Private ruling: Goods and services tax (GST) and sale of properties
Published: October 2012

Ruling: Q1: Will GST be payable on your sales of the properties? | A1: No. | Q2: Will you have increasing adjustments as a result of selling the properties? | A2: Yes.

Relevant facts and circumstances: You are registered for GST. You were incorporated on a certain date for the purpose of carrying out a development project in a certain place. During the certain financial years, you acquired a number of adjoining properties on a certain street. You did not succeed in acquiring the something property and it is owned by an unrelated party. The certain number of properties (the properties) you purchased are residential properties with homes attached to each. You purchased the properties from individual home owners, being persons not registered for GST. These persons simply sold their own homes and these sales were not subject to GST. Since you purchased the properties, you have not altered the buildings on them and you have been renting out the properties. Your rentals of the existing premises are input taxed supplies. You have not claimed input tax credits for expenses relating to leasing out the existing premises. When you purchased the properties, the properties were zoned residential (single dwelling). Your intention was to amalgamate the site; obtain a higher zoning (villas/townhouses or units); build new residential premises on the site and then sell the new residential premises on completion of their construction. You have achieved a rezoning for units and DA approval for a certain number of units. No construction works have commenced. You acquired various things in order to obtain the rezoning for units and DA approval for a certain number of units. Your intention when you acquired the development related things was to construct home units and sell them on completion. You are planning to sell the properties, as is, to a builder.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act subsection 11-15(1) | A New Tax System (Goods and Services Tax) Act subsection 11-15(2) | A New Tax System (Goods and Services Tax) Act section 9-5 | A New Tax System (Goods and Services Tax) Act section 9-40 | A New Tax System (Goods and Services Tax) Act paragraph 40-35(1)(a) | A New Tax System (Goods and Services Tax) Act subsection 40-65(1) | A New Tax System (Goods and Services Tax) Act subsection 40-65(2) | A New Tax System (Goods and Services Tax) Act section 40-75 | A New Tax System (Goods and Services Tax) Act subsection 40-75(1) | A New Tax System (Goods and Services Tax) Act subsection 40-75(2) | A New Tax System (Goods and Services Tax) Act Division 129 | A New Tax System (Goods and Services Tax) Act section 129-50 | A New Tax System (Goods and Services Tax) Act section 129-55

