014 and completion of the works by A Ltd. Appendix 5 also describes the extent of renovations to the ground level and first floor as follows: Ground floor: ● New lift (instead of internal stairs); ● New double glazed windows to replace previous single pane; ● New electrical wiring since meter board required to be externally accessible; ● All new plumbing lines to replace substandard sizes and earthenware sewage lines that did not provide constant fall; ● Change functional use in three rooms (laundry and bathroom functions reversed) and sitting room (to bedroom or study) and lift; ● Install RSJ underside courtyard/terrace (part of sun room ceiling) to support joining slabs that are moving separately due to water penetration; ● New door to an enclosed sunroom; ● New fit outs for all downstairs areas excluding garage and store (only painted or rendered and painted) ● Enlarged store area; ● Heated flooring in bath, laundry and hallway. First floor: ● All brick and stud walls replaced – only way to rectify water penetration; termite destruction; termite proof; and reinstate structural integrity; ● New ceiling and roof structures (steel framed) within old RL; ● Copper roof and gutter replacing old concrete tiles that leaked; ● New sliding doors and windows (double glazed etc.); ● All new finishes and cabinetry throughout; ● All new appliances and fittings; ● All new electrical and plumbing; ● Split system A/C upper level including bedroom; ● All lights and blinds automated – CBus control; ● New external brick veneer between sandstone arch and entry corner to correct for bow in old brickwork. Appendix 5 also contains a schedule of costs incurred by A Ltd, including $X to acquire the Property plus build costs of $Y (for builders, consultants, items by supply and install, items direct suppliers and all other).

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 11-5 | A New Tax System (Goods and Services Tax Act) 1999 section 25-10 | 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 75-5 | A New Tax System (Goods and Services Tax Act) 1999 section 75-10 | A New Tax System (Goods and Services Tax Act) 1999 section 195-1 ‘substantial renovations’

Reasons for decision: Summary: All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated. The renovations are substantial renovations as they affect the building as a whole and involve the replacement of substantially all of the building. Consequently the sale of the Property by A Ltd is a taxable supply of new residential premises, being residential premises that have been created through substantial renovations of a building. Detailed reasoning Section 40-65 states: (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. Section 195-1 sets out the meaning of ‘residential premises’: Residential premises means land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a *floating home Section 40-75 sets out the meaning of ‘new residential premises. Subsection 40-75(1) states: (1) *Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than *commercial residential premises (other than *commercial residential premises) and have not previously been the subject of a *long term lease; or (b) have been created through *substantial renovations of a building; or (c) have been built, or contain a building that has been built, to replace demolished premises on the same land. Paragraphs (b) and (c) have effect subject to paragraph (a). Residential premises: Paragraphs 6 and 7 of Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) state: 6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition. 7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises. A footnote to paragraph 6 of GSTR 2012/5 states that ‘premises’ refers to whatever is supplied, whether it is the whole or any part of land or a building. The description of the improvements to the Property in Appendix 3, i.e. a one and two storey brick and timber residence together with other improvements, plus the ‘before’ and ‘after’ ground floor and first floor plans and images in Appendix 4 indicate that the Property satisfies paragraph (b) of the ‘residential premises’ definition, i.e. the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation. Paragraph 7 of GSTR 2012/5 provides that whether premises satisfy paragraph (b) of the ‘residential premises’ definition is demonstrated through the physical characteristics of the premises. Subsection 40-65(1) requires that the residential premises are ‘to be used predominantly for residential accommodation (regardless of the term of occupation). Paragraphs 9 and 10 of GSTR 2012/5 state: 9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. 