Private ruling: Input taxed supply of property
Published: January 2014

Ruling: Q1: Is the supply of residential premises by you a taxable supply? | A1: No. The supply is an input taxed supply.

Relevant facts and circumstances: You purchased a property in 2009. The vendor who you purchased the property from was not registered for GST. Accordingly, you did not claim an input tax credit. The property contained a residential dwelling. At the time of purchase, the property was leased to a tenant. You sought, and were granted with development approval to knock down the existing premises and to build two townhouses. You have since decided not to proceed with the development and now wish to sell the property with the residential dwelling intact. The premises are not presently leased to a tenant. You are registered for GST.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | Section 9-5 | Section 40-65

Reasons for decision: Summary: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies that you make. Section 9-5 of the GST Act 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, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (Items marked with an *asterisk are defined in the Dictionary at section 195-1 of the GST Act). In this case, the supply of the property by you is made for consideration, it is made in the course or furtherance of an enterprise that you carry on, it is connected with Australia and you are registered for GST. We therefore need to consider if the supply is GST-free or input taxed. There are no provisions within the GST Act that make the supply of the property in this case GST-free. However, 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; or (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Our view on this matter is contained in Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5). Paragraphs 9 to 13 state: 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. 1 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). 11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation. 12. John carries on an enterprise which involves leasing a house on property which he owns. Based on the physical characteristics of the house it is residential premises to be used predominantly for residential accommodation. The area in which the house is located has recently been rezoned by the local Council to permit higher density residential apartments. Following the rezoning, a developer, Knock Them Down Co, approaches John and offers to purchase his property. Knock Them Down Co intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments. 13. The fact that Knock Them Down Co does not intend to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. Knock Them Down Co's intention is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accommodation. The sale of the house by John to Knock Them Down Co is an input taxed supply under section 40-65. You have advised that the property in question is residential premises that have been used for residential accommodation only. It is not commercial residential premises, nor is it new residential premises. The supply of the property by you is therefore an input taxed supply of residential premises. GST does not apply to the supply; neither can you claim input tax credits on acquisitions that relate to the making of the supply. 1 Paragraph 40-35(2)(a) varies this wording slightly, requiring that the premises ' are to be used predominantly for residential accommodation (regardless of the term of occupation)' (emphasis added). It is considered, however, that this wording establishes the same requirement as that set out in subsection 40-65(1) and subsection 40-70(1).