Private ruling: Goods and services tax (GST) and sale of new residential premises
Date of advice: 14 February 2017
Published: July 2017

Ruling: Q1: Is GST payable on your sale of the specified units? | A1: GST is not payable on the sale of some of the units. GST is payable on the sale of some of the units. GST would be payable on the sale of some of the units if the units were sold and the settlement date was the date of issue of this ruling. However, if you continue to retain these units, then depending on the duration of future leasing activities, the sale of these units may or not be subject to GST. See reasons for decision for further guidance.

Relevant facts and circumstances: You are registered for GST. You were formed after 2 December 1998. You were established to build residential premises for sale. You built a complex of many home units at a location in Australia. Your original intention was to sell all units on completion of construction. There was no written business plan. Money was borrowed to finance the development. The initial loan agreement included a special condition to sell a minimum of X units on completion. The majority of the home units in that complex have been sold. By a certain date, there were only a few units left to sell. Some units were sold on date (settlement date). A company was appointed as agent for a number of years (a particular year to a particular year) and another company took over marketing and rental management from a certain date to a certain date. During a certain period the real estate market began to soften and you did not succeed in selling any of the few units in question although they were advertised for sale. Your directors decided to lease out the remaining few units to cover the cost of maintenance. The units in question have never been the subject of a long-term lease (a lease with a specified term of at least 50 years). Some of the units in question were exclusively rented out or listed for rent for a continuous period of at least 5 years since they were built. You did not exclusively rent out or listed for rent particular units (that have been sold) for a continuous period of at least 5 years. You have not exclusively rented out or listed for rent particular units (that have not been sold yet) for a continuous period of at least 5 years.

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 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 Division 129

Reasons for decision: Summary: The sales of some units will be input taxed sales of residential premises other than new residential premises, pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sales of some units are not input taxed sales. As all of the requirements of section 9-5 of the GST Act are met, GST is payable on this sale. The sale of some units may or may not be input taxed depending on future leasing activity. If the sales of these units are not input taxed, GST will be payable on the sales as all of the requirements of section 9-5 of the GST Act would be met under such circumstances. | Detailed Reasoning - Detailed reasoning: GST is payable on any taxable supply that you make. Section 9-5 of the GST Act sets out the requirements for a supply to be taxable. 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 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. (* Denotes a term defined in section 195-1 of the GST Act) 'Indirect tax zone' means Australia In your case, you meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is: ● you have sold or will sell the units in question for consideration ● you will supply these units in the course or furtherance of your property development and leasing enterprise. ● these supplies are connected with Australia (as the units are located in Australia) ● you are registered for GST Based on the information provided, there are no provisions of the GST Act under which your sales of the units in question are GST-free. The only provision under which sale of a unit could be input taxed is section 40-65 of the GST Act. Section 40-65 of the GST Act 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 (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Section 40-75 of the GST Act defines new residential premises. Subsection 40-75(1) of the GST Act states: *Residential premises are new residential premises if they: (a) have not previously been sold as 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. However, subsection 40-75(2) of the GST Act states: However, the *residential premises are not new residential premises if, for the period of at least 5 years since: (a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or (b) if paragraph (1)(b) applies - the premises were last *substantially renovated; or (c) if paragraph (1)(c) applies - the premises were last build the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a). Renting out residential premises is an input taxed supply under paragraph 40-35(1)(a) of the GST Act. Goods and Services Tax Ruling 2009/4 (GSTR 2009/4), at paragraphs 36 to 38 and 132 to 141 discuss the 5 year rule in section 40-75 of the GST Act and other concepts relevant to determining if the 5 year rule is met. They state: 36. Applying the analysis at paragraphs 30 to 35 of this Ruling, new residential premises held in connection with an entity's enterprise are being applied in carrying on the entity's enterprise. For the purpose of considering whether or not any adjustment arises under Division 129, in relation to new residential premises, it is necessary to determine the extent to which that application is for a creditable purpose. 