10. The requirement for residential premises to be used predominantly for residential accommodation 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 accommodation (for example, where the premises are used as a business office). As the description, floor plans and images of the improvements to the Property indicate that the physical characteristics of the Property make the Property suitable for residential accommodation, the ‘to be used predominantly for residential accommodation’ requirement is satisfied. New residential premises created through substantial renovations of a building: As noted above, paragraph 40-65(2)(b) of the GST Act provides that a sale of residential premises is not input taxed to the extent that the residential premises are ‘new residential premises’ and paragraph 40-75(1)(b) provides that residential premises are new residential premises if they have been ‘created through substantial renovations of a building’. ‘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 replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. Paragraph 55 of Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) provides that the ‘substantial renovations’ definition requires consideration of what work has been done to the building since it was acquired by the current owner. Work excluded from ‘substantial renovations’ - curtilage: Paragraphs 53 to 79 of GSTR 2003/3 discuss the definition of ‘substantial renovations’ in section 195-1, which refers to substantial renovations ‘of a building’. Paragraph 56 of GSTR 2003/3 refers to the Macquarie Dictionary definition of ‘building’, i.e. …a substantial structure with a roof and walls, as a shed, house, department store etc… and paragraph 59 of GSTR 2003/3 states: 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.) Paragraph 66 of GSTR 2003/3 deals with ‘curtilage’ and provides that work associated with renovations but not directly attributable to the building itself, e.g. landscaping and beautification of surrounding land is not renovations ‘of a building’ and therefore falls outside the ‘substantial renovations’ definition. It was submitted that the following renovations were not renovations ‘of a building’ and should be disregarded when determining whether there had been ‘substantial renovations’: ● new driveway ● new fence to replace old fence; ● new service lines; ● new dividing fence between Property and adjacent property; ● sloping, draining, waterproofing and tiling of external surfaces; ● replacement of part of iron east fence with glass panels; ● removal of external patio; and ● new vehicle turntable. ● new awning. We agree that these items should be disregarded in determining whether the building at the Property has been substantially renovated. Work excluded from ‘substantial renovations’ – additions: Paragraph 67 of GSTR 2003/3 states: 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. In Appendix 2 it was submitted that as the new rear deck on the first floor was an addition, the new awning should also be treated as an addition and excluded when determining whether the Property had been substantially renovated. We could not find a reference to a new awning over a rear deck in Appendix 5, although Appendix 5 does refer to ‘new awning for glass slider to lift entry’ and we agree that that is an addition. Work excluded from ‘substantial renovations’ – cosmetic work: Paragraph 77 of GSTR 2003/3 states: 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. In the ruling request it was submitted that the works listed under the heading ‘cosmetic’ in Appendix 2 to the ruling request should be disregarded when deciding whether substantial renovations have been undertaken, i.e. ● painting of the garage and store; ● painting of external walls; ● repaired external brick veneer; ● new finishes and cabinetry; ● new fit outs for all downstairs areas excluding garage and store; ● new appliances fittings and furnishings We agree that painting is cosmetic, although we note that Appendix 5 states that all external walls and that either the garage or enlarged store were rendered as well as painted and paragraph 74 of GSTR 2003/3 provides that rendering entire walls is non-structural building work. We do not consider that repair of the external brick veneer is cosmetic because paragraph 77 pf GSTR 2003/3 describes cosmetic work as not impacting on the structure of the building and Appendix 5 describes the relevant work as: New external brick veneer between sandstone arch and entry corner to correct for bow in old brickwork which suggests that the work did impact on the structure of the building and replaced part of an exterior wall (which is listed as non-structural building work in paragraph 74 of GSTR 2003/3). Nor do we consider ‘new finishes and cabinetry’ to be cosmetic to the extent it relates to replacing the kitchen on the first floor and the bathroom and laundry on the ground floor as that work is not similar to ‘replacing worn or out of date fittings such as light fittings’ (per paragraph 77 of GSTR 2003/3) and because paragraph 74 of GSTR 2003/3 provides that replacing kitchen cupboards and bathroom fixtures is non-structural building work. We consider that this work to be more extensive than the examples of cosmetic work in Example 4 - ‘replacing the kitchen’ – and Example 5 - ‘replacing all the fittings in the kitchen and bathroom – in GSTR 2003/3. We do not consider that ‘new fit outs for all downstairs areas excluding garage and store’ is cosmetic. As noted above, paragraph 77 of GSTR 2003/3 refers