Private ruling: Goods and services tax and sale of property
Date of advice: 11 March 2020
Published: April 2020
Ruling period: 25 October 2019 to date of settlement of the property
Date scheme commenced: 25 October 2019

Ruling: Q1: Is the sale of the property a supply of residential premises to be used predominantly for residential accommodation, such that the sale of the property will be input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, the sale of the property is not a supply of residential premises to be used predominantly for residential accommodation and therefore the supply will not be input taxed under section 40-65 of the GST Act. | Q2: If the Commissioner considers that the supply of the property requires apportionment on the basis that part of the premises is not residential premises to be used predominantly for residential accommodation, what is the extent of the apportionment? | A2: The Commissioner considers that no apportionment is applicable to the supply of the property as the whole of the property does not meet the requirement of section 40-65 of the GST Act.

Relevant facts and circumstances: The Entity (Vendor) is registered for Goods and services tax (GST) with an Australian Business Number . The property was originally acquired in XXX1 by an associate of the Vendor. At the time of this acquisition, the property had already been converted into a restaurant and was functioning as a restaurant. In XXX2, the property was transferred by the associates to another associated entity and in XXX3 the property was transferred to the Vendor. In XXX4, the Vendor entered into a Contract of Sale of Real Estate (the Contract) for the sale of the property to the purchaser and/or nominee for the sale price of $X million. The Contract was subject to a Special Condition which required the parties to obtain a private ruling from the ATO to determine the GST status of the supply. The property had been operating as a restaurant prior to XXX1. From XXX1 to its eventual sale in XXX4 by the Vendor, the property has continuously been used as a restaurant. During this period only cosmetic changes had been undertaken to the property by the Vendor and/or its associates. Specifically, the toilets, kitchen and dining areas have been cosmetically renovated varying from painting through to tiling. No structural changes were made to the property by the Vendor and its associates during their period of ownership of the property. The property consists of one title with a large two-storey home. The zoning summary of the property is: Planning Zone: General Residential Zone (GRZ) General Residential Zone - Schedule 12 (GRZ12) Planning Overlay: Heritage Overlay (HO) Heritage Overlay Schedule (HO155) The property was marketed by a real estate agent and in its marketing material it stated: This stunning heritage building represents the ultimate opportunity to reposition this well-regarded asset as a residence, restaurant, education facility or medical suites (STCA). ... The opportunity to re-create a grand residence... A news article by the real estate agent provided a brief history of the property. In that article the following is stated of the property: The residence was constructed in the XXXXs as a gift of the owner's child. It is identical to the dwelling next door - a property which has been retained as a prestige home which last sold in XXXX... The real estate agents said the neighbouring property could prove the blue print for the property "providing a four bedroom residence with formal dining room, living room and ground floor kitchen area." "The property would suit conversion back to a grand residential home..." There is also an opportunity to develop apartments to take advantage of the location... The agents added that the property could also be developed into medical suites... The block spreads XX square metres and has a small rear car park. Investors and owner occupiers are other suitors for the vacant building which is configured with five dining areas, two commercial kitchens and is surrounded by manicured gardens. A copy of the floor plan of the neighbouring property is available on the internet. On XXX5, we received via email a letter from the Vendor's representatives informing the ATO that: "...one of the bathroom toilets in the Property will be modified shortly with the installation of a shower to ensure, without any doubt, that all basic living facilities for "residential premises" are provided when settlement of the Property under the Contract is due to occur". Settlement of the sale as per the Contract is due to occur on the date that is 6 months after the Day of Sale.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Detailed Reasoning - Question 1 and 2: Section 40-65 of A New Tax System (Goods and Services Tax) Act 1999 (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 accommodation). Section 195-1 of the GST Act defines residential premises as follows: 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. Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) consider how section 40-65 applies to supplies of residential premises. | Detailed Reasoning - Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation): Paragraphs 6 and 7 of GSTR 2012/5 explain the definition of residential premises to be as follows: Definition of residential premises 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 (emphasis added). 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. Therefore, to satisfy paragraph (a) of the definition of residential premises contained in section 195-1 of the GST Act, the actual use of the property needs to be for residential accommodation. As the property is being used as a restaurant, paragraph (a) of the definition contained in section 195-1 of the GST Act is not met. Paragraph (b) of the definition of residential premises is satisfied if the premises are intended to be occupied and are capable of being occupied as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises. | Detailed Reasoning - Physical Characteristics: Paragraph 9 of GSTR 2012/5 explains that 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 10 of GSTR 2012/5 provide that 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). 