Private ruling: GST, property and substantial renovations
Date of advice: 11 August 2021
Published: October 2021

Ruling: Q1: Will the supply of your property units (Existing Units) be input taxed supplies pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)? | A1: Yes, the supply of the Existing Units is considered to be input taxed supplies pursuant to section 40-65 of the GST Act.

Relevant facts and circumstances: You provided the relevant background facts and information as follows: • You as trustee for a Trust is registered for the Goods and Services Tax ('GST') since XX date XX month XXXX year. • The enterprise that the Trust carries on is the leasing of commercial offices in Australia. • The Trust has Council and Building permits to construct new units above the existing apartment building, which will be known New Units. The Trust commenced construction of the New Units during XX year. • The property is approximately XX years old and has never been materially renovated. As such, while the Building is being vacated for the construction works to the New Units and there are tradesmen at the Building, You and another entity are intending to refurbish the Existing Units. • The renovation plans for the Existing Units and the construction plans for the New Units are outlined in the architectural drawings prepared by Architects and the building contract with another entity. Renovations to Existing Units The planned renovations to the Existing Units can be described as follows: • a change to the front landscaping so that the streetscape presentation is consistent with the neighbourhood character; • replacing external windows; • removing internal, non-supporting walls that merely separate the kitchen from the dining room; • adding a balcony to a Unit and extending the balconies on X Units as required by the Council in order to receive the Planning Permit to add X Units to the lot; • installation of new building entry/ exit doors with better fire proof rating (required due to the age of the existing doors); • modern waterproofing of old wet areas (required due to the age of the building); • replacing of plumbing and electrical systems that are approximately XX years old, as required by the builder and modern standards for an occupancy permit. This installation cost will be incurred by the builder and will only be conducted to the extent required, given the existing state of electrical and plumbing devices in the Existing Units; • conversion of ground floor study into a single garage in Unit X by installing a garage door (as extra off-street parking is required by the Council for the two additional units); • a new front fence to provide an opening for a car to drive from a road directly into the Unit X garage; • cosmetic changes such as painting internal walls, replacing external and internal light fittings and replacing certain areas of flooring. You provided further information as follows: • The ceiling above the ground level covers Units X, Y and Z and the downstairs part of Unit X (Ground Floor). The ceiling above the first level covers Units X and Y and the upstairs part of Unit X (First Level). • The ceiling for the Ground Floor is not being replaced, renovated or enhanced. • The roof, trusses and ceilings of the First Level had to be replaced for the new units on top. • The existing ceiling of the First Level was plaster and the new ceiling will still be plaster, but modified to add load-bearing capacity and meet current-day Council and building requirements in relation to fire and sound proofing. • The purpose for the new ceiling is not to improve the existing units to any extent; it will actually detract from their value because the new ceiling will be slightly lower than the existing ceiling in some parts. • The owner requested to have the existing ceilings left as they were to the extent possible, as reflected in the ceiling of the Ground Floor being unchanged, but that was not possible for the First Level ceiling due to the construction of the new units on top. You provided that none of the Existing Units will be extended and there will be no changes to external walls, other than to install a garage door as mentioned above. More specifically, the total floor space of the ground floor and first floor before and after the renovations is X square metres. There are no structure changes to any of the internal supporting walls in relation to the X number of Existing Units. The only change to internal walls will be to remove the internal walls between the kitchens and dining rooms that are not supporting walls - most of which are unclosed, partial walls - and merely block the vision of the kitchen from the dining room, as was commonplace at the time that the Building was originally constructed. It is contemplated that this will be done for all of the Existing Units. Due to the dilapidated condition of the kitchens and bathrooms after approximately X years, the plumbing in these areas had to be replaced to meet safety standards. Cosmetic changes are required due to work that is already being done at the building to repair the plumbing and to construct two additional units on top of the building. The number of bedrooms, kitchen, bathrooms, study etc. is shown on the Architectural Plans provided and is largely not changing before and after the works, with the following exceptions: • In Unit X, it is expected that the lounge room will be divided by a stud wall with a door to make a study or small second bedroom; and • Other than Unit X, as mentioned above, any non-supporting wall that separates the kitchen from the dining area will be removed. You provided that the purpose for each of the abovementioned modifications is as per below. Proposed sale Immediately following construction of the New Units and the Proposed Renovations of the Existing Units, all of the units of the Building may be sold individually under separate contracts of sale.

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 Subsection 40-65(2) | A New Tax System (Goods and Services Tax Act) 1999 Section 40-75 | A New Tax System (Goods and Services Tax Act) 1999 Subsection 40-75(1) | A New Tax System (Goods and Services Tax Act) 1999 Paragraph 40-75(1)(b) | A New Tax System (Goods and Services Tax Act) 1999 Section 195-1