to ‘removing or replacing worn or out of date fittings such as light fittings’ whereas the ‘Appendix 5 refers to: ● Change to functional use it 3 rooms (laundry and bathroom functions reversed) and sitting room (to bedroom or study) and lift ● New fit outs for all downstairs areas ex garage and store (only painted or rendered & painted) In addition, the ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that a toilet basin and shower were installed in the former laundry, a toilet and shower were removed from the former bathroom (which then became part of the enlarged store) and that the former patio was enclosed and then divided by a new internal wall into a sun room and laundry with appropriate plumbing fixtures installed in the new laundry. The change in functional use of the existing bathroom and laundry and the reference in Appendix 5 to ‘fit out’ of most ground floor rooms in contrast to merely painting or rendering and painting the store and garage suggest that the ‘new fit outs’ involved new gyprock, waterproof membrane and tiling, removal of existing plumbing fixtures and installation of new plumbing fixtures appropriate to the new function of each relevant room. Paragraph 74 of GSTR 2003/3 includes plumbing and replacing bathroom fixtures in non-structural building work. Does the work included in determining whether substantial renovations have occurred affect the building as a whole? Paragraphs 60 to 79 of GSTR 2003/3 set out the criteria for substantial renovations. Paragraphs 61 and 62 state: 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. In relation to the first requirement paragraph 64 of GSTR 2003/3 states: 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. The submissions in the ruling request concerning whether the work affected the building as a whole distinguished between work classified in Appendix 2 as either structural or non-structural. It was submitted that the work classified as structural did not affect the building as a whole because replacement of brick and stud walls, new ceiling and roof structures and extension of the floor only affected the first floor and installation of the RSJ beam only affected the sunroom on the ground floor. It was accepted that the non-structural work comprising new electrical wiring and new plumbing affected the whole building, but it was submitted that following non-structural work only affected individual rooms: rendering of external walls, garage and store was a non-structural renovation as it is described in paragraph 74 of GSTR 2003/3 as non-structural work; installing new doors, windows and garage door (described in paragraph 70 of GSTR 2003/3 as structural renovations only if it is necessary to alter brickwork) were non-structural renovations as they only altered interior or exterior walls that are non-supporting (described in paragraph 74 of GSTR 2003/3 as non-structural work); changing the ground floor rooms (reversing of laundry and bathroom and installation of a lift) and replacing concrete roof tiles with copper were non-structural renovations as they did not involve modification of structural or supporting structures; installing a new spit system air conditioning system was a non-structural renovation as paragraph 74 of GSTR 2003/3 states that removing or replacing air conditioning systems is non-structural; installing automation systems for lights and blinds were non-structural renovations as they did not involve modification of structural or supporting structures. The ruling request referred to Example 3 in paragraphs 104 to 108 of GSTR 2003/3. Example 3 involves renovations to a large, two storey, four bedroom Victorian terrace house. Where the renovations were limited to replacement of the existing kitchen, removal of a bathroom on the ground floor, conversion of a first floor bedroom to a bathroom, removal of the wall between the kitchen and the former ground floor bathroom, replacement of windows and a door at the rear of the dwelling with French doors, replacement of the slate roof with new tiles, replacement of all of the ground floor joists, bearers and floorboards and replacement of the ceilings of most ground floor rooms, the ATO considered the renovations not to be substantial as a number of rooms were unaffected and the house in its entirety was not substantially renovated. The ruling request referred to the conclusion stated in relation to Example 3 in paragraph 106 of GSTR 2003/3: The house in its entirety has not been substantially renovated, as a number of rooms have not been affected. It was submitted: Likewise, both the structural and non-structural work performed on the Property did not affect the house in its entirety, and a number of rooms were not affected by the renovations. Specifically, the most significant item of structural work, being the replacement of the ceiling and roof structures, only affected the rooms on [the first floor] and did not affect any of the rooms on the ground floor. Furthermore, no structural or non-structural work was done on any of the bedrooms on the ground floor. While in this case there