Private ruling: Goods and Services Tax (GST) and the sale of residential premises and supplies of accommodation
Date of advice: 24 May 2018
Published: July 2018

Ruling: Q1: Will the sale of new residential premises by Entity A for consideration that exceeds 50% of the GST inclusive market value of the premises, be GST-free pursuant to subsection 38-250(1) of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”)? | A1: No, it will be a taxable supply pursuant to section 9-5 of the GST Act. | Q2: Will the sale of new residential premises, by Entity A, be GST-free pursuant to subsection 38-250(2) of the GST Act where the supply is for consideration that is less than 75% of the consideration Entity A provided, or was liable to provide, for acquiring the new residential premises? | A2: Yes. | Q3: Will subdivision 72-C of the GST Act apply to the supply of the new residential premises by Entity A to Entity B where the value of the supply is less than the GST inclusive market value of the premises? | A3: No. | Q4: Is the lease of residential premises from Entity B to Customers at less than 75% of the GST inclusive market value of the supply, GST-free under section 38-250(1) of the GST Act? | A4: Yes. | Q5: Will Entity B make a creditable acquisition of the new residential premises from Entity A pursuant to section 11-5 of the GST Act in respect of the purchase of new residential premises from Entity A where the supply to Entity B is a taxable supply and its rent of the premises is GST-free? | A5: Yes. | Q6: Will the sale of residential premises at a price that exceeds 50% of market value from Entity B to Customers be input taxed under section 40-65 of the GST Act? | A6: No. | Q7: Will Entity B have an adjustment where it makes an input taxed supply of residential premises that have previously been used for a creditable purpose, and the adjustment periods have expired? | A7: No.

Relevant facts and circumstances: Entity A: ● Is a company limited by guarantee and registered for GST ● Is registered as a charity and public benevolent institution (“PBI”) with the Australian Charities and Not-for-profits Commission (“ACNC”), and is endorsed by the Commissioner of Taxation (“the Commissioner”) as a Deductible Gift recipient. (DGR). ● Has entered into an informal verbal agreement (“the Agreement”) with Entity B to construct residential premises to sell to Entity B for: ● consideration greater than 50% of the market value, or ● consideration that is less than 75% of the consideration Entity A provided, or was liable to provide, for acquiring the residential premises. Entity B: ● Is a NFP association that registered for GST from 1 July 2000 ● Is registered as a charity and has DGR status ● Will either lease or sell the units it acquires from Entity A ● Where Entity B leases the units to Customers, it will be for: ● consideration that exceeds 50% of market value, or ● at a price that exceeds 50% of the market value of the rent but does not exceed 75% of the market value and ● Where Entity B on-sells the units to Customers it may do so at any time following purchase up to a time following the expiry of any adjustment periods for the acquisition of the unit. (The units will sell for prices that are either less than $500,000 or exceed $500,000 and have respective adjustment periods of either 5 or 10 periods.) ● Is required under the Agreement to provide accommodation to identified tenants in need of accommodation or to sell the houses to those in need at market value and ● May also enter into vendor finance arrangements with the purchasers of the properties when it sells them. ● Entity A and B have similar broad charitable objects however: ● Both entities will also undertake other activities besides this arrangement which will not involve each other ● Entity A’s predominate activities will be to construct or arrange to construct residential premises which it will sell to Entity B ● Entity B will deal directly with the clients who they will either sell or rent the residential premises to its customers and ● Entity A and B are not associates for the purposes of section 318 of the ITAA. Contentions The Shorter Oxford Dictionary as per an ATO ID provides that ‘accommodation is Room and provision for the reception of people, lodgings; living premises’ and the GST Act defines residential premises to mean 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. Therefore, the term “accommodation”, by its ordinary meaning, should include the supply of houses, units or townhouses, being the supply of “living premises” or “residential premises” A supply of new residential premises includes a bundle of rights and one of those rights is the right to occupy those premises. As accommodation includes the right to occupy the premises, the supply of either is the same for purposes of 38- 250.