Reasons for decision: Summary: You are an entity for the purposes of the GST Act and will be liable for GST on any taxable supplies you make. Section 9-5 states that 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. If the supply of property is GST-free or input taxed, then the supply will not be taxable under section 9-5. Subsection 40-65(1) contains provisions that deem the sale of particular residential premises to be an input taxed supply. If a supply is input taxed, then no GST is payable on the supply, and there is no entitlement to an input tax credit for anything acquired to make the supply. However, subsection 40-65(2) has the effect that the sale is not input taxed to the extent that the residential premises are either commercial residential premises, or new residential premises (other than those used for residential accommodation before 2 December 1998). Subsection 40-75(1) states that *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. The issue to be determined is whether the properties are being created through 'substantial renovations' of a building. Guidance on substantial renovations (refer to paragraph 40-75(1)(b)) is provided in the following relevant paragraphs from the Goods and Services Tax Ruling Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3): 54. The term substantial renovations is defined in section 195-1: '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. 55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner. 56. The word 'building' is not defined in the GST Act. 'Building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'. In the context of the provision, we consider that an individual strata title unit or apartment is a 'building' and its structure is enclosed within the external walls of the unit, rather than the entire complex. In your case the building refers to each of the 6 individual strata titled units. 57. The general usage of the term 'renovate' is 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'. ] However, the term needs to be considered in the light of the surrounding words in the definition of substantial renovations. 58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. 59. A building comprises a number of components, which can be termed either structural (i.e. the foundations, external walls, interior supporting walls, floors, roof, etc) or non-structural (including fixtures, fittings, plumbing, mechanical, fire systems, electrical, lifts, air conditioning, etc. | Detailed Reasoning - Criteria for substantial renovations: 60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances. 61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial: (i) the renovations need to affect the building as a whole; and (ii) the renovations need to result in the removal or replacement of all or substantially all of the building. 62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made. | Detailed Reasoning - Substantial renovations need to affect the building as a whole: 63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example, curtilage) and additions to the building. | Detailed Reasoning - Building in its entirety: 64. 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. | Detailed Reasoning - ...: 76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient for substantial renovations to have occurred. 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'. ... (Emphasis added) | Detailed Reasoning - The works undertaken: You provided information that the planned renovations by the Trust to the Existing Units included landscaping and adding a balcony to Unit X and extending the balconies on Units X and Y, as required by the Council in order to receive the Planning Permit to add two units to the lot. You provided the following material facts relating to the planned renovations which include the following: • replacing external windows; • removing internal, non-supporting walls that merely separate the kitchen from the dining room; • installation of new building entry/ exit doors with better fire-proof rating (required due to the age of the existing doors); • modern waterproofing of old wet areas (required due to the age of the building); • replacing of plumbing and electrical systems that are approximately X years old, as required by the builder and modern standards for an occupancy permit; • a new front fence to provide an opening for a car to drive directly into the Unit X garage; • cosmetic changes such as painting internal walls, replacing external and internal light fittings and replacing certain areas of flooring. • The ceiling above the ground level covers Units X, Y, Z and the downstairs part of Unit X (Ground Floor). The ceiling above the first level covers Units X, Y and the upstairs part of Unit X (First Level). • The ceiling for the Ground Floor is not being replaced, renovated or enhanced. • The roof, trusses and ceilings of the First Level had to be replaced for the new units on top. • The existing ceiling of the First Level was plaster and the new ceiling will still be plaster, but modified to add load-bearing capacity and meet current-day Council and building requirements in relation to fire and sound proofing. • The purpose for the new ceiling is not to improve the existing units to any extent; it will actually detract from their value because the new ceiling will be slightly lower than the existing ceiling in some parts. • The owner requested to have the existing ceilings left as they were to the extent possible, as reflected in the ceiling of the Ground Floor being unchanged, but that was not possible for the First Level ceiling due to the construction of the new units on top. • You provided that none of the Existing Units will be extended and there will be no changes to external walls, other than to install a garage door as mentioned above. • Significantly, there are no structural changes to be undertaken to any of the internal supporting walls in relation to the X number of Existing Units. • The only change to internal walls will be to remove the non-supporting internal walls between the kitchens and dining rooms - most of which are unclosed, partial walls - and merely block the vision of the kitchen from the dining room, as was commonplace at the time that the Building was originally constructed. • Due to the dilapidated condition of the kitchens and bathrooms after approximately X years, the plumbing in these areas had to be replaced to meet safety standards. Cosmetic changes are required due to work that is already being done at the building to repair the plumbing and to construct two additional units on top of the building. • The number of bedrooms, kitchen, bathrooms, study etc. is shown on the Architectural Plans provided and is largely not changing before and after the works, with the following exceptions: • In Unit X, it is expected that the lounge room will be divided by a stud wall with a door to make a study or small second bedroom (but should this plan affect the outcome of the ruling, The Trust will not progress such work).; and • Other than Unit X, as mentioned above, any non-supporting wall that separates the kitchen from the dining area will be removed. In order for renovations to be considered substantial renovations, the renovations and work done need to affect the building as a whole. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. Further, renovations often undertaken on a property 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 renovation work of this nature to be cosmetic and as such these types of renovations are not substantial renovations. Based on the information you have provided, it is considered that whilst there are extensive renovation works being undertaken to each building, not all or substantially all of the building has been removed or replaced or that the building has been affected as a whole. It is significant in your circumstances that there are no structural changes being made to any of the supporting internal walls of the X number of existing units. Therefore, the Existing Units do not satisfy subsection 40-75(1)(b) and are not considered new residential premises pursuant to section 40-75. Accordingly, the sales of the Existing Units are input-taxed supplies under section 40-65.