Private ruling: GST and the supply of real property
Published: June 2012

Ruling: Q1: Will the sale of your property be a taxable supply to any extent? | A1: Yes. The fenced area containing the two story residence and the shed is input taxed, while the balance of the land containing the farm land is a taxable supply.

Relevant facts and circumstances: You are registered for GST. You acquired a property located in Australia (the Property) for $X for investment purposes. No GST was payable on the purchase. The property is approximately X acres in size and includes a two story house and a shed located behind the house. The house and the shed are encircled by a fence and the balance of the property is divided by fences into approximately 4 paddocks with a yard and fence to handle stock. One paddock contains a dam. The house is occupied as a residence and has facilities for day to day living such as kitchen, laundry, bathroom and bedroom facilities. When the property was acquired only minor improvements were made to the premises such as carpet replacement, air-conditioning, painting and minor repairs. Since you acquired the property it has been tenanted or available for rent under a residential tenancy agreement. The property is currently leased for $X per week, the tenants have access to the whole property, however you advised there are no activities being carried on land surrounding the house. During late 200X a developer approached you to purchase the property for development subject to development approval being obtained. At the same time he approached the owner of an adjacent property to buy that property and to have it included in the development approval process. The owner of the adjacent property became a party to that DA process. The development application was granted in 200Y for both properties however the purchaser was unable to proceed with the contract and you retained the parcel of land and the DA that related to the land. In 200Z the adjacent property was purchased by an entity related to you with the development approval in place. You now intend to sell the property in combination with the owner of the adjacent property with the DA in place and want to know to what extent the supply of your property will be a taxable supply.

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 199-1 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if: · you make a supply for consideration · the supply is made in the course or furtherance of your enterprise · the supply is connected with Australia, and · you are registered or required to be registered. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. 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. In your case, you intend to: · supply the property for consideration, · the supply is made in the course or furtherance of the leasing enterprise you carry on, · the supply is connected with Australia as the property is located in Australia and · you are registered for GST. Furthermore there are no provisions in the GST Act that will make your supply of the premises, GST-free. In your factual situation the premises do not meet the GST definition of commercial residential premises or of new residential premises. Therefore, the supply of the premises will be a taxable supply and thus, subject to GST unless the supply is input taxed to any extent. The definition of residential premises in section 195-1 of the GST Act 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 (regardless of the term of occupation), and includes a floating home. Draft Goods and Services Tax Ruling GSTR 2012/D1: residential premises and commercial residential premises (GSTR 2012/D1) represents the Commissioners preliminary though considered view about the characteristics of residential and commercial residential premises. Paragraph 26 of GSTR 2012/D1 explains that the physical characteristics common to residential premises are premises that provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. The premises on the property is described as a two story house containing bedrooms, bathroom and a kitchen and is fit for human habitation. Therefore, the two story house on the property meets the definition of residential premises and will be an input taxed supply and not subject to GST. Paragraph 35 of GSTR 2012/D1 provides the following information in regards to the situation where land is supplied with a building and an example of a property where a house is located on farmland. It provides that: 35. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises. Paragraph 37 to 41 of GSTR 2012/D1 provides an example of where Bob sells a property which consists of a house, tennis court and swimming pool which is separately fenced off from farming land. To determine the extent to which Bob's property is residential premises to be used predominantly for residential accommodation it is necessary for us to consider the physical characteristics of the property. Paragraph 40 of the example provides that: Based on the physical characteristics of the premises, the house is residential premises to be used predominantly for residential accommodation. Additionally, based on the physical characteristics, the separately fenced-off one hectare of land containing the tennis court, swimming pool and maintained gardens is to be enjoyed with the house. However, the other 79 hectares are distinguishable on the basis of physical characteristics as land for farming rather than for enjoyment in conjunction with a residential building. Appendix 1 of GSTR 2012/D1 provides further explanation of the Commissioner's preliminary view. Paragraph 163 expands on the above reasoning in regards to 'Land supplied with a building' providing that ' just because land is used privately does not mean that the land necessarily has the physical characteristics to indicate that the land is to be enjoyed in conjunction with the residential building.' In your case the house is surrounded by lawn and has a large shed at the rear of the house, both the house and the shed are fenced off from the balance of the 20 acres. The balance of the land is described as being paddocks, one of which contains a dam, and a stock yard, You have advised that there are no farming activities being undertaken on the property, nor is the land used by the tenant's occupying the residential premises. The physical layout of the property indicates that there is a clear distinction between the area of land surrounding the house which is to be used in conjunction with the residential building as opposed to the fenced off area which has the physical characteristics of farm land. Therefore while the house, shed and associated amenities within the fenced area are considered to residential premises, the remainder of the land does not form part of the residential premises to be used predominantly for residential accommodation. The remainder of the land is therefore taxable under section 9-5 of the GST Act. Paragraph 29 of GSTR 2012/D1 deals with supplies of premises that require apportionment between taxable and non taxable portions. The principles contained in the paragraph are applicable to your situation. Paragraph 29 provides that where part of the premises is not residential premises to be used predominantly for residential accommodation there needs to be an apportionment of the value of the supply. The overriding requirement is that the method used must produce an outcome that is fair and reasonable in the particular circumstances. In addition you advised that the property will be supplied with development approval attached. The ATO provides a series of publications called ATO Interpretative Decisions or ATO ID's which provide the ATO view on particular factual situations. | Detailed Reasoning - ATO ID 2004/303 answers the factual question.: Is the entity, a property developer that is making an input taxed supply of residential premises, making a separate taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when under a contract of sale, it assigns to the purchaser a development consent that runs with the premises? | Detailed Reasoning - It provides the following answer: No, the entity is not making a separate taxable supply under section 9-5 of the GST Act when under a contract of sale it assigns to the purchaser a development consent that runs with the premises. The entity is making a single input taxed supply of the residential premises, which includes the development consent. Although your property is a mixed supply of residential premises and vacant land with different GST treatments the principles contained in this ATO ID are relevant. Therefore when your property is sold with the development approval attached the development approval is automatically transferred to the purchaser as a natural consequence of the sale. Therefore, the entity is not supplying the purchaser with anything more than the property. | Summary: When you sell the property you will be making a mixed supply of an input taxed residential premises and a taxable supply of vacant land. You will be required to apportion the price of the land between the taxable and input taxed parts. Further Information You may be eligible to apply the margin scheme to calculate the GST payable on the taxable portion of your supply. For further information you can refer to the fact sheet 'GST and the Margin Scheme' which is available on our web 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.