Private ruling: GST and residential premises
Published: March 2013

Ruling: Q1: If the partnership develops the residential block of land they own jointly by sub-dividing the land into two parcels, build a second new residence to use as their private residence and rent out their existing residential premises, will the rental income be subject to Goods and Services Tax (GST)? | A1: No. Residential rent is input taxed under Section 40-35 of the GST Act. GST is not payable for these supplies. | Q2: Is there any GST component that may be claimed back, if so, when and how? | A2: No, there is no component of GST to claim back. When a supply is input taxed, GST is not payable on the supply and there is no entitlement to claim input tax credits for anything acquired to make the supply. You are not entitled to claim any input tax credits back for the expenses related to the rental property or for the financial supply of a loan. | Q3: (3.1) Is there any legal tax ruling preventing you from re-mortgaging PropertyA for the amount of say $xx and then renting this house out? (3.2) Can you redraw on the advance monies held for the initial residence PropertyA to pay for the components that belongs the first property and percentage of the costs for the application process? Which will result in the initial PropertyA having a larger mortgage that any income received from renting it out - what benefits could be obtained organising a Real Estate Agent to handle the rental? | A3: Item 3.1 will be answered by the income tax line of the ATO. Item 3.2 can not be answered by the ATO as it relates to commercial law and or financial planning. | Q4: How do you pay for the additional taxes applicable to the increase of income from the property that is be rented considering that we already have the investment property and receive a BAS from ABN xx xxxx xxxx? | A4: The GST component of this question has been answered in question one above.

Relevant facts and circumstances: · You have carried on a commercial rental business in partnership since 200X and you are registered for Goods and Services Tax (GST). · You are joint owner of property1. · Property1 is currently used as your residential premises it includes a house with a large block of land · You are in the process of building another dual occupancy dwelling (Property2) on the property. · You applied for and have been granted a Development Application (DA) thorough your local council. · You have engaged builders to construct the dual occupancy dwelling at property1. · You intend to move into the new property2 and use it as your primary residence. · Property2 will be available to be occupied by you soon, and it is expected that property1 will be rented to a tenant in shortly. You intend to lease it out continuously. · You intend to provide property1 to a tenant under a lease to collect rental payments. · Costs associated with the development of property2 include the construction of a new garage and driveway for the property1. · You provided the following components of costs to prepare property1 for lease: (a) maintenance component to bring up to rental standards $xx (b) component of construction loan (dual occupancy) $xx (c) component of driveway to allow access to Property2 $xx · You are organising a Real Estate Agent to handle the rental. · On a date, we clarified the GST components of your questions and you agreed the issues to be address by the GST line can be presented in the format of question one. Question two was taken from your original PBR request.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-5. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-35 | 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 129-1. | A New Tax System (Goods and Services Tax) Act 1999 Section 11-5. | A New Tax System (Goods and Services Tax) Act 1999 Section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Regulation 1999 Regulation 40-5.09

