Private ruling: GST and property transactions
Published: October 2012

Ruling: Q1: Are you entitled to an input tax credit on the supply of a property to you comprising two titles and on which exists a residential house? | A1: No | Q2: If you continue to offer the house for rent and subsequently dispose of the property, will you be required to charge GST on the subsequent sale? | A2: No | Q3: If you were to demolish the house in order to increase the property's value and then sell it, will you be required to charge GST on the subsequent sale? | A3: Yes | Q4: Does the fact that there are two titles impact on the answers to Questions One to Three? | A4: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · You are a company. · You conduct a commercial property leasing enterprise. · You are registered for GST. · You have recently acquired a property comprising two titles and on which exists a residential house. · The residential house contains bedrooms and the basic facilities for daily living. · You intend to re-sell the property at a profit. · The property was acquired from the owner of the adjoining commercial complex (the "Vendor"), who had originally purchased the property with the intention of extending the commercial complex. · The Vendor has successfully gained Development Approval ("DA") for the commercial extension. · The house is currently occupied by way of lease. · The Vendor believes that, because it intended to develop the land and had gained the necessary DA, it would need to charge GST on the sale to you.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 : Subsection 7-1(1) | Section 9-5 | Paragraph 9-20(1)(c) | S ection 23-5 | S ubsection 40-35(1) | S ubsection 40-65(1) | S ubsection 40-65(2) | S ection 40-75 | Subsection 40-75(1)

