Private ruling: goods and services tax (GST) and going concerns and residential premises
Date of advice: 27 November 2015
Published: February 2016

Ruling: Q1: Are you entitled to an input tax credit on your purchase of the apartment? | A1: No.

Relevant facts and circumstances: You have been registered for GST with effect from (date). You purchased an apartment, (address) on (date) (settlement date) from X (vendor) You purchased the apartment to lease out. Your GST turnover was less than $75,000 when you purchased the apartment. The vendor has been registered for GST since (date). The apartment is part of a serviced apartment complex. The vendor rented out the apartment for short term holiday stays. The vendor used the on-site manager to market the property for short term holiday rental and manage the rental activity. Legally, the apartment cannot be used as a permanent residence because of the zoning (Y zone). The by-laws also prohibit the apartment from being used as a permanent residence. A cross was inserted in the box in the sale contract next to the words 'The sale is not a taxable supply because the sale is not made in the course or furtherance on an enterprise that the vendor carries on'. The sale contract states that the sale of the apartment is a GST-free supply of a going concern. The apartment was sold to you with vacant possession. The sale was not subject to any existing residential tenancy agreement. In the time leading up to settlement, the on-site manager actively marketed the property for short term holiday rental, on the vendor's behalf. The sale of the apartment to you was not the first sale of the apartment. The vendor did not substantially renovate the apartment.