have been some renovations to [the first floor], the renovations done to the ground floor should be considered less extensive than provided in Example 3. Similarly non-cosmetic renovations do not affect all the rooms aside from the replacement of electrical and plumbing. The submissions also referred to Example 5 in paragraphs 111 to 114 of GSTR 2003/3 in which the renovations to a dilapidated bungalow included adding an upstairs extension to create a bedroom and bathroom (which involved replacing the roof and all ceilings on the lower level), rewiring the lower level, repairing cracked walls by removing and replacing all of the gyprock, rendering exposed brick walls, installing stairs (which required removal of two walls) and replacing the floor in two ground floor rooms. The renovations also included some cosmetic work (repainting, polishing floorboards and replacing the fittings in the kitchen and bathroom). Paragraph 113 of GSTR 2003/3 states: The work undertaken…constitutes substantial renovations. All of the rooms of the house are affected by the work and several of the rooms have undergone structural renovation work. A substantial part of the bungalow is removed and replaced in undertaking the renovation work. The cosmetic work has not been taken into account when deciding whether substantial renovations have occurred. In the ruling request it was submitted that the renovations to the Property were not as extensive as Example 5. We do not agree with these submissions. Based on a comparison of the ‘before’ and ‘after’ floor plans in Appendix 4 plus the ‘Extent of Renovations’ section of Appendix 5, we consider that all but one of the rooms which existed on the ground floor prior to the work being undertaken were affected by work that is included in either structural or non-structural building work in paragraphs 70 and 74 of GSTR 2003/3 and not required by paragraphs 66, 67 or 77 of GSTR 2003/3 to be disregarded in determining whether substantial renovations were undertaken. In relation to the ground floor the ‘Extent of renovations’ section of Appendix 5 refers to: New electrical wiring since meter board required to be externally accessible and not behind locked gates as original All new plumbing lines to replace substandard sizes and earthenware sewage lines that did not provide constant fall and paragraph 74 of GSTR 2003/3 includes replacing electrical wiring and plumbing in non-structural building work. The ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that the existing lounge on the ground floor was converted into a small bedroom, lift shaft and hallway by the construction of two new walls and a new doorway from the new hallway into the new bedroom. To achieve this, the internal staircase in the former lounge was removed to provide space for the new hallway and the existing door from the lounge out to the driveway was removed and replaced with a window. Appendix 5 states that heated flooring was installed in the hallway (replacing floors being included in structural work in paragraph 70 of GSTR 2003/3, although in Appendix 2 it was submitted that this was installation of a heating system rather than alteration of a floor and was non-structural work). As noted above, the ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that in the existing ground floor bathroom the toilet and shower rose were removed (removing bathroom fittings being included in non-structural work in paragraph 74 of GSTR 2003/3) and the bathroom was enlarged to become the store and contain the hot water service which formerly sat outside the building to the rear of the garage. The existing laundry was transformed into a new bathroom which involved the installation of a toilet, shower, basin and heated flooring and must have involved plumbing and replacement of bathroom fixtures (both listed as non-structural building work in paragraph 74 of GSTR 2003/3). In relation to the existing ground floor patio there was structural work (installation of a RSJ in the ceiling was acknowledged in Appendix 2 to involve alteration of a supporting wall), the patio was enclosed and an internal wall constructed to create a sunroom and new laundry (which must have involved non-structural work (plumbing and installation of heated flooring)). The only existing ground floor room relatively unaffected was the bedroom (in which a robe and a double glazed window was installed). On the first floor all of the rooms shown on the ‘before’ first floor plan in Appendix 4 were affected by either structural or non-structural work referred to in paragraphs 70 and 74 of GSTR 2003/3. In relation to the first floor the ‘Extension of renovations’ section of Appendix 5 states: All brick and studs walls replaced – only way to rectify water penetration; termite destruction; termite proof and reinstate structural integrity New ceiling and roof structures (steel framed) within old R L. All new electrical and plumbing In our view this is either structural work referred to in paragraph 70 of GSTR 2003/3 (replacing supporting walls (interior or exterior), modifying of roofs) or