Reasons for decision: Summary: You are not making a creditable acquisition when you purchase the property. This is because the supply to you of the property is not a taxable supply. The supply of the property is an input taxed supply | Detailed Reasoning - Detailed reasoning: Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to an input tax credit for any creditable acquisition that you make. 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. In order to determine whether the supply of the property is an input taxed supply of residential premises we need to consider the character of the supply at the time the subject matter of the supply is transferred. The supply occurs when settlement for the real property is completed. The definition of residential premises is applied to whatever is supplied at settlement. The character of what is supplied is determined by all facts and circumstances surrounding the supply, primarily as reflected in the contractual arrangements between the parties. In this case what has been supplied is a property comprising two titles and on which exists a residential house, the house straddles both blocks. There is a current development approval attached to the property. Under section 40-65 of the GST Act, a supply of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation unless the premises are commercial residential premises or new residential premises to any extent. Under subsection 40-65(1) of the GST Act, 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 (regardless of the term of occupation). Section 195-1 of 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. Goods and Services Tax Ruling GSTR 2000/20 provides guidance on what the ATO considers to be residential premises Paragraphs 19 to 22 of the Ruling explains the meaning of residential premises and to be used for residential accommodation. They state: 19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation. 20. To be used for 'residential accommodation' or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. This follows from the definition of commercial residential premises referred to in paragraph 18. 21. Some examples will indicate the differences that need to be understood in this context. If a building consists of a shop below and a flat above, the physical characteristics indicate that only part of the building is residential premises, that is, the flat. The shop is not residential premises and is taxable in the normal way when leased or sold. 22. The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property. The premises in your case contain bedrooms and the basic facilities for daily living. Therefore, they are residential premises being occupied as a residence. These residential premises are not commercial residential premises. We do not consider that the existence of the development approval has changed the character of the premises to commercial residential premises. | Detailed Reasoning - Development approval: The development approval is attached to the land belonging to the residential premises and runs with that land. Upon the sale of the residential premises, the development approval is automatically transferred to you as a natural consequence of the sale. This transfer takes place regardless of any formal assignment in a sale contract. Assignment of development approval does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the land itself. Therefore the vendor will not be supplying you with anything more than the residential premises. Even a formal assignment of the development approval will not amount to a separate supply because it will not affect the transfer of anything that will not already be transferred to you as a direct and natural consequence of the sale of the premises. As such, the vendor will not be making a separate taxable supply under section 9-5 of the GST Act when/if they assign to you, under a contract of sale, development approval that runs with the premises. They will be making a single input taxed supply of the residential premises, which includes the development approval. New residential premises New residential premises is defined in section 40-75 of the GST Act. Subsection 40-75(1) of the GST Act states: *Residential premises are new residential premises it they: (a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of 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 build, to replace demolished premises on the same land. The residential premises in your case have previously been sold as residential premises other than commercial residential premises. Paragraph 28 of Good and Services Tax Ruling 2003/3 provides that paragraphs 40-75(1) (b) and 40-75(1) (c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises under those paragraphs. There have not been any substantial renovations to the residential premises in your case. Additionally, these residential premises have not been built, and do not contain a building that has been built, to replace premises demolished on the same land. Therefore, the residential premises are not new residential premises. Hence the supply of the property to you will be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act. As the supply to you is not a taxable supply it follows that you did not make a creditable acquisition when you purchased the property, as you do not satisfy paragraph 11-5(b) of the GST Act (see above). As all paragraphs of section 11-5 of the GST Act must be met it is not necessary to consider paragraph 11-5(a) of the GST Act. Therefore as the supply to you is an input taxed supply you are unable to claim an input tax credit on the purchase of the property. | Summary: Under subsection 40-65(1) of the GST Act, 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 (regardless of the term of occupation). | Detailed Reasoning - Detailed reasoning: GST is payable by you where you make a taxable supply. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act which states: 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 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. (*Denotes a term defined in section 195-1 of the GST Act) A sale of residential premises is input taxed under subsection 40-65(1) of the GST Act, but only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation). Based on the above, your property has the physical characteristics of a residence and satisfies the definition of residential premises to be used predominantly for residential accommodation. The requirements in subsection 40-65(1) of the GST Act are therefore satisfied. However, subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are: a) commercial residential premises; or b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. As discussed above we have already ascertained that the property is residential premises and not commercial or new residential premises, accordingly, in the circumstances described the sale of your property would be an input taxed supply under subsection 40-65(1) of the GST Act, and GST would not apply to the sale. | Summary: The sale of the vacant residential land would be a taxable supply and therefore subject to GST. | Detailed Reasoning - Detailed reasoning: As discussed above 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 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. As discussed previously under section 40-65 of the GST Act, a supply of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation unless the premises are commercial residential premises or new residential premises to any extent. GSTR 2000/20 at paragraphs 24 and 25 state the following in relation to the definition of residential premises and vacant land: 24. The definition of 'residential premises' in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation or is intended and capable of being occupied as a residence or for residential accommodation. 25. The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation. A sale of vacant land is not a GST-free supply or input taxed supply under the GST legislation. In your case, the supply of vacant land will be: (1) for consideration as you will receive payment on the sale, and (2) the supply will be connected with Australia as the land is located in Australia, and (3) you are registered for GST. For the supply of your vacant land to be a taxable supply, the supply of the vacant land will need to be 'in the course or furtherance of an enterprise that you carry on'. Therefore, it needs to be determined if an enterprise is being carried on. Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade. The issue to be considered is whether the sale of the land is 'in the course or furtherance' of an enterprise. Goods and Services Tax Determination GSTD 2006/6 provides guidance on the characteristics of an 'enterprise' for the purposes of the GST Act. This is based on section 9-20 of the GST Act which sets out the essential elements required for an enterprise to exist. It defines an enterprise in terms of an activity or series of activities done in a certain manner or by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or continuous basis, activities done by charitable or religious institutions, and activities done by the Commonwealth, a State, a Territory, or local government. Also, there are certain activities that are excluded from the definition. The exclusions include activities done as an employee, as a private recreational pursuit or hobby, or by individuals without a reasonable expectation of profit or gain. 'An adventure or concern in the nature of trade' includes a commercial activity that does not amount to a business. Isolated transactions with commercial characteristics fall into this category. However, it does not extend to the mere realisation of investment or private assets such as the family home and private cars. The Property and Construction Issues Register (Item 15.4.18) available on the Australian Taxation Office Tax Reform web site specifically deals with the issue. Under the heading 'Where a business, trading company or trust holds land as an investment or as an asset which is used for their enterprise, is the sale subject to GST if they are registered?' the register item states: 'Is the sale of the land 'in the course or furtherance' of an enterprise? A transaction is a supply 'in the course or furtherance' of an enterprise that is carried on where the supplies can be considered to be connected to the entity's enterprise. The term 'in the course or furtherance ' is not defined in GST legislation, but the term is wide enough to cover any supply in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. As the business, trading company or trust owns the land, and it was held as part of the business structure, the sale is in the course or furtherance of its enterprise and will be a taxable supply unless it is an input taxed supply.' In this case you have purchased the property as part of your enterprise and have stated that you would sell the property for a profit. It is clear that the intention of the sale is undertaken as part of your enterprise and you will be making a taxable supply of vacant land. | Detailed Reasoning - Detailed reasoning: The fact that the property encompasses 2 titles does not impact on the GST implications of the sale of the property in any form for the reasons discussed above. | Detailed Reasoning - Supplies of real property and the 'margin scheme': Under normal circumstances, where the sale of the property by the vendor is a taxable supply, they will be liable to remit GST equal to 1/11th of the sale price to the Tax Office. However, the GST Act contains provisions relating to the sale of freehold interests that, in certain circumstances, allow a vendor to use an alternative method of calculating the GST payable when they make a taxable supply of real property. These provisions are commonly referred to as the margin scheme . The margin scheme is an alternative method of calculating the GST payable on sales of real property. It limits the GST payable on sales of real property to 1/11th of the 'margin' rather than 1/11th of the total sale price. A vendor that makes a taxable supply of real property can choose to apply the margin scheme , providing that the supply to them (by the previous owner of that property) was not a taxable supply on which the GST payable was calculated on the value of the supply without applying the margin scheme. Depending on when, and from whom, the property was purchased, the margin is the difference between the sale price and: • the amount the seller paid for the property, or • a valuation of the property at a given date. Further information about the margin scheme can be obtained from the margin scheme fact sheets available on our website www.ato.gov.au

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.