Private ruling: GST and substantial renovations
Date of advice: 29 November 2022
Published: 23 January 2023
Ruling period: 1 July 20YY to 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: In accordance with paragraph 40-75(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), will new residential premises be created through substantial renovations of buildings located at XXXX? | A1: No.

Relevant facts and circumstances: Entity A (You) are carrying on an enterprise of student residences operation (except boarding schools). You have been registered for GST since DD MM YYYY. On DD MM YYYY you purchased the property located in the indirect tax zone, known as Lot X on X (the Property) as part of a GST-free supply of a going concern. The Property is currently configured as student accommodation. The Property was built as purpose-built student accommodation with construction completed in MM YYYY. You did not acquire the Property from the original developer; you acquired it as a subsequent sale. At the time of this private ruling application, you cannot confirm if the Property has or has not previously been sold as residential premises (other than commercial residential premises) or if the Property has or has not previously been the subject of a long term lease. Since acquiring the Property you have operated and managed the student accommodation. The Property consists of four multi-level buildings that contain student accommodation units and communal kitchen and laundry facilities. The Property also has a single level student services centre and managers unit. The student services centre contains a commercial kitchen, dining hall, games room, function room and toilets. Students residing at the Property are provided with daily meals at communal tables in the dining hall. The Stage 1 buildings currently consist of: • One multi-level building with X three-bedroom and X four-bedroom student dormitories. • One multi-level building with X three-bedroom and X four-bedroom student dormitories. The Stage 2 buildings currently consist of: • One multi-level building with X three-bedroom and X four-bedroom student dormitories. • One multi-level building with X three-bedroom and X four-bedroom student dormitories. Units on upper levels can be accessed via external staircases. Each unit contains single occupancy bedrooms, a shared living room and a bathroom/toilet. Each unit also contains a basic kitchenette that includes a kettle, a fridge/freezer and a microwave. The kitchenette does not contain a sink or a stove and cooking meals is not permitted in the units. The units do not have a laundry within them and do not have a courtyard or a balcony. Each X-level building contains a 'do-it-yourself' kitchen located on the ground floor for students to use to prepare their own meals if they choose to. The 'do-it-yourself' kitchens contain ovens with stoves, a microwave, a dishwasher and a sink. Each X-level building contains at least one communal laundry room located on the ground floor for students to use. The laundries contain coin operated commercial washing machines and dryers. On DD MM YYYY, a Development Application (DA) was lodged with the Council to change the use of the Property from student accommodation to multi-unit housing. Development approval was granted on DD MM YYYY. The proposed redevelopment will be undertaken in 3 stages: • Stage 1 - renovation of the 2 buildings into: o One multi-level building with X two-bedroom and X three-bedroom residential apartments o One multi-level building with X two-bedroom and X three-bedroom residential apartments • Stage 2 - renovation of the 2 buildings into: o One multi-level building with X two-bedroom and X three-bedroom residential apartments o One multi-level building with X two-bedroom and X three-bedroom residential apartments • Stage 3 - the format for future redevelopment of the existing Student services centre is yet to be determined. The proposed Stage 3 redevelopment is not the subject of this private ruling. On completion the units will be sold as separate strata titled apartments (the Apartments). The estimated cost of renovations is $X (excluding GST) per (new) apartment. The Apartments will be marketed for sale at prices between $X to $X each. The following images are floorplans included in the Redevelopment Plans. • Image 1: Illustrates the existing three-bedroom student accommodation unit configuration • Image 2: Illustrates the redeveloped two-bedroom apartment configuration The works to be undertaken include: 1. Works to the existing multi-level buildings Demolition / Removals • remove the existing fixtures and fittings in the communal laundry rooms and 'do-it-yourself' kitchens on the ground floor. These areas will be fitted out as store rooms, including bicycle storage. In each accommodation unit: • demolish the internal wall of existing bedroom 3. This is a non-load bearing blockwork dividing wall with a doorway. Replacements In each accommodation unit: • replace all existing gyprock ceilings • demolish and replace the existing bathroom with the installation of a new shower, toilet, vanity unit, mirror, new tiles on walls and floor and new interior plumbing • replace floor coverings in the living/kitchen areas (timber flooring) and bedrooms (carpet) • replace wiring to all lights and power points • replace existing air conditioning units • convert the sliding window of existing bedroom 3 into a sliding door to provide access to a newly constructed balcony or courtyard. The wall to be modified is a load bearing wall. A steel beam will be installed to act as a lintel over the wider opening in the wall. External works: • wet fire sprinkler systems and exit lights will be replaced. Additions In each accommodation unit: • build a new kitchen including installation of plumbing and wiring • build a new laundry including tiling, fit-out, new plumbing and wiring • installation of built-in robes to remaining bedrooms • air conditioning units will be added to all units where no existing unit exists, ensuring all apartments are fully air conditioned • addition of a private courtyard (for ground floor apartments) or balcony (for apartments on upper levels), ranging in size from Xm² to Xm². o courtyards (for ground floor apartments) will be paved and landscaped with a timber fence, gate and new automatic irrigation. A structural slab will be constructed at each ground floor apartment that will be tiled to create a private terrace. o balconies will be tiled and fitted with new balustrading, lighting, fans and glass handrails. The new terraces are (tiled) structural concrete slabs at upper levels. A roof extension will be constructed to cover the top floor balconies. • new services will be run to each apartment including gas, water, power, and internet. Improvements In each accommodation unit: • all existing concrete block internal walls will be coated with gyprock. External works: • all exterior walls and elements will be painted. 