Private ruling: GST and the sale of residential premises
Date of advice: 29 November 2018
Published: March 2019
Ruling period: from 29 November 2018 to 29 November 2022

Ruling: Q1: Is the sale of the property a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No. The sale of the property is not a taxable supply pursuant to section 9-5 of the GST Act because that supply is an input taxed supply under section 40-65 of the GST Act.

Relevant facts and circumstances: You entered into a contract for the sale of two parcels of adjoining land, being Lots 45 and 46. Lot 46 is a vacant block of land that was historically used to operate a business and is not the subject of this ruling. You will sell this parcel as a taxable supply under the terms of the contract. Lot 45 has a house that had always been used for residential accommodation and has never been used for ‘commercial residential premises’ within the meaning of the GST Act. The contract refers to the present use of the property as ‘Residential’. At the time of the ruling application, the house was not tenanted and had not been tenanted for a number of years, when the last tenants moved out. The last tenants occupied the house as their residence and operated a business on the adjoining land. The house had been built on Lot 45 when you originally purchased it. You subsequently rented the house and land as a residence from the time you had acquired it until it was vacated by the last tenants. Whilst the house was untenanted, the house was vandalised by an unidentified unrelated party. An insurance claim was made by you for the damage but you chose not to repair the house as your intention was to sell it. Lot 45 is zoned by the local Council as ‘residential – emerging community’ and is surrounded by other by residential dwellings and lots zoned as ‘residential’, ‘neighbourhood centre’ and ‘low density residential’ in nature. The Council has not issued you with any defect notices nor has it conducted any inspection of the house on Lot 45. There are no contamination or demolition/building notices from Council that you were aware of at the time of submitting the ruling application. Electricity, water and telephone connections to the house on Lot 45 were disabled by you to ensure unnecessary usage does not occur, however physical line connections remain. The water has simply been turned off at the meter. These services can be easily reconnected. You continue to pay rates and utilities to Council and the relevant supplier, respectively. The house consists of 4 bedrooms, 2 bathrooms and 2 car spaces. The house has a kitchen, laundry, bathroom, doors and windows along with intact ceilings, walls and external roof. There is a smoke alarm in the kitchen, light fittings, door handles and carpet in each of the bedrooms. One of the bathrooms has functioning tap fittings, bath, shower, toilet and washing basin. The external roof of the house was replaced in the last 12 to 15 years and is intact. Also located on Lot 45 is a dilapidated shed and a pool. In support of the ruling application, you provided photos of the internal and external state of the house as well as the extent of the damage to the house by the vandals. The photos show: ● that one of the waste pipe and the tap fittings of the vanity basin in one of the bathrooms are missing. There is also damage to the front of one drawer. The toilet bowl and cistern are intact. ● the door, taps and tiles in the main bathroom are intact but the shower head is missing. ● there is damage to the plasterboard in the hallway but the integrity of the supporting structure is intact. ● there is damage to the plasterboard in the laundry area with some damage to the outside wall of the house i.e. there is a hole through the wall but the integrity of the supporting structure appears undamaged. ● the kitchen bench and kitchen sink have been smashed. However, the upper kitchen cupboards are intact. ● there is a small amount of damage to the plasterboard in one of the bedrooms. ● the roof, windows, and doors of the house are all intact.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 9-5 and 40-35