non-structural work referred to in paragraph 74 of GSTR 2003/3 (replacing electrical wiring, plumbing) which affected all the existing rooms on the first floor. In the existing kitchen/dining/living the floor was extended, the internal staircase was removed and the kitchen cupboards were replaced which involved structural work referred to in paragraph 70 of GSTR 2003/3 (altering of floors or parts thereof) and non-structural work referred to in paragraph 74 of GSTR 2003/3 (replacing kitchen cupboards). The existing bathroom was converted to an ensuite bathroom which, according to the ‘after’ first floor plan, involved non-structural building work referred to in paragraph 70 of GSTR 2003/3 (altering non-supporting walls and replacing bathroom fixtures). In one of the existing bedrooms a sliding door to an external terrace was closed off and a new doorway to the kitchen/dining/living created, both of which required non-structural building work referred to in paragraph 70 of GSTR 2003/3 (altering non-supporting walls or parts thereof). The other bedroom was opened up to the kitchen/dining/living area by removing a wall which was non-structural building work (removing non-supporting walls (interior or exterior)) and provided space for a new toilet and the lift shaft. We therefore see little similarity between the present case and Example 3 in GSTR 2003/3 where one of the four bedrooms on the first floor of a two level Victorian terrace was converted to a bathroom but the other three bedrooms were unaffected by the renovations. Nor is the submission in the ruling request that ‘a number of rooms were not affected by the renovations’ supported by either the ‘before’ and ‘after’ ground floor and first floor plans in Appendix 4 or the ‘Extent of Renovations’ section of Appendix 5. In our view the test in paragraph 64 of GSTR 2003/3 that the renovations directly affect most rooms in a building is satisfied and the renovations undertaken by A Ltd affected the building on the Property as a whole. Do the renovations result in the removal or replacement of all or substantially all of the building? Paragraph 68 of GSTR 2003/3 provides that the extent to which parts of a building are removed or replaced will determine whether this requirement is satisfied. Paragraph 68 also refers to the second sentence of the ‘substantial renovations’ definition and to paragraph 58 of GSTR 2003/3 which explains the second sentence in the ‘substantial renovations’ definition as follows: We consider the statement ‘…the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roofs or staircases’ means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roofs or staircases. Paragraph 69 of GSTR 2003/3 provides that the requirement that the renovations result in the removal or replacement of all or substantially all of the building is satisfied where there is a removal or replacement of a substantial part of either the structural components or the non-structural components of the building. Paragraphs 72 and 73 state: 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. In Example 5 (paragraphs 111 to 114 of GSTR 2003/3) a substantial part of a building is removed or replaced. In relation to the existing level of a dilapidated three bedroom one bathroom bungalow the electrical wiring was replaced, all gyprock was removed and replaced, all ceilings were replaced, walls in two rooms were cement rendered, two walls were removed and the floors in two rooms were replaced to accommodate the installation of stairs to a new upstairs extension. In the present case all of the wiring and plumbing was replaced on the first floor, some of the wiring and the plumbing lines were replaced on the ground floor; all of the gyprock and the ceiling was replaced on the first floor and on the ground floor the movement of the existing bath and laundry and creation of the lift shaft and hallway suggests that the reference in Appendix 5 to ‘new fit outs for all downstairs areas ex garage and store (only painted or rendered and painted)’ involved all of the gyprock or similar material being replaced on the ground floor; and floors on both the ground floor and first floor were altered either to extend them, to provide for the removal of the internal staircase or allow heated flooring to be installed. In our view the renovations involved the replacement of substantially all of the building. | Summary: The sale of the Property by A Ltd will be a taxable supply. We decline to rule on whether the Commissioner will exercise the discretion to determine that A Ltd is registered for GST with effect from April 2014. Subject to A Ltd successfully applying for registration for GST with effect from April 2014 and holding the relevant tax invoices, A Ltd will be entitled to claim input tax credits for GST included in the cost of things acquired by A Ltd from April 2014 onwards in renovating and selling the Property. | Detailed Reasoning - Detailed reasoning: Sale of the Property by A Ltd will be a taxable supply: Section 9-5 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 the *indirect tax