2. Other works (including curtilage) • exterior lighting, landscaping and rubbish collection access will be installed to satisfy Council requirements • all Apartments will have a covered car space and a secure store. These will be newly created with a reinforced concrete drive and slab and a steel structure with paint finish. o X existing uncovered carparks will be redeveloped into X visitor carparks, X covered carparks and storerooms o the existing covered student walkways will be redeveloped into X covered carparks with secure storage • a new swimming pool with a surrounding sun terrace, pool fencing and equipment will replace the existing communal clothes drying area • all exterior common property will be landscaped with new automatic irrigation • the perimeter of the Property will be secured with new fencing and automatic gates; a sliding gate will be installed to secure car parking • new signage and pedestrian gates will be installed • a new main gas tank will be installed with required safety barriers on concrete support pads. All other floors, roofs, walls (external and interior, supporting and non-supporting), foundations, staircases, doors and windows will remain untouched.

Relevant legislative provisions: 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 section 195-1

Reasons for decision: Summary: Subsection 40-65(1) provides that a sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) provides that the sale of real property 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. Section 40-75 defines the term 'new residential premises' and includes residential premises that have been created through substantial renovations of a building (paragraph 40-75(1)(b)). The term 'substantial renovations' 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 replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) discusses the circumstances in which residential premises are new residential premises created through substantial renovations. Paragraphs 42 to 43 of GSTR 2003/3 contain guidance on the subdivision of apartments into strata title units. 42. A building may comprise flats or units for which no separate title exists. Title refers to the registered ownership of the relevant land and improvements as a whole. The owner of the apartments may decide to obtain permission for a strata title subdivision so that each flat or unit can be sold separately. Approval for the subdivision may be subject to building works being undertaken. For example, approval may be conditional on the construction of a firewall or modifications to the entrance and exit of the building. 43. The process of strata titling an apartment block does not, by itself, create new residential premises under paragraph 40-75(1)(a). When the newly strata titled units are subsequently sold, the supplies of those units are not sales of new residential premises, if the land and the building together have previously been sold as residential premises, or been the subject of a long-term lease. Physically, the combination of land and the building as residential premises remains basically the same. It is only the nature of the legal interest which has changed. If the process of strata titling is accompanied by works on the building, it is then a question of whether the works constitute substantial renovations (see discussion at paragraphs 53 to 83). Paragraphs 56 to 59 of GSTR 2003/3 consider the term 'substantial renovations' as defined in section 195-1 and contain guidance on new residential premises created through substantial renovations: 55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner. 56. 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. 57. 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. 58. 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. 59. 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. The criteria for substantial renovations is discussed at paragraphs 60 to 62 of GST 2003/3: 60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances. 61. 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. 62. 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: Paragraphs 64 to 67 of GSTR 2003/3 discuss the concept of a building in its entirety, works on surrounding land (for example, curtilage) and additions to the building. Building in its entirety 64. 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 66. 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 67. 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 - The renovations need to result in the 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. 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. GSTR 2003/3 identifies structural work to include: • 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). 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. This view is expressed in paragraph 73 of GSTR 2003/3. GSTR 2003/3 identifies non-structural building work to include: • 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. Renovation work that does not impact on the structure of the building and is in the nature of reviewing or refreshing what is already there is considered to be cosmetic work. 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. While cosmetic work is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'. 