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 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 Division 11 | A New Tax System (Goods and Services Tax) Act 1999 Section 38-250 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 Division 72 | A New Tax System (Goods and Services Tax) Act 1999 Division 87 | A New Tax System (Goods and Services Tax) Act 1999 Division 129 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 | The Income Tax Assessment Act 1936 Section 318

Reasons for decision: Summary: Section 9-5 of the (GST Act provides that you make a taxable supply if: a) you make the supply for consideration b) the supply is made in the course or furtherance of an enterprise that you carry on c) the supply is connected with the indirect tax zone (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. Entity A will be selling new residential premises for consideration in the course of an enterprise it is carrying on in Australia and is registered for GST. Further, the supply of the premises will not be input taxed. Therefore, the supply will be taxable unless it is GST-free. Under subsection 38-250(1), a supply that is not a supply of accommodation will be GST-free where: ● the supplier is an endorsed charity and ● the consideration for the supply, is less than 50% of the GST inclusive market value of the supply. As the consideration Entity A will receive for the supply of the premises will exceed 50% of the GST inclusive market value, Entity A’s supply will not meet the requirements of section 38-250(1). Therefore, the supplies of the new residential premises by Entity A will be taxable supplies. You contended that the sales of new residential premises would be supplies of accommodation. We advise the following. The Macquarie Dictionary definition of premise includes: 1. (plural) a. the property forming the subject of a conveyance. b. a house or building with the grounds, etc., belonging to it. Residential premises are defined in section 195-1 of the GST Act: residential premises 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. From the above definitions, it can be seen that ‘residential premises’ refers to a physical asset. The physical asset can be used to provide a service of accommodation. Ownership of residential premises carries with it a bundle of rights which are to be enjoyed indefinitely by the owner. These rights include, but are not limited to: ● The right to resell the premises ● The right to the profits on any such sale ● Subject to the laws of the land, the right to use the premises in any way the owner deems fit, including letting of the premises ● Subject to the laws of the land, to make whatever modifications to the premises the owner wishes ● The right to use the premises for provision of accommodation of the owner, or such other party as the owner chooses Ownership of residential premises also carries with it certain obligations, such as the obligation to pay rates for the premises. A supply by way of sale of residential premises is the supply of ownership of the physical asset and the rights and obligations listed above. | Detailed Reasoning - Accommodation: The Macquarie Dictionary definition of accommodation includes: 6. lodging, or food and lodging Accommodation is one of the possible uses of residential premises, ie they are used to provide accommodation. Accommodation is provided in residential premises. A supply of accommodation or the right to accommodation, in residential premises does not include the supply of ownership of the physical asset. The right to accommodation will only be supplied for a specified period. Further, it will not convey most of the rights and obligations listed above. Some of the rights supplied under a supply of accommodation are set out below. ● A right to accommodation (short or long term) can be conveyed to another party by the owner of the property. ● The right to accommodation will not include the right to resell the premises or to the profits on any such sale. ● Even where the laws of the land permit a particular use of the premises, the right to use the premises in a particular way will require the consent of the owner. ● Similarly, even where the laws of the land allow for particular modifications to be made to the premises, the owner’s consent will be required. Section 38-250 provides amongst other things that supplies of accommodation by a charity will be GST-free as long as the consideration does not exceed 75% of the GST exclusive market value. However it provides that all other supplies that are not a supply of accommodation by the charity will only be GST-free if the price of the supply is less than the 50% of the GST inclusive market value of the supply. | Detailed Reasoning - Explanatory Memorandum (EM): The original intent of the legislation is an important consideration and is evidenced in the EM. We consider the phrase supply of accommodation would not include the sale of real property in circumstances where the title of the property is transferred to the purchaser. The EM for the bill which originally introduced increases in the threshold rates within section 38-250, contains references to “rental costs” and “residential rents” (at par.1.74), but does not contain any mention of sales of real property: 1.73 Consultation with charities indicate that the 50% test is too low to give effect to the policy of making non-commercial supplies of charities GST-free in the supported accommodation/community housing sector. 