zone; 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 the Property by A Ltd will be a taxable supply as the requirements of section 9-5 will be satisfied: A Ltd will make the supply of the Property for consideration as A Ltd intends to sell the Property for between $W and $Z. The supply will be made in the course or furtherance of an enterprise carried on by A Ltd. The definition of ‘enterprise’ in section 9-20 includes an activity, or series of activities, does in the form of an adventure or concern in the nature of trade. Paragraph 234 of Miscellaneous Taxation Ruling MT2006/1 (MT2006/1) provides that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 262 to 297 of MT 2006/1 discuss whether activities related to an isolated sale of real property amount to either carrying on an enterprise or the mere realisation of a capital asset. Paragraph 270 of MT 2006/1 provides that the Commissioner considers that there is an enterprise in the case of an isolated transaction where land is sold that was purchased with the intention of resale at a profit. In Appendix 5 it is stated that A Ltd acquired the Property in April 2014 to enable B Ltd to repair the boundary retaining wall (completed in October 2014) and with the intention that A Ltd would then undertake modest renovations to quickly prepare the Property for resale and that when initial renovations revealed the water and termite damage A Ltd undertook a more extensive renovation (between February and December 2015). We assume that the sale of the Property by A Ltd has been delayed by the need to obtain a Building Certificate in respect of unauthorised works. The sale of the Property by A Ltd will be connected with the indirect tax zone as the Property is in the indirect tax zone (subsection 9-25(4)). A Ltd is not registered for GST, but we consider that A Ltd will be required to register for GST. Section 23-5 provides that an entity is required to be registered if that entity is carrying on an enterprise and the entity’s GST turnover meets the registration threshold ($75,000 for an entity other than a non-profit body). Paragraph 188-10(1)(b) provides that an entity has a GST turnover that meets a particular turnover threshold if that entity’s projected GST turnover is at or above the turnover threshold. Subsection 188-20(1) provides that an entity’s projected turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is likely to make, during that month and the next 11 months other than supplies that are either input taxed, not made for consideration or not made in connection with an enterprise carried on by the entity. In the ruling request it was submitted that the sale of the Property should be included in A Ltd’s projected turnover as it will not be input taxed, will be made for consideration and will be made in connection with A Ltd’s enterprise. We agree. Paragraph 188-25(a) provides that in working out an entity’s projected turnover any supply made or likely to be made by way of transfer of ownership of a capital asset is to be disregarded. Although A Ltd’s enterprise involves dealing with a single asset paragraph 46 of Good and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) states: 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. The sale of the Property by A Ltd will not be GST-free or input taxed. Although a sale of residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) is input taxed under subsection 40-65(1), for the reasons set out in Question 1 the sale of the Property by A Ltd will be a sale of new residential premises within the meaning of paragraph 40-75(1)(b) which is stated by paragraph 40-65(2)(b) not to be input taxed. Date of effect of GST registration: The ruling request also asked the Commissioner to confirm that the Commissioner will allow A Ltd to register for GST with effect from April 2014 when A Ltd acquired the Property. Pursuant to section 25-10 the Commissioner has the power to decide the date of effect of an entity’s GST registration and that decision is a reviewable GST decision listed in subsection 110-50(2) in Schedule 1 to the Taxation Administration Act 1953 . Paragraph 101 of Law Administration Practice Statement PSLA 2008/3 (PSLA 2008/3) provides that the Commissioner may decline to make a private ruling if the matter sought to be ruled on is about how the Commissioner would exercise a power under a relevant provision and paragraph 102 of PSLA 2008/3 states (in part): 102. Therefore, the Commissioner may decline to rule on a matter relating to the exercise of a discretion if, in the circumstances of the applicant's case, it would be more appropriate to exercise the discretionary power under that provision, or to inform the applicant that the discretionary power will not be exercised. Generally, applicants seeking the exercise of a discretionary power should request the exercise of that power rather than apply for a private ruling on how that power might be exercised. Consequently we decline to rule on whether the Commissioner will allow A Ltd to register with effect from April 2014 on the ground that it would be