Private ruling: GST - substantial renovations
Date of advice: 23 January 2023
Published: 6 March 2023
Ruling period: XX XXX XXXX to XX XXX XXXX
Date scheme commenced: XXX

Ruling: Q1: Will the refurbishment of the property and its four units be considered new residential premises created through substantial renovations of a building under section 40-75 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ? | A1: No, the refurbishment of the property at XXX and individual units will not be considered new residential premises created through substantial renovations under section 40-75 of the GST Act.

Relevant facts and circumstances: XXX (You) is registered with ABN XXX and also registered for GST from XXX. You operate a main enterprise of XXX. You own XXX (The property) an XXX. You purchased The property in XXX and leased it to tenants for XXX. The property was bought with the intention of refurbishing the XXX units and selling them individually. You commenced refurbishment of The property before XXX, however this was halted due to unforeseeable factors, and re-commenced again in XXX. Cosmetic work undertaken includes: • XXX Non-structural work undertaken includes: • XXX Structural work undertaken includes: • XXX On XXX you provided further information in response to our request for more information. You stated additionally: • XXX

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

Reasons for decision: Summary: Section 40-75 of the GST Act defines the term 'new residential premises' and includes residential premises that have been created through substantial renovation of a building (paragraph 40-75(1)(b). The term 'substantial renovations' is defined in section 195-1 of the GST Act as: Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed, replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. The definition of 'substantial renovations' requires consideration of what work has been done to the building since it was acquired by the current owner. Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when substantial renovations apply in practice. Paragraph 61 of GSTR 2003/3 provides that, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria: • the renovations need to affect the building as a whole; and • the renovations need to result in the 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 and no further inquiry needs to be made. Renovations need to affect the building as a whole Paragraphs 63, 64, 68 and 69 of GSTR 2003/3 state: 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. 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. 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. Removal or replacement of all or substantially all of the building 68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial. 69. This criterion is satisfied where there is a removal or replacement of a substantial part of the: • structural components of the building; or • non-structural components of the building. Paragraphs 70 to 77 of GSTR 2003/3 state the following: 70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as: • Altering, or replacing of, foundations • Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior) • Lifting or modifying of roofs • Replacing existing windows and doors such that it is necessary to alter brickwork (for example replacing a single door with a double sliding door). 71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. 72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced. 73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred. 74. Non-structural building work includes: • Replacing electrical wiring; • Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior); • Plastering or rendering an entire wall or walls; • Plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes); • Removing or replacing kitchen cupboards, bathroom fixtures, etc; • Removing or replacing air-conditioning or security system. 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. Further paragraph 78 and 79 of GSTR 2003/3 states: 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'. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110. 79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises. Guidance is provided on what we regard as substantial renovations in Example 6 of GSTR 2000/31: Example 6 - residential premises built, rented, restored and then sold 115. David is a property developer whose enterprise includes the construction of residential rental accommodation, renting those premises for a number of years (never less than 10 years) and the eventual sale of those premises. 116. Normal maintenance of the premises is undertaken while the premises are rented. 117. When the decision is made to sell the premises, work is undertaken to restore the premises to their original condition and to rectify damage done by the tenants. As part of this process a new kitchen, bathroom etc may be installed. 118. Where the restoration work affects most of the rooms in the house, but is largely cosmetic in nature (for example, replastering and repainting) and only the kitchen and bathroom are replaced, we consider there have not been substantial renovations. 119. The residential premises have been continuously used only for making input taxed supplies (i.e. residential rental) for a period of at least 5 years since the premises first became residential premises and there have not been substantial renovations. Therefore, the sale of the premises will be an input taxed supply. 120. However, where the damage done is so severe that it is necessary to replace the damaged plumbing, electrical wiring, most of the interior walls, floors, windows, doors, kitchen and bathroom (including fixtures and fittings), and restore the exterior walls and roof, there would be substantial renovations. The painting of the building inside and out is cosmetic in nature, and not a factor in deciding whether substantial renovations have occurred. In this case, the sale of the premises will be a taxable supply as the premises are new residential premises created through substantial renovations. | Detailed Reasoning - Conclusion: As previously stated, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria: • the renovations need to affect the building as a whole; and • the renovations need to result in the removal or replacement of all or substantially all of the building. To satisfy the first condition, the entire building needs to be affected by the renovations. This condition is satisfied. For the second condition, the renovations need to result in the removal or replacement of all or substantially all of the building and in this case, while there have been structural and non-structural components of the building and individual units removed or replaced, they do not amount to substantial renovations. The refurbished building and its units are therefore not new residential premises under paragraph 40-75(1)(b) of the GST Act.