37. The sale of new residential premises is a taxable supply. Therefore, the holding of new residential premises for the purpose of sale as part of an entity's enterprise, based on an objective assessment of the facts and circumstances, will be an application of the premises for a creditable purpose. As discussed at paragraphs 132 to 135 of this Ruling, if an entity has applied new residential premises for a creditable purpose in accordance with Division 129, the premises will also have been used other than for making supplies that are input taxed under paragraph 40-35(1)(a) and the requirements of the '5 year rule' in subsection 40-75(2) will not be satisfied. However, the supply of residential premises by way of lease is an input taxed supply. Consequently, the holding of new residential premises for the purpose of leasing, or the supply of new residential premises by way of lease, will be an application that relates to making input taxed supplies and will not be an application of the premises for a creditable purpose. 38. New residential premises will not be applied for a creditable purpose, to any extent, when they are being used exclusively as part of an enterprise of leasing residential premises. However, the new residential premises would not be precluded from being applied for a creditable purpose in the future if the entity subsequently decided to sell the new residential premises as part of its enterprise activities and, based on an objective assessment of the facts and circumstances, the entity commenced holding the new residential premises for the purpose of sale. | Detailed Reasoning - Interaction between Division 129 and the '5 year rule' in subsection 40-75(2): 132. It is considered that the term 'used' in subsection 40-75(2) and the meaning of 'apply' for the purposes of Division 129 should be interpreted consistently. This means that if an entity has applied new residential premises for a creditable purpose in accordance with Division 129, the premises will also have been used other than for making supplies that are input taxed under paragraph 40-35(1)(a) and the requirements for subsection 40-75(2) to apply will not be satisfied. 133. The '5 year rule' in subsection 40-75(2) provides an exception to the meaning of new residential premises in subsection 40-75(1). The '5 year rule' is discussed in paragraphs 89 to 93 of 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? As discussed in paragraphs 89 and 90 of GSTR 2003/3, subsection 40-75(2) requires that for a period of at least 5 years since the premises became new residential premises, the premises have only been used for making supplies that are input taxed under paragraph 40-35(1)(a). The period must be a 5 year continuous period. However, it can be any continuous period between when the premises would otherwise have become new residential premises and when they are sold. If this requirement is satisfied then the premises will not be new residential premises. 134. 'Used' is an important term in subsection 40-75(2). As noted in paragraph 33 of this Ruling, there is a strong similarity between the meanings of 'use' and 'apply'. That is, the relevant meanings are largely synonymous. 135. Adopting a consistent interpretation for the term 'used' in subsection 40-75(2) and the term 'apply' in Division 129 is consistent with the policy explained in the Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 8) 2000 (the Explanatory Memorandum), which introduced section 40-75, that new residential premises will not be taxable if an entity is not entitled to input tax credits for acquisitions relating to the construction of the premises. Alternative view 136. An alternative view is that the phrase 'the premises have only been used for making supplies that are input taxed' in subsection 40-75(2) only requires identification of the actual supplies that the premises have been used to make during the relevant period. 137. On this alternative view, if the only supplies that the premises have been used to make during the specified period are input taxed supplies, then subsection 40-75(2) is satisfied. Other uses of premises such as private use or holding the premises for the purpose of sale do not preclude the application of subsection 40-75(2). 138. This alternative view is not the preferred view of the Commissioner. 'Used' is a word of wide import and its meaning depends to a large extent upon the context in which it is used. It is considered that a broad interpretation of 'used' in subsection 40-75(2) to extend to any uses of the premises by the entity including applications for a creditable purpose by way of holding premises for the purpose of sale is consistent with the intended policy referred to in the Explanatory Memorandum (see paragraph 135 of this Ruling). On the alternative view, contrary to this intended policy, an entity entitled to retain a significant portion of input tax credits in relation to the construction of new residential premises, on the basis that they were being held for the purpose of sale whilst being leased, may, due to the application of subsection 40-75(2), make an input taxed supply when the premises are sold. Thus, it would bear no GST on the supply despite having claimed substantial input tax credits on acquisitions that relate to the supply. Example 17 - premises applied for the purpose of sale which do not satisfy the requirements of the '5 year rule' 139. Matthew constructs new residential premises for the purpose of sale and is entitled to input tax credits on his acquisitions. On completion of the premises Matthew decides to lease the premises because of a downturn in the property market. Matthew continues to hold the premises for the purpose of sale as part of his enterprise and does so until the premises are ultimately sold. He is therefore applying the premises for two purposes under Division 129. He is required to make an increasing adjustment at the end of the first adjustment period because the actual application is less than the intended application. He will also need to consider whether further adjustments are necessary in each of the relevant adjustment periods. 