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). Basic living facilities would include kitchens, toilets and shower facilities. However, not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation (paragraph 25 of GSTR 2012/5). Example 8 of GSTR 2012/5 (paragraphs 41 to 43 of GSTR 2012/5) provides an example of residential premises that have been partly converted for business use. It states: 41. Shannon decides to partly modify her house to use in her profession as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage for the business. A sealed car park is also added to the property. Significant physical modifications are made to these areas, including the removal and alteration of walls, and the addition of lighting, hygiene facilities and security to meet industry standards. The existing lounge room is used as the patients' waiting room. An existing bedroom is used for storage. No physical modifications are made to the lounge room or bedroom. 42. The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises to be used predominantly for residential accommodation. Objectively, part of the premises is still designed predominantly for residential accommodation, comprising bedrooms (including the bedroom used for storage), bathroom, kitchen, living room, lounge room and gardens. 43. If Shannon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply. The Vendor has not been able to provide any floor plans of the property prior to its conversion to a restaurant or details of the work that was undertaken on the property to convert it from a dwelling to a restaurant as the property had been purchased by related entities of the Vendor in its current form. However, in the advertising material for the sale of the property in XXX4, it has been stated that the property can be "re-created" as a residential premises and can be restored back to a grand home just like the neighbouring property. The marketing material further states that the neighbouring property had been built identical to the property and has been retained as a prestige home. The neighbouring property was last sold in XXXX and floor plans are available on the internet. A comparison of the two floor plans reveals the following differences between the two properties: Ground Floor of the property: - the wall between the sitting room and the dining room in the front of the property is removed to create one open space and serve as a dining area, - the family room has the single door entry moved from the corner to the middle of the wall and replaced with a bigger double door. This room serves as a further dining area, - the powder room, laundry and the kitchen is gutted and replaced with another large open space serving as yet another dining area, - the meals room to the rear of the property is partitioned to create a bar and cellar, - the building has been extended at the back to include: · a commercial kitchen comprising numerous cook-tops, grills, numerous fridges, sinks, bench tops etcetera, · separate area housing barbeque cookers, · a separate store room, · a separate area housing a large pizza oven, · two cool rooms, · further bench top space, · two further store rooms, · male toilets comprising two cubicles and two hand basins, · female toilets comprising two cubicles and two hand basins. · a small multi car park at the rear of the property. First Floor of the property: - the wall between the two front bedrooms is removed to create a single space that is being utilised as a dining area, - the family bathroom is replaced with female toilets (two cubicles and two hand basins) and male toilets (one cubicle, two urinals and a hand basin), - the walk in wardrobe, en-suite and a wall of the master bedroom is removed to create another open space for another dining area, - the back bedroom is partitioned and converted into an office and a kitchenette, - a further store room and toilet is built on to the back of the building, - a deck and flight of steps are added to the outside of the back of the first floor to allow an exit directly from the first floor to the ground floor externally. As at the date of the application of this private ruling, which is after the signing of the Contract, the property did not have any showering facilities. During the private ruling application process, the ATO was provided with a letter form the Vendor's representatives informing the ATO that showering facilities were being installed in one of the current toilets of the property. However, the property has had almost every room in it subject to some form of structural change to convert living rooms, dining rooms, family room, bedrooms, bathrooms, kitchen to areas suitable for commercial dining, commercial cooking, commercial food storage, commercial toilet/hygiene facilities and a small multiple car park at the rear of the property. As in Example 8 of GSTR 2012/5, significant physical modifications have been made to the property, including removal of walls, alteration of walls, the addition of lighting and commercial kitchens, the addition of various cool rooms, store rooms, separate barbeque kitchen, pizza oven, commercial refrigeration and the addition of numerous toilets to meet industry standards. These extensive modifications, to the whole of the property, result in the whole of the property no longer being residential premises to be used predominantly for residential accommodation. Further, it is clear from the physical characteristics of the property that its suitability for living accommodation is ancillary to the property's prevailing function of a restaurant. As such, consistent with the principal established in paragraph 25 and Example 8 of GSTR 2012/5, the property is not residential premises to be used predominantly for residential accommodation. That is the physical characteristics of the property indicate that the property in its current form is a place to undertake tasks associated with the preparation and provision of meals in a commercial restaurant environment. A supply of the property would not therefore be input taxed under Division 40 of the GST Act.