Private ruling: GST
Date of advice: 27 September 2018
Published: November 2018

Ruling: Q1: Will the sale of the renovated residential house be a supply of new residential premises within the meaning under section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: ● You are an entity and you are registered for the goods and services tax (GST). ● Several years ago, you purchased an old three bedroom weatherboard cottage (house). ● The weatherboard house was liveable with functional amenities. ● The house has been renovated for the purpose of resale. ● The renovations were carried out over a period of twelve months. ● The renovated house went on the market for sale soon after the renovations were completed. ● The renovations involved: n Sanding, painting and renovating the bathrooms ● The format of the bathrooms has stayed the same but with modern fixtures. ● An additional toilet was inserted. n Creation of a 4 th bedroom by walling into an open area of the house. n Adding an extension to the rear of the house to create a kitchen and living room, laundry, as well as an open deck on one end. n Attaching a small awning to the external of the existing house: the awning is an extension of the roof along the same roofline to the back door. ● The original kitchen had minimal cupboards and a stand-alone stove. The cupboards were removed, the room was painted and lino removed; original windows remained. However, a door was replaced from the old kitchen onto the deck. The original kitchen is now a living space. ● The other original rooms, including the three bedrooms, of the original weatherboard house remained the same. ● The skirting boards remained unchanged.

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 40-65; | A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1); | A New Tax System (Goods and Services Tax) Act 1999 section 40-75; | A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(b); and | A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision: Summary: All legislative references in this Ruling are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise indicated. Section 40-75 of the GST Act defines the term ‘new residential premises’. Paragraph 40-75(1)(b) of the GST Act provides that new residential premises may be created through substantial renovations of a building. New residential premises are created through substantial renovations when an owner of residential premises does work to it that satisfies the definition of 'substantial renovations' in section 195-1 of the GST Act. Section 195-1 states: substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. 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 ? (GSTR 2003/3) provides guidance on when the sale of real property is the sale of new residential premises. It considers substantial renovations in paragraphs 53 to 87. Whether renovations are substantial is a matter of fact and degree and is to be determined in the light of all the facts and circumstances. Paragraph 61 of GSTR 2003/3 explains that for the work to constitute substantial renovations, it must satisfy the following criteria: (i) the renovations need to affect the building as a whole; and (ii) the renovations need to result in a removal or replacement of all or substantially all of the building. Where one of the above criteria is not satisfied substantial renovations have not occurred. Paragraph 64 of GSTR 2003/3 states: Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is, the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. Paragraph 67 of GSTR 2003/3 states the following in relation to additions to the building: Additions 67. Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added. Paragraphs 70 and 74 of GSTR 2003/3 set out examples of structural and non-structural work which may result in the removal or replacement of all or substantially all of the building. Paragraphs 77 and 78 of GSTR 2003/3 discuss what is meant by the term ‘cosmetic work’. These paragraphs state as follows: 77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes: ● painting; ● sanding floors; ● removing and replacing worn or out of date fittings such as light fittings; ● replacing curtains or carpets. 78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'... However, paragraph 79 of GSTR 2003/3 then clarifies that where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work under taken will form part of new residential premises. From the information you have provided, we consider that the renovations undertaken do not affect the building as a whole and did not result in the removal or replacement of all or substantially all of the building. We do not consider that your renovations of the residential premises fall within the ATO’s view of what constitutes substantial renovations in GSTR 2003/3. The works undertaken on the house are not considered to be substantial renovations which would create new residential premises for the purposes of paragraph 40-75(1)(b) of the GST Act. Therefore, your sale of the renovated house will not be the sale of new residential premises. Consequently, your sale of the renovated house will be an input taxed supply under subsection 40-65(1) of the GST Act. If a supply is input taxed, there is no GST liability on the supply but there is also no entitlement to GST credits on GST included in the price of purchases that relate to the making the supply. Therefore, you are not liable for GST on the sale of the renovated house. At the same time, you will not be entitled to claim any GST credits for GST included in the price of acquisitions of materials and labour costs incurred for the renovation and associated costs incurred in the sale of the premises. Please note that substantial renovations of residential premises depend on what is actually done to the premises and that each case depends on its own facts. This means that you are constantly required to consider whether the renovations done by you on a property amount to substantial renovations and subsequently whether new residential premises have been created through the process of renovating residential premises.