140. Matthew sells the premises six years after they were completed. He has been leasing the premises for this whole period. However, the requirements of subsection 40-75(2) are not satisfied because the premises have not only been used for making supplies that are input taxed because of paragraph 40-35(1) (a). The premises have also been used for the purpose of sale because Matthew has been holding the premises for sale as part of his enterprise. 141. The premises are new residential premises and, provided all the requirements of section 9-5 are satisfied, Matthew makes a taxable supply of new residential premises when the premises are sold. Input taxed sales of units Your sales of some units will be sales of residential premises other than commercial residential premises. Your sales of these units will be the first sales of these residential premises and they had not previously been the subject of a long-term lease. Therefore, whether these units are new residential premises at the time of sale depends on whether the 5 year rule in subsection 40-75(2) of the GST Act is met. You exclusively rented out or listed for rent these units for a continuous period of at least 5 years since they were built. Therefore, you used these units solely for making input taxed supplies under paragraph 40-35(a) of the GST Act for a continuous period of at least 5 years since they were built. Hence, pursuant to paragraph 40-75(2)(a) of the GST Act, the sales of these units will not be sales of new residential premises. Therefore, as the requirements of section 40-65 of the GST Act are met, the sales of these units are input taxed. Hence, your sales of these units are not taxable supplies. Therefore, GST is not payable on your sales of these units. Non-input taxed sales of units Your sales of certain units were sales of residential premises other than commercial residential premises. Your sales of the relevant units were the first sales of these residential premises and they had not previously been the subject of a long-term lease. Therefore, whether these units are were new residential premises at the time of sale depends on whether the 5 year rule in subsection 40-75(2) of the GST Act is met. You did not exclusively rent out or list for rent the relevant units for a continuous period of at least 5 years. Therefore, your sales of the relevant units were sales of new residential premises. These new residential premises were not used for residential accommodation before 2 December 1998. Therefore, your sales of these units were not input taxed under section 40-65 of the GST Act. As all of the requirements of section 9-5 of the GST Act are met, your sales of the relevant units are subject to GST. Sales that may or may not be input taxed Your sales of certain units will be sales of residential premises other than commercial residential premises. Your sales of these units will be the first sales of these residential premises. Therefore, presuming that they are not the subject of a long-term lease at some point in future before you sell them, the requirements of paragraph 40-75(1)(a) of the GST Act will be met. The 5 year rule in subsection 40-75(2) of the GST Act has not been met in respect of certain units so far. If you had already secured buyers and settlement date was the date of issue of this ruling, the sales of these units would have been sales of new residential premises that have not been used for residential accommodation before 2 December 1998. Therefore, the sales of these units, under such circumstances, would not have been input taxed. As all of the requirements of section 9-5 would have been met under such circumstances, the sales of these units would have been subject to GST under such circumstances. You still retain these units. Therefore, it is possible that the 5 year rule in subsection 40-75(2) of the GST Act may be met at some time in the future, but this cannot be determined at the present time. If the 5 year rule is met at some point in the future, the sales of these units would be input taxed under section 40-65 of the GST Act, and therefore not subject to GST. If you exclusively rent out or list the units for rent for a continuous period of at least 5 years, the 5 year rule will then be met. If the 5 year rule is not met at any stage before sale, the sales will be taxable as all of the requirements of section 9-5 of the GST Act would be met (presuming that the units do not become the subject of a long-term lease at some point in future before you sell them). | Detailed Reasoning - Additional information: You may have increasing adjustments under Division 129 of the GST Act in respect of the units in question because you built these units solely for the purpose of selling, which is a creditable purpose, but you have applied these units partly for a non-creditable purpose (leasing out), subject to certain time limits. Increasing adjustments under Division 129 effectively involves reversing the benefit of input tax credits on construction costs etc. to the extent that these acquisitions are reasonably apportionable to leasing out the units. For more information on such adjustments, refer to GSTR 2009/4 - type in GSTR 2009/4 into an internet search engine and Goods and Services Tax Ruling GSTR 2000/24. There is a four year time limit on the Australian Taxation Office collecting GST liabilities. Any unpaid amount of indirect tax ceases to be payable 4 years after it became payable by you unless ● within those 4 years the Commissioner has required payment of the amount by giving a notice to you; or ● the Commissioner is satisfied that the payment of the amount was avoided by fraud or evaded. Where an increasing adjustment arose for you under Division 129 of the GST Act, the 4 years commences from the day after the due date of lodgment of the BAS in which the adjustment was originally required to be reported. Practice Statement Law Administration PS LA 2009/3 provides guidance on the 4 year rule - type in PS LA 2009/3 into an internet search engine.