Private ruling: Residential premises
Date of advice: 11 November 2022
Published: 9 January 2023
Ruling period: DD MM 20YY to DD MM 20YY.

Ruling: Q1: Was the sale of your property in Australia (the property) an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the sale of the property was an input taxed supply of residential premises under section 40-65 of the GST Act.

Relevant facts and circumstances: You are registered for GST. The property was purchased by you a long time ago, and you constructed residential apartment buildings on the site shortly after its purchase. Detailed reasoning When a supply of the property is an input taxed supply of residential premises Subsection 40-65(1) of the GST Act provides that 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. Subsection 40-65(2) of the GST Act provides exceptions to the sale of real property being input taxed. The sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Real property Section 195-1 of the GST Act provides that the term 'real property' includes, amongst other things, any interest in or right over land, which would include your ownership of the property prior to its sale. Residential premises The term 'residential premises' is also defined in section 195-1 of the GST Act, which provides that the term means land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a floating home. Paragraph 9 of Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides that the requirement in section 40-65 of the GST Act that premises be 'residential premises to be used predominantly for residential accommodation' 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. An examination of the subjective intention of, or use by, any particular person is not required. 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 (refer to paragraph 10 of GSTR 2012/5). Whereas 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 (refer to paragraph 11 of GSTR 2012/5). Premises must also be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation (refer to paragraph 20 of GSTR 2012/5). However, paragraph 21 of GSTR 2012/5 provides that residential premises that are either: in a minor state of disrepair; or subject to a temporary legal prohibition for occupation pending minor repairs; are still suitable for, and capable of, being occupied as a residence or for residential accommodation. Commercial residential premises Section 195-1 of the GST Act also contains the definition of 'commercial residential premises'. That term is relevantly defined to mean a hotel, motel, inn, hostel or boarding house (in paragraph (a) of the definition), or anything similar to a hotel, motel, inn, hostel or boarding house, etc. (in paragraph (f) of the definition). While paragraph (f) extends the scope of the definition, its operation is limited to premises that have some or all of the characteristics of both residential premises and one of the classes of premises listed in paragraphs (a) to (e) of the definition. The ATO's view on the meaning of commercial residential premises is set out in Goods and Services Tax Ruling 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6). Paragraph 9 of GSTR 2012/6 provides that the terms hotel, motel, inn, hostel or boarding house in paragraph (a) of the definition are not defined in the GST Act and take their ordinary meanings in context. Paragraph 12 of GSTR 2012/6 sets out some common characteristics of hotels, motels, inns, hostels, boarding houses or similar premises. These are: • commercial intention - properties are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body. • multiple occupancy - premises have capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory. • holding out to the public - offer accommodation to the public or a segment of the public. • accommodation is the main purpose of the premises. • central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site. • management offers accommodation in its own right rather than as agent. • provision of, or arrangement for services and facilities. • occupants have status as guests - occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant. New residential premises When defining new residential premises, section 195-1 of the GST Act defines the term by reference to the meaning given for the term in section 40-75 of the GST Act. Subsection 40-75(1) of the GST Act provides 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. Paragraphs (b) and (c) have effect subject to paragraph (a). However, in accordance with subsection 40-75(2) of the GST Act, the residential premises are not new residential premises if, for the period of at least five 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). Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises). Supply of things used solely in connection with making supplies that are input taxed but not financial supplies Further to the above, subsection 9-30(4) of the GST Act provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies. How this applies in your case The apartments that you leased as a part of your enterprise and then sold as part of the property sale clearly had the indicators of residential accommodation. In addition to the above, the apartment buildings that were on the property at the time of its supply by you were not new residential premises as that term is defined in the GST Act. It is also not considered that the apartment buildings were commercial residential premises, as they didn't meet the definition under section 195-1 of the GST Act. The accommodation that you provided did not have enough of the characteristics of commercial residential premises. We also note subsection 9-30(4) of the GST Act, which provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies. In conclusion, your sale of the property as a whole is a composite supply of residential premises to be used predominantly for residential accommodation and is input taxed under section 40-65 of the GST Act.