Reasons for decision: Summary: GST is payable on a taxable supply. Section 9-5 of the GST Act provides that you make a taxable supply if: ● you make the supply for consideration ● the supply is made in the course or furtherance of an enterprise that you carry on ● the supply is connected with the indirect tax zone, and ● you are 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. On the facts provided, you are registered for GST and making the supply of Lot 45 for consideration under the terms of the Contract in the course of an enterprise you carry on. As Lot 45 is located in Australia it is connected with the indirect tax zone and the supply of Lot 45 does not fall under the GST-free provisions in Division 38 of the GST Act. The issue that arises under section 9-5 of the GST Act in the present case is whether the supply of Lot 45 is an input taxed supply of the sale of residential premises under section 40-65 of the GST Act. Section 40-65 of the GST Act provides that 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). However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises (subsection 40-65(2) of the GST Act). Section 195-1 of the GST Act defines ‘residential premises’ to mean 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; (regardless of the term of the occupation or intended occupation) and includes a floating home. Section 40-75 of the GST Act relevantly defines new residential premises as residential premises that have not been previously sold as residential premises. The house had been built on Lot 45 when you originally purchased it. You subsequently rented the house and land as a residence until it was vacated by the last tenants. On the facts you provided, Lot 45 has always been used for residential accommodation and has never been used for commercial residential premises. As such, Lot 45 does not come within the meaning of new residential premises as defined in section 40-75 of the GST Act nor does it come within the definition of commercial residential premises. As the house has remained vacant for a number of years prior to sale and is in a dilapidated state, the issue that arises is whether the house and land otherwise come within the definition of residential premises for the purposes of section 40-65 of the GST Act. The Commissioner of Taxation (Commissioner) considers the meaning of residential premises in Goods and Services Tax Ruling GSTR 2012/5 specifically to the requirements set out in subsection 40-65(1) of the GST Act that premises are residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) with respect of the following propositions: | Detailed Reasoning - Physical Characteristics:: The requirement that premises be 'residential premises to be used predominantly for residential accommodation' 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. (Paragraph 9 of GSTR 2012/5) 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). (Paragraph 10 of GSTR 2012/5) Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. With regards to the physical characteristics, Lot 45 is zoned by the Council as residential – emerging community (EC). Lot 45 is located in the largely residential suburb and is surrounded by residential dwellings. The house on Lot 45 was occupied by tenants as their residence for a number of years. The house consists of 4 bedrooms, 2 bathrooms, 2 car spaces and a kitchen and laundry and contains fixtures including a smoke alarm, light fittings, door handles, sinks, a bath, shower and a toilet. The physical characteristics of the house and land indicate that it was built so as to be suitable to be occupied and capable of being occupied as a residence or for residential accommodation. | Detailed Reasoning - Shelter and basic living facilities: 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 (Paragraph 15 of GSTR 2012/5). The house on Lot 45 provides an occupant with a place for eating (kitchen), sleeping (bedrooms) and bathing (bathrooms). Electricity, water and telephone lines although disconnected would be reasonably simple to reconnect. The roof, windows and doors are intact and the house exhibits physical characteristics that provide shelter and basic living facilities. | Detailed Reasoning - Fit for human habitation: Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation. (Paragraph 20 of GSTR 2012/5) Residential premises that are either in a minor state of disrepair or subject to a temporary legal prohibition for occupation pending minor repairs are still suitable for, and capable of, being occupied as a residence or for residential accommodation. (Paragraph 21 of GSTR 2012/5) Example 3 at paragraph 23 of GSTR 2012/5 discusses circumstances where there is a temporary disruption to occupation of residential premises due to damage to the roof and windows by a cyclone. Council issued a notice stating that the premises were not fit for habitation. In that example the premises are found to have physical characteristics that show that the house is suitable for, and capable of, being occupied as a residence or for residential accommodation notwithstanding the damage to the premises and the action taken by the Council. Although the house has been vacant for a number of years and was subsequently vandalised, the damage to the house does not prevent the house from being occupied for residential accommodation. There is no evidence that the damage to the house was so severe that the integrity of the supporting structure was compromised to the extent that the building was unsafe and beyond repair. The damage to the kitchen, bathroom, hallway and laundry would be readily repairable and does not involve the structural integrity of the house as a whole. Further, there are no demolition or contamination notices issued in relation to Lot 45. The house, the disused pool and dilapidated shed are the only structures on the land. There are no physical characteristics of the land and other structures to indicate that the land and other structures were not to be enjoyed in conjunction with the residential building. The whole of Lot 45 had been leased to the tenants for their enjoyment. The house was occupied as a residence and continues to exhibit those characteristics which indicate that it was intended to be occupied and is capable of being occupied as a residence or for residential accommodation. In the absence of evidence to the contrary, Lot 45 which includes the land, the house, pool and shed comes within the definition of residential premises to be used predominantly for residential accommodation. This is the case notwithstanding that Lot 45 had not been occupied for a number of years (vacant) before being sold or that the intention of the purchaser is to demolish the residential premises and redevelop the site, or that the house is in a dilapidated state. Accordingly, the sale of Lot 45 which includes land and the residential house satisfies the requirements under section 40-65 of the GST Act for the sale of real property that is input taxed. It follows therefore that the sale of Lot 45 is not a taxable supply pursuant to section 9-5 of the GST Act because that supply is an input taxed supply under section 40-65 of the GST Act. That is, the sale of Lot 45 is the supply of residential premises that are not new residential premises or commercial residential premises.