1.74 Supported accommodation agencies charge clients an income-based contribution towards rental costs. In many cases this contribution is marginally above the 50% of market-value test. Not meeting the 50% test would make the supplies input taxed as residential rents, or taxable as commercial accommodation in the case of some boarding houses. Either treatment would have a negative impact on funding for this sector. 1.75 Items 67 and 68 increase the 50% market value and cost of supply tests for the non-commercial supplies of charities to 75% for supplies of supported accommodation/community housing. The test for supplies other than accommodation remains at 50%. [New paragraphs 38-250(1)(b) and 38-250(2)(b)] Therefore the sale of new residential premises is not a supply of accommodation. | Detailed Reasoning - Question 2: As per our advice in question one, the sales of new residential premises are not supplies of accommodation and will be taxable supplies unless they are GST-free. Subsection 38-250 (2) provides that a supply by an endorsed charity, which is not a supply of accommodation is GST-free if the consideration provided is less than 75% of the consideration the supplier provided or was liable to provide for acquiring the thing. Therefore where the consideration Entity A receives for the supply of the premises is less than 75% of the consideration Entity A provided, or was liable to provide, for acquiring the new residential premises then the supply will be GST free. | Detailed Reasoning - Question 3: Division 72 C sets out the values for taxable supplies where inadequate consideration is provided between ‘associates’. The definition of “associates” for GST purposes relies on the definition of that term in section 318 of the Income Tax Assessment Act 1936 . You advised in your application that Entity A and B are not associates for the purposes of section 318 of the ITAA 1936, therefore subdivision 72-C will not apply to them. | Detailed Reasoning - Question 4: Subsection 38-250(1) relevantly provides that a supply of accommodation by an endorsed charity for consideration that is less than 75% of the GST inclusive market value of the supply will be GST-free. This section of the GST Act is not an election therefore where you meet the criteria your supplies will be GST-free. Therefore, where you supply accommodation at less than 75% of the GST inclusive market value, the supply will be GST-free. | Detailed Reasoning - Question 5: Section 11-5 of the GST act provides that you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose; and (b) the supply of the thing to you is a taxable supply; and (c) you provide, or are liable to provide, consideration for the supply; and (d) you are *registered, or *required to be registered Section 11-15 provides that you acquire something for a creditable purpose to the extent that you acquire it in carrying on your enterprise and it does not relate to making supplies that are input taxed. As: ● Your rental supplies will be GST-free ● The supplies of the new residential premises to you were taxable supplies ● You were liable to provide consideration for the supplies and ● You are registered for GST. Your acquisitions of the new residential premises will be creditable acquisitions. | Detailed Reasoning - Question 6: Will the sale of residential premises at a price that exceeds 50% of market value from Entity B to Customers be input taxed under section 40-65 of the GST Act? The sale of residential premises by Entity B will not be GST free under the GST Act. Section 40-65 provides that sales of real property that are residential premises to be used predominantly for residential accommodation are input taxed to the extent that they are not new residential premises or commercial residential premises. The sale of individual houses will not meet the definition of commercial residential premises. | Detailed Reasoning - New residential premises: Residential premises are defined in section 40-75 to be ‘not new residential premises’ where they have previously been sold as new residential premises. As you acquired the premises you are selling, from Entity A they are not new residential premises. Therefore your sale of the residential premises will be input taxed supplies pursuant to section 40-65. | Detailed Reasoning - Question 7: Section 129-40 explains how to work out whether you have an adjustment. The first requirement is that there is an adjustment period. Where there are no remaining adjustment periods, there will be no adjustments. Therefore, as per Division 129, there will be no adjustments for Entity B when they sell any of their residential premises following the expiry of all adjustment periods.

Reasons for decision: In this reasoning, unless otherwise stated, | all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au | all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act