Private ruling: GST – substantially renovated
Date of advice: 25 October 2018
Published: January 2019
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 May 2017

Ruling: Q1: Is the residential premise considered to be substantially renovated for GST purposes? | A1: Yes

Relevant facts and circumstances: The relevant property is a terrace house. The property is a residential premise and zoned medium density residential. The property is not a commercial residential premise. It is not to be used for commercial accommodation. The property was settled some years ago and was subsequently tenanted from for a couple of years. Construction works later commenced and completed. Work was completed on the existing dwelling with new additions. The work being completed on the existing dwelling includes the following: ● Demolish existing staircase and make good ● Install new staircase ● New paintwork ● New ceiling to living areas ● New ceiling to first floor bedroom ● New bathroom on first floor ● Wall configurations on first floor The new additions include the following: ● New kitchen ● New bathroom ● New ensuite and wardrobe to first floor bedroom ● New glazing ● Change in number of bedrooms ● New laundry ● New external decking ● New joinery ● New roof ● New timber floor structures The construction costs totalled upwards of $200,000 plus GST. The intention of the entity is to sell the property on completion if a reasonable offer is received The property is currently in the process of being marketed for sale. The entity is registered for Goods and Services Tax (GST).

Relevant legislative provisions: Goods and Services Tax Act 1999 section 9-5 | Goods and Services Tax Act 1999 subsection 40-75

Reasons for decision: Summary: Goods and Services Tax Ruling 2003/3: when is a sale of real property a sale of new residential premises? Explains sales of housing which has been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not subject to GST as new residential premises. The exceptions are where new residential premises are created through substantial renovations or are built to replace demolished premises on the same land. Supply of residential premises by way of sale is a taxable supply where all the following conditions are met: ● the residential premises are new residential premises as defined in section 40-75; ● the new residential premises were not used for residential accommodation before 2 December 1998; ● the supply is made for consideration; ● the supply is made in the course or furtherance of an enterprise that the vendor carries on; ● the residential premises are in Australia; and ● the vendor is registered, or required to be registered. Subject to subsection 40-75(2), residential premises are new residential premises, as defined in subsection 40-75(1), if they: (a) have not previously been sold as 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 term substantial renovation 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. This definition requires consideration of what work has been done to the building since it was acquired by the current owner. 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. 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. 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. 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: Whether renovations are substantial is to be determined in the light of all the facts and circumstances. 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. 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: Building in its entirety 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. Curtilage Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building. Additions Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added. | Detailed Reasoning - Removal or replacement of all or substantially all of the building: 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. 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. 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). Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. 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. 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. 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 (eg 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 systems. 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. 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. 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. 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. | Detailed Reasoning - Application to your circumstances: Substantial renovations of residential premises depend on what is actually done to the premises and that each case depends on its own facts. This means that you are constantly required to consider whether the renovations done by you on a property amount to substantial renovations and subsequently whether new residential premises have been created through the process of renovating residential premises. Your renovation work does affect the building as a whole. Your work does result in the removal or replacement of all or substantially all of the building. The work does amount to creation of new residential premises through substantial renovations. Therefore, your sale of the residential premise will not be an input taxed supply pursuant to subsection 40-65(1) of the GST Act. It will be a taxable supply pursuant to section 9-5 of the GST Act because this is considered a new residential premise through substantial renovations. | Detailed Reasoning - Other information: Refer to paragraph 17 of Law Companion Ruling 2018/4 for guidance on GST at settlement. Purchaser liability for taxable supplies of new residential premises 17. A purchaser may have a GST withholding obligation under section 14-250 for acquisitions of 'new residential premises'. The term 'new residential premises' has the meaning given by the GST Act. Section 14-250, however, does not apply to: (a) a supply of new residential premises that have been created through substantial renovations, or (b) a supply of 'commercial residential premises'. Therefore, there is no GST withholding for the purchaser, as the supply of new residential premises has been created through substantial renovations.