Reasons for decision: Summary: According to section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), GST is payable on taxable supplies. Section 9-5 of the GST Act defines taxable supplies, it 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 Australia; and (d) you are *registered or *required to be registered. However, a supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.' * To find definitions of asterisked terms, see the Dictionary, starting at section 195-1. All of the above conditions must be satisfied in order for a supply to be a taxable supply. The supply of rental property1 will be for a price, the property is located in Australia and you are registered for Goods and Services Tax (GST). Therefore you will satisfy sections 9-5(a), (c) and (d) of the GST Act. Based on the facts provided, there is no legislative basis to classify property1, leased to a tenant, as a GST-free supply under Division 38 of the GST Act. Therefore, the two issues to consider here is if the letting out of propety1 is in the course or furtherance of your enterprise under section 9-5(b) of the GST Act and if is an input taxed supply. | Detailed Reasoning - Enterprise: Subsection 9-20(1) (a), (b) and (c) of the GST Act provides: An enterprise is an activity, or series of activities, done: (a) in the form of a *business; (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. Paragraph 244 in MT 2006/1 states: 244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature Goods and Services Tax Determination GSTD 2000/9 Goods and services tax: if you let out a residence do you need to get an ABN for PAYG purposes or register for GST? (GSTD 2000/9) considers whether the letting of a residential property by an investor owner is an enterprise. In regard to paragraph (c) of the definition of enterprise it states: The letting of a property is an activity in the nature of a lease, license or other grant of an interest in property. If it is done on a regular and continuous basis, the activity will meet the definition of enterprise. From the facts you intend to provide property1 to a tenant under a lease and collect rental payments. The letting of the residential property is an activity in the nature of a lease, licence or other grant of an interest in property and you intend to lease it out on a continues bases. You also carry on a commercial leasing enterprise which is registered for GST. Therefore, you will satisfy all the positive limbs of Section 9-5 of the GST Act, being section 9-5(a), (b), (c) and (d) of the GST Act. It is necessary to consider whether the leasing of propety1 is a supply of residential rent which is input taxed. | Detailed Reasoning - Residential rent: A supply of residential premises by way of lease, hire or licence is input taxed under subsection 40-35 (1) of the GST Act, it states: (1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if: (a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or (b) the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25. Only one of the above conditions needs to be met for the premises to be classified as an input taxed supply. The issue to consider is, whether property1 satisfies paragraph 40-35(1) (a) of the GST Act. Section 195 of the GST Act provides the definition of residential premises, it states Residential premises mean 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. The meaning of residential premises is also considered in paragraphs 6 -10 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) these paragraphs have been reproduced below: | Detailed Reasoning - Definition of residential premises: 6. Premises1, 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. 8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments. | Detailed Reasoning - Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics: 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.2 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). In this case Property1 was used by you as your primary residence. It contains all the necessary characteristics of residential premises. Therefore, the supply of property1 by way of lease will be an input taxed supply, as it satisfies paragraph 40-35(1) (a) of the GST Act. GST is not payable for input taxed supplies. It follows then that the supply of rental accommodation will not satisfy the definition of a taxable supply under section 9-5 of the GST Act, therefore no GST is payable for rental income collected under the terms of the lease for Property1. | Detailed Reasoning - Question two - Summary: If a supply is classified as input taxed there is no entitlement to an input tax credit for the thing that is acquired to make that supply. You are not entitled to claim input tax credits as a result of making acquisitions that have a direct nexus with the provision of residential rental accommodation, financial supplies or those used for private purposes. Subsection 11-15(2) (b) of the GST Act specifically excludes private or domestic acquisition and input taxed supplies from the definition of 'creditable purpose'. Therefore, you are not entitled to claim GST credits for acquisitions related to rental property1 or the construction of your newly created residence located at property2. | Detailed Reasoning - Question two - Creditable purpose: You are entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you make a creditable acquisition. Under section 11-5 of the GST Act, you make a creditable acquisition if: a) you acquire anything solely or partly for a creditable purpose b) the supply of the thing to you was a taxable supply c) you provide, or are liable to provide, consideration for the supply; and d) you are registered, or required to be registered for GST. Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, subsection 11-15(2) states you do not acquire the thing for a creditable purpose to the extent that: a) the acquisition relates to making supplies that would be input taxed; or b) the acquisition is of a private or domestic nature. From the facts the components of costs you would like considered, include: · construction loan (duel occupancy) $xx · maintenance to bring property1 up to rental standards $xx · driveway to allow access to Property2 $xx | Detailed Reasoning - Your $xx construction loan: This loan relates to both property1 and property2. The ATO view in relation to loans is located in the publication titled 'Financial services - questions and answers' under item 2.1. This publication is available on our web site www.ato.gov.au by conducting a search using 'Financial services - questions and answers'. Item 2.1 states: | Detailed Reasoning - 2.1. Are loans subject to GST?: Non-interpretative - other references (see GSTR 2002/2 - Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions). No GST is payable on a loan. It is a financial supply under item 2 in the table in subregulation 40-5.09(3) of the GST Regulations and is input taxed. The $xx construction loan for dual occupancy is a financial supply. The loan is input taxed. Subsection 11-15(2) (b) of the GST specifically excludes input taxed supplies from the definition of 'creditable purpose'. | Detailed Reasoning - Maintenance and driveway access: The $xx of maintenance costs to bring rental property1 up to standard, the and the $xx costs associated with the driveway access are also input taxed supply as outlined in question one above, because they are related to rent received for Property1 the residential premises. Subsection 11-15(2) (b) of the GST specifically excludes input taxed supplies from the definition of 'creditable purpose'. | Detailed Reasoning - New premises used for private purposes: Costs associated with the construction of property2 relating to your new residence will be for your private use. Subsection 11-15(2) (b) of the GST specifically excludes private or domestic acquisition from the definition of 'creditable purpose'.