Reasons for decision: Summary: You will make input taxed sales of the properties under subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), because · you will sell residential premises to be used predominantly for residential accommodation, and · the premises are not new residential premises or commercial residential premises. Therefore, GST will not be payable on your sales of the properties. | Detailed Reasoning - Detailed reasoning: GST is payable by you where you make a taxable supply. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: · you make the supply for *consideration; and · the supply is made in the course or furtherance of an *enterprise that · you *carry on; and · the supply is *connected with Australia; and · 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) You will satisfy the requirements of paragraph 9-5(a) to 9-5(d) of the GST Act, because: · you will supply the properties, by way of sale, for consideration · you will the supply the properties in the course or furtherance of your property trading enterprise, · these supplies will be connected with Australia, because the properties are located in Australia, and · you are registered for GST. There are no provisions in the GST Act under which your sales of the properties will be GST-free. Therefore, what remains to be determined is whether your sales of the properties will be input taxed. In accordance with subsection 40-65(1) of the GST Act, a sale of residential premises is input taxed to the extent that it is 'to be used predominantly for residential accommodation'. However, in accordance with subsection 40-65(2) of the GST Act, a sale of residential premises is not input taxed to the extent that: · it is commercial residential premises or · residential premises other than those used for residential accommodation before 2 December 1998. Whether residential premises are 'to be used predominantly for residential accommodation' depends on the physical characteristics of the premises (in accordance with paragraph 19 of Goods and Services Tax Ruling GSTR 2000/20). The intended use of the property by the buyer is not relevant. The residential premises in your case have the physical characteristics of residential premises. Therefore, they are residential premises to be used predominantly for residential accommodation. Section 40-75 of the GST Act defines new residential premises. Subsection 40-75(1) 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. Subsection 40-75(2) of the GST Act states: However, the 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 built; the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a). Leasing out residential premises is an input taxed supply under paragraph 40-35(1)(a) of the GST Act (subject to certain exceptions). In accordance with paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3, paragraphs 40-75(1)(b) and 40-75(1)(c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises. Your sales of the residential premises will not be sales of new residential premises because: · the residential premises have previously been sold as residential premises other than commercial residential premises · the residential premises were not created by you through substantial renovations of the buildings, and · the residential premises were not built by you, and do not contain a building that you built, to replace premises you demolished on the same land. Additionally, the residential premises are not commercial residential premises. Therefore, you will make input taxed sales of residential premises under subsection 40-65(1) of the GST Act. As you will make input taxed sales of the properties, you will not make taxable supplies of the properties. Therefore, GST will not be payable on your sales of the properties. | Summary: You will have increasing adjustments under Division 129 of the GST Act, because you acquired the development related things for a creditable purpose but you will apply these things for a non-creditable purpose. | Detailed Reasoning - Detailed reasoning: In accordance with Division 129 of the GST Act, an increasing adjustment arises where you acquire a thing for a creditable purpose but later apply it for a non-creditable purpose. | Detailed Reasoning - Acquiring a thing for a creditable purpose: Subsection 11-15(1) of the GST Act states: · You acquire a thing for a creditable purpose to the extent that you acquire it · in carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: · However, you do not acquire the thing for a creditable purpose to the extent · that: · the acquisition relates to making supplies that would be *input taxed; or · the acquisition is of a private or domestic nature. In accordance with paragraph 40-75(1)(a), paragraph 40-75(1)(c) and subsection 40-75(2) of the GST Act, your sale of the new units would have been sales of new residential premises as: · they would have been sales of residential premises · these premises would not have been sold before and would not have previously been the subject of a long-term lease. · these premises would have been built by you to replace premises you would have demolished on the same land, and · you would not have leased out these premises. These new residential premises would not have been used for residential accommodation before 2 December 1998. Therefore, your sales of the new units would not have been input taxed supplies under subsection 40-65(1) of the GST Act. There are no other provisions of the GST Act under which your sales of the new units would have been input taxed. You acquired development related items for a creditable purpose, as: · you acquired the things in carrying on your enterprise, · these acquisitions did not relate to making supplies that would be input taxed, and · the acquisitions were not of a private or domestic nature. | Detailed Reasoning - Applying a thing for a non-creditable purpose: Section 129-50 of the GST Act states: (1) You apply a thing for a creditable purpose to the extent that you apply it in carrying on your *enterprise. (2) However, you do not *apply a thing for a creditable purpose to the extent: that: (a) the application relates to making supplies that are *input taxed; or (b) the application is of a private or domestic nature. Section 129-55 of the GST Act states: Apply, in relation to a thing acquired or imported, includes: · supply the thing; · consume, dispose of or destroy the thing; and · allow another entity to consume, dispose of or destroy the thing. We do not consider that you have applied the development related things you acquired by leasing out the properties, as the rezoning and development approvals are not relevant to leasing out the existing premises and would not have increased the amount of rent you could obtain from leasing out these premises. However, when you sell the properties, you will be applying the development related things acquired, for the purposes of section 129-55 of the GST Act. This is because you will be selling the properties and the rezoning and development approvals would pass with the land and could enhance the sale prices. Your application of the development related things acquired will relate to making input taxed sales (selling the properties). Therefore, you will apply the development related things for a non-creditable purpose when you sell the properties. As you have acquired the development related things for a creditable purpose but you will apply these things for a non-creditable purpose, you will have increasing adjustments under Division 129 of the GST Act. This is subject to the value thresholds and time limitations in Division 129 of the GST Act. In accordance with Division 129 of the GST Act, where you have an increasing adjustment in the circumstances you have set out, the amount of the increasing adjustment will be equal to the amount of the input tax credit you claimed. Goods and Services Tax Ruling GSTR 2000/24 contains more information about adjustments under Division 129 of the GST Act. This can be found on the Australian Taxation Office website, www.ato.gov.au.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.