more appropriate for A Ltd to apply via www.ato.gov.au for registration with effect from that date and the Commissioner to exercise the power under section 25-10. We note that subsection 25-5(1) obliges the Commissioner to register an entity if the entity has applied for registration in the approved form and the Commissioner is satisfied that the entity is carrying on an enterprise from a particular date specified in the entity’s application. A Ltd could apply for GST registration with effect from April 2014 on the grounds set out in the ruling request, i.e. that ‘carrying on’ an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise and that the enterprise carried on by A Ltd commenced with the acquisition of the Property by A Ltd in April 2014 with the initial intention of undertaking modest renovations and then selling the Property. A decision made by the Commissioner in June 2017 to register A Ltd for GST with effect from April 2014 would not offend against the limitation in subsection 25-10(1A) that the date of effect of GST registration must not be a day that occurred more than 4 years before the day of the Commissioner’s decision. Entitlement to claim input tax credits: Subsection 7-1(2) provides that entitlements to input tax credits arise on creditable acquisitions and creditable importations. Section 11-5 states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. In the ruling request it was submitted that either A Ltd or B Ltd on A Ltd’s behalf has acquired things in the course of renovating the Property and A Ltd expects to acquire more things in the course of selling the Property. To the extent that the supplies of those things to A Ltd were taxable supplies we agree that those things were acquired for a creditable purpose as they were acquired in the course of carrying on A Ltd’s enterprise and the acquisitions of those things do not relate to making input taxed supplies (as the sale of the Property will be a taxable supply of new residential premises) and are not of a private or domestic nature. Provided A Ltd provided, or is liable to provide, consideration for the acquisitions of those things, the acquisitions of those things will be creditable acquisitions as we consider that A Ltd is required to be registered for GST. The effect of backdating an entity’s GST registration on the claiming of input tax credits is dealt with in paragraph 54 of Law Administration Practice Statement PSLA 2011/8 (PSLA 2011/8): 54. If an entity's GST registration is backdated it will result in the entity being required to pay GST on taxable supplies and taxable importations made from that earlier date. The entity will be entitled to claim input tax credits on creditable acquisitions or importations from the earlier date, provided the appropriate documentation is held. However, for tax periods that commence on or after 1 July 2012, the Commissioner cannot backdate the date of effect to a date that is more than four years before the date on which the Commissioner decides the date of effect of the entity's registration As A Ltd acquired the Property in April 2014 the four year time limit is not an issue. Pursuant to subsection 29-10(3), attribution of an input tax credit by A Ltd to a tax period will depend upon A Ltd holding the relevant tax invoice when lodging the GST return. | Summary: As A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme A Ltd will be able to apply the margin scheme in working out the amount of GST on a taxable supply of the Property made by A Ltd. As we do not know whether the $X ‘cost to acquire’ stated in Appendix 5 includes settlement adjustments paid by A Ltd we cannot provide a ruling confirming that A Ltd can calculate the margin on the sale of the Property by A Ltd as the sale price (including GST) less $X. | Detailed Reasoning - Detailed reasoning: Eligibility for the margin scheme: It was submitted that as A Ltd acquired the Property from an existing residential premises from a vendor that was not registered for GST or required to be registered, A Ltd did not acquire the Property through a supply that was ineligible for the margin scheme. Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land, a stratum unit or granting or selling a long term lease if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply. However subsection 75-5(2) provides that the margin scheme does not apply to the supply of a freehold interest etc. if the supplier acquired the freehold interest through a supply that was ‘ineligible for the margin scheme’. Section 195-1 provides that ‘ineligible for the margin scheme’ has the meaning given by subsections 75-5(3) and (4). With application to supplies made on or after 17 March 2005 paragraph 75-5(3)(a) states: (3) A supply is ineligible for the margin scheme if: (a) it is a * taxable supply on which the GST was worked out without applying the * margin scheme; or The test in paragraph 75-5(3)(a) is similar to the test in the former subsection 75-5(2) before it was repealed and replaced by the Tax Laws Amendment (2005 Measures No 2) Act 2005 (2005 Amendment Act). Paragraph 