Private ruling: Goods and services tax (GST) and residential premises
Published: September 2013

Ruling: Q1: Will the sale of the pair of properties be input taxed? | A1: Yes.

Relevant facts and circumstances: You are registered for GST. You purchased a pair of properties (the property). You purchased the property for the purposes of conducting a business in one property and residing in the other property. The only alterations you have made to the property, is reducing the size of the kitchen in one property, to be a kitchenette. No walls or further structural changes have been made to the property. . You received development consent allowing special usage of one property as a business. Your business opened. Then you joined an existing business in a nearby commercial office. Property one was leased to another business. You charged GST on the rental for property one to the business. Property two was leased to a residential tenant and continues to be a residential letting. The business advised they would not renew the lease and moved out. You commenced general repairs and maintenance, and installation of a new kitchen in property one in preparation for residential leasing. The work is nearly complete in preparation for residential rental. Property one and property two each comprise of bedrooms, living/dining room, kitchen, bathroom, and laundry in a residential street and are zoned residential. You would like to sell the property to pay down debt and want to confirm that the sale is not a taxable supply for GST.

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 9-40, | A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C, | 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 and | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision: Summary: The premises display all the characteristics necessary to determine the premises suitability and capability for residential accommodation. Therefore, the sale of the property will be an input taxed supply of residential premises and no GST will be payable. | Detailed Reasoning - Detailed reasoning: In this ruling, please note: · All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). · All terms marked by *asterisk are a defined term in the GST Act. Goods and services tax (GST) is payable on taxable supplies. Section 9-5 states: You make a taxable supply if: (a) you make a 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, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. In your case, the property will be sold for consideration, the supply will be made in the course of your enterprise, the supply is connected with Australia and you are registered for GST. Consequently, the supply will be taxable unless the supply is GST-free or input taxed. For the purposes of this ruling we will only consider whether the supply is input taxed. | Detailed Reasoning - Sales of residential premises: Subdivision 40-C provides for supplies of residential premises that are input taxed. Section 40-65 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; or (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation). Goods and Services Tax Ruling GSTR 2012/5 Goods and Services tax: residential premises (GSTR 2012/5), considers how subdivision 40-C applies to supplies of residential premises. Paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-65 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 at the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Further, paragraph 10 of GSTR 2012/5 provides that 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 your case, the property, consisting of a pair of properties, display all the physical characteristics necessary to determine the premises suitability and capability for residential accommodation. Based on the information submitted, we do not consider the premises to be commercial residential premises as defined in section 195-1, or new residential premises as per section 40-75. | Detailed Reasoning - Supplies requiring apportionment: Paragraph 40 of GSTR 2012/5 explains that the value of a supply of premises needs to be apportioned to the extent that part of the premises is not residential premises to be used predominantly for residential accommodation. This is illustrated in example 8 of GSTR 2012/5 which states: Example 8 - residential premises partly converted for business use 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 . In your case, you have advised that the only modification made was to the kitchen in property one, being the conversion to a kitchenette. Subsequently, you have nearly finished installing a new kitchen in preparation for residential rental. Based on the information provided it is considered there have been no significant modifications to the property which would change the nature from one of residential premises. As such, no apportionment will be required. Therefore, the sale of the properties, will be an input taxed supply of residential premises and no GST will be payable.