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: For the purposes of the GST Act, renovations are 'substantial renovations' of a building if they are renovations in which all, or substantially all, of a building is removed or replaced. This requires consideration of: • what constitutes the 'building' • how much of the 'building' is to be 'removed' or 'replaced' • whether the extent to which the building, or parts of it, that will be 'removed' or 'replaced' amounts to 'all' or 'substantially all' of the building. Only renovation works carried out by the current owner are considered. The current owner in this case is Entity A. | Detailed Reasoning - What constitutes the 'building'?: As stated above, the definition of substantial renovations requires consideration of what work has been done to the building since it was acquired by the current owner. This necessitates that we examine the building in its entirety, that is the building as a whole, as it existed before the renovation works commenced. We note that the strata plan will be registered once the renovation works have been completed. The process of strata titling the units affects the nature of the legal interest only and is inconsequential in defining the building and in considering whether the works constitute substantial renovations. We therefore consider the buildings that are being renovated are the multi-level buildings, each in their entirety (4 buildings in total). This includes the multi-level buildings that contain the student dormitories, the communal laundry rooms and 'do-it-yourself' kitchens. Each building is inclusive of all structural and non-structural components including external walls, internal walls, floors, windows, doors, roof, staircases and internal and external fixtures. | Detailed Reasoning - How much of the building will be 'removed' or 'replaced'?: We must now consider how much of the buildings will be removed or replaced. | Detailed Reasoning - Removals/Replacements: With respect to the buildings in their entirety, we consider the following works will constitute a 'removal' or a 'replacement': • the existing fixtures and fittings in the communal laundry rooms and 'do-it-yourself' kitchens on the ground floor will be removed - (non-structural work) In each accommodation unit: • one existing sliding window will be replaced with a sliding door to provide access to a newly constructed balcony or courtyard. This involves modifying a load bearing wall - (structural work) • one non-load bearing internal wall will be removed to convert an existing bedroom into a kitchen and dining area - (non-structural work) • the existing bathroom will be demolished and fitted out with a new shower, toilet, vanity unit, mirror, new tiles on walls and floor and new interior plumbing. We consider the bathroom will be replaced - (non-structural work) • all existing gyprock ceilings will be replaced - (non-structural work) • all wiring for lights and power points will be replaced - (non-structural work) • existing air conditioning units will be replaced - (non-structural work) • floor coverings in living/kitchen area and bedrooms will be replaced - (cosmetic work) | Detailed Reasoning - Improvements: We consider the following works are improvements, as opposed to removals or replacements: • all exterior buildings and elements will be painted - (cosmetic work) • all existing concrete block internal walls will be coated with gyprock - (non-structural work) | Detailed Reasoning - Additions: As stated above, additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. Although these works involve an activity of 'renovation', the installation or addition of these features constitutes neither 'removal' or 'replacement' of any part of the building, as required to meet the criteria for substantial renovations. We consider the following works are additions: • installation of a kitchen and dining area, including new plumbing and wiring • installation of a laundry, including tiling, fit-out, new plumbing and wiring • installation of built-in robes to remaining bedrooms • the addition of a courtyard for ground floor apartments or a private balcony for apartments on upper levels • adding air conditioning units to student accommodation units (where not currently air conditioned) • new exit lights will be installed • new wet fire systems will be installed | Detailed Reasoning - Curtilage: Works associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not classified as renovations of a building. In your case, this includes: • installation of newly created covered car spaces and secure stores • installation of a swimming pool • installation of new fencing and gates • all landscaping, including new automatic irrigation • installation of signage and pedestrian gates • installation of exterior lighting and rubbish collection access. | Detailed Reasoning - Remainder of the building: In considering the buildings in their entirety and with reference to the floorplans in the Redevelopment Plans, the following parts of the building will be left intact and will be neither removed nor replaced (some parts will be refurbished): • all other walls (exterior/interior supporting/non-supporting walls and common walls dividing the apartments) • foundations • the floors • the roof • the staircases • the other openings (windows and doors). | Detailed Reasoning - Will all, or substantially all, of the building be removed or replaced?: To satisfy the criteria for substantial renovations, the renovations need to affect the building as a whole and the renovations need to result in the removal or replacement of all or substantially all of the building. Based on the facts in this case, with respect to the each of the four multi-level buildings, the structure of the buildings will not be substantially affected by the works. In each unit, one supporting wall will be modified to increase the size of an existing opening. The balance of the works are considered to be non-structural and cosmetic in nature. In considering the buildings in their entirety and the works to be completed, the renovation works will neither result in the removal or replacement of all of the building, nor will they result in the removal or replacement of substantially all of the building. Consequently, the proposed works will not constitute substantial renovations as defined in section 195-1. Therefore, paragraph 40-75(1)(b) will not be satisfied.