Private ruling: Renovation of residential premises
Date of advice: 23 January 2017
Published: July 2017

Ruling: Q1: Will the sale of the property located in Australia, following the proposed renovations be a supply of new residential premises in accordance with sub-paragraph 40-65(1)(b) of A New Tax system (Goods and Services Tax) Act 1999 (GST act)? | A1: Yes

Relevant facts and circumstances: You are a trust and are not registered for GST. You acquired the property in 201X for $xx to renovate and sell. The property is located in Australia, is a single storey, 3 bedroom, 1 bathroom house with laundry, kitchen and living areas. It is not heritage listed and the plans are subject to council approval. The proposed renovation budget is $xx and the plan is to demolish the rear of the house, rebuild an expanded rear area, add a second storey above both the house and the garage, connect the existing house to the existing garage by extending the house down to the garage You supplied copies of the proposed extensions dated 201X. The following details were taken from the facts and plans you supplied. ● The rear of the house (kitchen, bathroom, laundry, living and study areas) is being demolished, including all interior and most of the exterior walls. The roof and floor of this area are also being demolished. ● The front porch is being demolished and a new wrap around verandah will be built. ● The entire roof will be replaced. ● The rear of the house will be demolished and will be enlarged it will house the new living and dining areas, kitchen, bathroom, laundry and stairway to the new first floor. A new inset courtyard will be placed between the ensuite, laundry and bathroom, a door will be placed in the laundry to permit access. ● The existing kitchen is to be demolished and will be located to the newly created area that extends from the house to the garage This newly created area will also include a staircase to the new second storey addition above the existing garage and a large walk in pantry. ● Bedrooms one and two will have a section of wall between them removed to create a doorway. An existing entrance between bedroom two and the hallway will be filled in. Bedroom two will be converted to an ensuite and walk in robe. Sections of the floor will be removed for plumbing purposes. Plumbing rough-in will be cut into the existing brick wall. New floor covering and floor levelling will be undertaken. Ceiling roses and cornices will be installed in bedroom one. The window will be replaced in the new ensuite area. Windows in both bedrooms one and two are to be replaced with double glazed timber framed windows. ● The existing sitting room is to have the ceiling lowered to accommodate the upper level extension, the windows are to be replaced with new double glazed windows. ● The construction of a second storey above the existing house will contain 3 new bedrooms, 1 bathroom, study and an additional living area. ● Construction of a second story over the garage will contain a bedroom with an ensuite, walk-in-robe and decking area. ● The northern wall of the existing garage will be demolished , the concrete floor will remain with infill and extension of concrete and extension of garage. New steel beams and timber members will be used in the garage to support the new second storey. An inset courtyard is being located in the area of the existing bathroom and a stairway to the new second storey will also be located in this space. Glass windows will be installed to the rear of the new living room. A new pool is being installed abutting the living room. New floor coverings will be installed throughout the house for the new areas and to cover existing concrete floors in bedroom 1, bedroom 3 and the hall. Internal doors in two rooms are being retained. Wiring throughout the house will be re-cabled and the plumbing replaced as all existing wet areas are being demolished and will be relocated to the other side of the house to which they were previously located. The entire roof will be removed and replaced.

Relevant legislative provisions: A New Tax system (Goods and Services Tax) Act 1999 Section 40-75 | A New Tax system (Goods and Services Tax) Act 1999 Section 195-1 | 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 9-5 | A New Tax system (Goods and Services Tax) Act 1999 Division 129 | A New Tax system (Goods and Services Tax) Act 1999 Division 75