29 of Goods and Services Tax Ruling GSTR 2006/8 (GSTR 2006/8) explains the operation of the test in the former subsection 75-5(2): 29. Under the subsection 75-5(2), prior to its amendment, you could not apply the margin scheme if you acquired the real property through a taxable supply and the GST on the supply was not calculated under the margin scheme. The effect of the former subsection 75-5(2) was that the margin scheme could only apply if the supply of the real property that you acquired was: from an entity that applied the margin scheme on the supply to you; or not a taxable supply. For example, supplies that are GST-free or input taxed , or from an entity that was not registered or required to be registered for GST purposes . If A Ltd acquired the Property from an entity that was not registered or required to be registered for GST, A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme pursuant to paragraph 75-5(3)(a). Nor do paragraphs 75-5(3)(b) to (g) apply to the acquisition of the Property by A Ltd. A Ltd will be able to apply the margin scheme when calculating the GST payable on a sale of the Property by A Ltd which is a taxable supply provided A Ltd and the recipient agree in writing that the margin scheme is to apply and that agreement is made either on or before A Ltd makes the supply of the Property or within such further period as the Commissioner allows. Amount of margin: Subsection 75-10(1) provides that if a taxable supply of real property is under the margin scheme, the amount of GST is 1/11 th of the margin for the supply. Subsection 75-10(2) provides that, subject to certain exceptions, the margin is the amount by which the consideration for the supply exceeds an entity’s consideration for the acquisition of the relevant interest. In the ruling request it was submitted that if A Ltd applies the margin scheme to a taxable supply of the Property, the margin will be the sale price (including GST) less the original purchase price of $X (which is referred to in Appendix 5 as ‘cost to acquire’). In relation to the ‘consideration for the supply’ referred to in subsection 75-10(2) (i.e. the consideration for which A Ltd sells the Property), ‘consideration’ is defined in section 195-1 in relation to a supply as any consideration within the meaning of sections 9-15 and 9-17 in connection with the supply and subsection 9-15(1) provides that consideration includes any payment in connection with a supply of anything. If the terms of the contract increase the amount payable to A Ltd by the purchaser by the amount of any GST payable by A Ltd on the sale of the Property then that amount is included in the consideration for the supply of the Property by A Ltd. Goods and Services Tax Determination GSTD 2006/3 (GSTD 2006/3) provides that, due to adjustments (defined as adjustments for rates, taxes and other outgoings on settlement of a contract for the sale of real property), the consideration may not be the sale price shown on the contract. Paragraphs 2 to 5 of GSTD 2006/3 state: 2. The consideration may be either monetary or non-monetary or both. The consideration will not always be the price shown on the contract as, on settlement, adjustments are commonly made for rates, land tax and other outgoings. 3. For example, rates or land tax may be assessed to and paid by the supplier before the date of settlement. In such a case, the contract will usually require the recipient to pay an extra amount to the supplier for the balance of the rates or land tax period that reflects the recipient's period of ownership. 4. In the usual case where the contract stipulates that both the purchase price and the adjustment must be paid at settlement in return for possession and title documents, the supplier is receiving and the recipient is paying extra consideration for the sale and purchase of the land. 5. Even though the adjustment amounts are calculated by reference to rates, the adjustments form part of the calculation of the amount required under the contract to be paid by the purchaser to the vendor in return for title to the property. In relation to the ‘consideration for the acquisition of your interest’ referred to in subsection 75-10(2) paragraph 48 of Goods and Services Tax Ruling GSTR 2006/8 (GSTR 2006/8) provides that the consideration for the acquisition of real property is the original purchase price after taking into account settlement adjustments and paragraph 49 of GSTR 2006/8 provides that the consideration for acquisition does not include costs incurred by the supplier associated with the purchase of the real property (e.g. legal expenses or stamp duty) and does not include costs incurred in developing the property either prior to or after acquisition. As we do not know what costs are included in the $X ‘cost to acquire’ stated in Appendix 5 we are unable to provide the ruling requested confirming that $X can be used by A Ltd to calculate the margin in relation to the sale of the Property by A Ltd. In our view GSTR 2006/8 and GSTD 2006/3 provide sufficient guidance to enable A Ltd to calculate the margin.