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 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 23-15 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | 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 188 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: You are not entitled to an input tax credit on your purchase of the apartment because: • you did not acquire the property for a creditable purpose • the sale of the property was not subject to GST, and • you were not registered or required to be registered for GST when you purchased the property (on settlement date). | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisitions. You make a creditable acquisition where you meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: 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, are liable to provide, *consideration for the supply (d) you are registered or required to be registered (*Denotes a term defined in the GST Act) Acquisition for creditable purpose You make an acquisition for a creditable purpose if you meet the requirements of section 11-15 of the GST Act. Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. You acquired the apartment in carrying on your holiday rental enterprise and your acquisition of the apartment was not of a private or domestic nature. We shall now consider whether you acquired the apartment to make input taxed supplies. Section 40-35 of the GST Act provides that a supply of accommodation in residential premises is input taxed (subject to certain exclusions). Subsection 40-35(1) of the GST Act states: A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if: (a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or (b) the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25. Subsection 40-35(2) of the GST Act states: However: (a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and (b) the supply is not input taxed under this section if the lease hire or licence, or the renewal or extension of a lease, hire or licence is a*long-term lease. Paragraphs 6 to 11 of Goods and Services Tax Ruling GSTR 2012/5 provide the Australian Taxation Office view on the meaning of 'residential premises to be used predominantly for residential accommodation'. They state: 6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition. 7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises. 8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments. Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics 9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. 10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office). 11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation. Paragraph 75 of GSTR 2012/5 provides further guidance on residential premises and residential accommodation. It states: 75. Residential premises, as defined in the GST Act, provide living accommodation. Living accommodation does not require any degree of permanence of occupation. It includes lodging, sleeping or overnight accommodation. In South Steyne Hotel Pty Ltd v. FC of T ( South Steyne ), Stone J referred to a number of overseas decisions on this point including Urdd Gobaith Cymru and Owen . Her Honour noted: 37. [In Urdd Gobaith Cymru ] The Tribunal chairman agreed that 'a residence' clearly implied a building with a significant degree of permanence of occupation but added: However, the word loses that clear meaning when used as an adjective. In ordinary English 'residential accommodation' merely signifies lodging, sleeping or overnight accommodation. It does not suggest the need for such accommodation to be for any fixed or minimum period. 38. In Owen the Court of Appeal expressed a similar view as to the meaning of 'residential accommodation' used in the context of the Capital Gains Tax Act 1979 . The position was put succinctly by Leggat LJ who said: In my judgment the expression 'residential accommodation' does not directly or by association mean premises likely to be occupied as a home. It means living accommodation, by contrast, for example with office accommodation. Your apartment is designed so as to be suitable for, and capable of, being occupied for residential accommodation; it has the necessary physical characteristics. Therefore, it is residential premises to be used predominantly for residential accommodation regardless of the fact that one is not permitted to use the apartment as their permanent place of residence. In accordance with section 195-1 of the GST Act, commercial residential premises are a hotel or motel or similar premises. Goods and Services Tax Ruling GSTR 2012/6 provides guidance on the meaning of commercial residential premises. Paragraphs 95 to 98 of GSTR 2012/6 state: Separately titled rooms, apartments, cottages or villas 95. In addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree. 96. Separately titled rooms, apartments, or adjacent cottages or villas located on adjoining or abutting land can be combined with sufficient commercial infrastructure (as discussed in paragraph 95 of this Ruling) so that, as a whole, it can be operated similarly to a hotel, motel, inn, or hostel. Supplies of accommodation in premises operated in this way are supplies of accommodation in commercial residential premises. 97. A single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises under paragraph (a) or (f) of the definition. 98. A supply by sale or lease of real property consisting of part of a building cannot be characterised by reference to another supply. For example, a hotel may be strata titled so that each hotel room and the commercial infrastructure are separate strata units. Where the strata units are individually supplied under multiple sale contracts or leases, each individual supply of a strata unit must be characterised without reference to other supplies of strata units. A supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to at paragraph 95 of this Ruling is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises. This characterisation does not change where an entity makes multiple supplies of strata units by sale or lease to another entity that together constitute a hotel or other commercial residential premises. Therefore, your apartment is not commercial residential premises in its own right, regardless of whether the complex as a whole is a hotel or similar premises, because the apartment does not include commercial infrastructure. Additionally, even if the complex as a whole is commercial residential premises, you do not own or control the complex as a whole, so the second exclusion in paragraph 40-35(1)(a) of the GST Act will not apply to your supplies of accommodation in your apartment. Also, you will not enter into *long-term leases. Therefore, your supplies of accommodation in the apartment will be input taxed supplies under subsection 40-35(1) of the GST Act. You purchased the apartment to make these input taxed supplies. Hence, you did not purchase the apartment for a creditable purpose. Therefore, the requirement of paragraph 11-5(a) of the GST Act is not met. 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 the indirect tax zone; 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. The indirect zone is Australia. The requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are met. That is, • the sale of the apartment was a supply for consideration • the sale was made in the course of furtherance of the vendor's enterprise of holiday rental • the sale is connected with Australia (as the property is located in Australia), and • the vendor was registered for GST at the time of settlement. Therefore, what remains to be determined is whether the sale is GST-free or input taxed. | Detailed Reasoning - GST-free supplies of going concerns: A supply of a going concern is GST-free if the requirements of section 38-325 of the GST Act are met. Subsection 38-325(2) of the GST Act states: A supply of a going concern is a supply under an arrangement under which: (a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier). Subsection 38-325(1) of the GST Act states: The *supply of a going concern is GST-free if: (a) the supply is for *consideration; and (b) the *recipient is *registered or *required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. Paragraphs 149 to 151 of Goods and Services Tax Ruling GSTR 2002/5 discuss the concept of continued operation of an enterprise. They state: Continued operation 149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise. 150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating. 151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. The vendor in your case rented out the apartment. Therefore, they operated a rental enterprise. The vendor sold the apartment to you. The vendor did not transfer any lease to you. However, the vendor was actively marketing the property for rental up to the time of settlement. Therefore, we consider that the vendor supplied to you all of the things necessary for the continued operation of a rental enterprise by selling the apartment to you. The vendor carried on their rental enterprise in the time leading up to sale as the vendor continued to actively market the property for rental. Therefore, the vendor supplied a going concern to you. The sale was made for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met. The vendor and purchaser agreed in writing that the sale of the property was the supply of a going concern. Therefore, the requirement of paragraph 38-325(1)(c) of the GST Act is met. We consider that in order for the requirement of paragraph 38-325(1)(b) of the GST Act to be met, the purchaser must be registered or required to be registered for GST when they purchase the property. You were not registered or required to be registered for GST on settlement date. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is not met. As not all of the requirements of section 38-325 of the GST Act are met, the sale of the apartment to you is not a GST-free supply of a going concern under that provision. | Detailed Reasoning - Input taxed sales of residential premises: A sale of residential premises is input taxed if the requirements of section 40-65 of the GST Act are met. Subsection 40-65(1) of the GST Act states: 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). Subsection 40-65(2) of the GST Act states: However, 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 the occupation) before 2 December 1998. Section 40-75 of the GST Act defines new residential premises. Subsection 40-75(1) of the GST Act states: *Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than *commercial 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. Subsection 40-75(2) of the GST Act states: However, the *residential premises are not new residential premises if, for the period of at least 5 years since: (a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or (b) if paragraph (1)(b) applies - the premises were last *substantially renovated; or (c) if paragraph (1)(c) applies - the premises were last built; the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a). Paragraph 80 of Goods and Services Tax Ruling GSTR 2003/3 discusses substantial renovations. It states: Renovation work by previous owners 80. Only renovations by the current owner which are reflected in the building at the time of sale are considered in determining whether new residential premises have been created through substantial renovations. Renovations undertaken by previous owners are disregarded in determining whether new residential premises have been created through substantial renovations by the current owner The sale of the apartment to you was a sale of residential premises to be used predominantly for residential accommodation. As the sale of the apartment to you was not the first sale of the apartment and the vendor did not substantially renovate the apartment, the sale of the apartment to you was not a sale of new residential premises. As the vendor supplied to you an apartment only, we do not consider that it sold commercial residential premises to you, regardless of whether the complex as a whole is commercial residential premises. Therefore, the sale of the apartment to you was input taxed under section 40-65 of the GST Act. Hence, the sale of the apartment to you was not a taxable supply. Therefore, the requirement of paragraph 11-5(b) of the GST Act is not met. Consideration You provided consideration for the sale of the property. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act. GST registration You were not registered or required to be registered for GST when you purchased the apartment. Therefore, you do not meet the requirement of paragraph 11-5(d) of the GST Act. Conclusion You did not acquire the apartment for a creditable purpose. The sale of the apartment to you was not a taxable supply for GST purposes. You were not registered or required to be registered for GST when you purchased the apartment. As you have not met all of the requirements of section 11-5 of the GST Act, you are not entitled to an input tax credit on your purchase of the apartment.