Reasons for decision: Summary: In this ruling, please note that unless otherwise stated: ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). ● all terms marked with an asterisk are a defined in section 195-1 in the GST Act. Section 40-65 of the GST Act provides that amongst other things a sale of real property is input taxed to the extent that the property is residential premises to be used for residential accommodation except to the extent that it is new residential premises. Section 195-1 of the GST Act 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. Paragraph 40-75 (1) (b) of the GST Act provides that amongst other things residential premises are new residential premises if they have been created through substantial renovations of a building which are defined in the GST Act as “renovations in which 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.” Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? provides at paragraph 64 to 74 the following information in regard to substantial renovations. 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. 65. For example, the owner of a large 4 bedroom house removes the wall between two bedrooms for the purpose of creating a large bedroom with ensuite. The former door to one of the bedrooms is removed and replaced with gyprock so that the newly created larger bedroom can only be entered by one doorway. The room is repainted and recarpeted. Although significant, the work does not constitute substantial renovations as only one area of the house is affected. Curtilage 66. Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building. Additions 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. | Detailed Reasoning - Removal or replacement of all or substantially all of the building: 68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial. 69. This criterion is satisfied where there is a removal or replacement of a substantial part of the: • structural components of the building; or • non-structural components of the building. 70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as: • altering, or replacing of, foundations; • replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior); • lifting or modifying of roofs; • replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door). 71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. 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. 74. Non-structural building work includes: • replacing electrical wiring; • replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior); • plastering or rendering an entire wall or walls; • plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes); • removing or replacing kitchen cupboards, bathroom fixtures, etc; • removing or replacing air-conditioning or security systems. In your renovation, there are structural and non-structural changes including: ● Demolition of the rear half of the house, including the walls, roof and floor, which currently accommodates the living, kitchen, bathroom, laundry and walk in closet. ● Demolition of front porch to be replaced by a new wrap around verandah. ● Rebuilding and extension of the rear of house with new slab and walls, this will also be extended out to enlarge the living area and pool. ● Extension to join house with garage, a new kitchen, walk in pantry and staircase to second storey above garage will be located in this area. ● Addition of second storey to the existing house containing three new bedrooms, living area and bathroom. ● Removal of northern wall of garage, infill of concrete to extend garage. ● Addition of second storey to garage containing bedroom, robe, bathroom and outside deck area. New steel beams and timber members will be utilised to support the addition. ● Removal of a wall between a storeroom and living room and construction of walls for the new bathroom and laundry. ● Conversion of bedroom two in the front half of the house to an ensuite and walk in robe. ● Replacing and moving all electrical wiring and plumbing; and ● Replacing of roof. Even though the entire house will not be demolished and rebuilt there will be some significant structural changes and non-structural modifications of some sort, to all rooms of the house. Example 5 in paragraphs 111 to 114 provides the following explanation of a scenario which the ATO considers to be one of substantial renovations | Detailed Reasoning - Example 5 - substantial renovations: 111. Mary-Anne, a builder, acquires a dilapidated bungalow that has 3 bedrooms and one bathroom. Mary-Anne intends to renovate and sell the bungalow as part of her enterprise. She lives in the bungalow while she carries out the following renovations. 112. Mary-Anne adds an upstairs extension which creates a new bedroom and a bathroom. As part of the extension, the roof of the bungalow and all ceilings on the lower level are replaced. The renovations to the lower level include rewiring, repairing cracked walls by removing and replacing all of the gyprock and cement rendering the exposed bricks in the combined family room and kitchen. The installation of stairs necessitated the removal of two walls and replacement of the floor in two of the ground floor rooms. Mary-Anne also does some cosmetic work by repainting, polishing floorboards, and replacing all the fittings in the kitchen and bathroom. 113. The work undertaken by Mary-Anne constitutes substantial renovations. All of the rooms in 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. 114. When Mary-Anne sells the renovated house she will be making a taxable supply of new residential premises, which includes all the work done (whether structural, non-structural or cosmetic) to the house. Whether or not a person resides in the premises does not alter the analysis. The level of renovations in your premises exceeds that set out in the above example. The similarities are that you have also acquired a premise which you intend to renovate and sell as part of your enterprise. You are demolishing half the house, rebuilding and extending. You are putting a second storey onto the main house and on the garage. You are rewiring and re-plumbing the entire house. All roofing will be replaced. Most of the rooms in the house are being affected by the renovations, with most rooms being newly created. Based on the information you have provided we consider that the renovations you have conducted on your property satisfy the definition of substantial renovations in of the GST Act. We therefore consider the premises will be new residential premises when the renovation project is completed. Therefore you will be required to be registered for GST and the supply of the premises will be a taxable supply. You will also be entitled to any GST credits on creditable acquisitions.