Private ruling: GST and residential premises
Published: February 2015

Ruling: Q1: Are the supplies that you make to your shareholders input taxed, with the consequence that you are not liable for GST on these supplies? | A1: Yes, the supplies that you make to your shareholders, being the right to use and occupy the home units, are input taxed and as such, you are not liable for GST on these supplies. However, you will be liable for GST on your supplies of administrative type services where you are registered or required to be registered for GST. | Q2: Are you entitled to a refund of the GST overpaid for the relevant tax periods? | A2: You are only entitled to a refund of overpaid or excess GST for the relevant tax periods when you have reimbursed the shareholders who are entitled to that reimbursement. | Q3: Would the reimbursement requirements be satisfied if the refund payable to the shareholders was paid by a set-off against the amounts payable by the shareholders to you? | A3: The reimbursement requirements will only be satisfied where the reimbursement by way of a set-off has been made pursuant to an agreement between you and the shareholders, the set-off is against a pre-existing liability and the amount of the set-off for each shareholder corresponds to the overpaid or excess GST that was incurred by that shareholder. | Q4: Can you cancel your GST registration as at a specified date? | A4: Yes, you can cancel your GST registration as at a specified date.

Relevant facts and circumstances: You are a company limited by shares. You have been registered for GST since 1 July 2000 and you report GST on a quarterly basis. The objects for which you were established and your primary aims are listed in your Constitution. You are the owner of land and a building that is in a typical 'company title' arrangement. The building comprises a number of home units, car spaces, etc. To date, you have been collecting GST on all amounts invoiced to the shareholders in accordance with the Constitution and claiming input tax credits as you were under the impression that the supplies you were making to the shareholders were taxable supplies. However, you now believe that these supplies are input taxed and as such, not subject to GST. As yet you have not reimbursed any overpaid GST to the shareholders. However, instead of reimbursing the overpaid GST directly to the current shareholders, you are considering off-setting it against the amounts that they owe to you. To support your view that this set-off will satisfy the requirements of section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA), you have referred to Dixon J in the Federal Commissioner of Taxation v Steeves Agnew & Co (Victoria) Pty Ltd (1951) 82 CLR 408, who said: If cross-liabilities in sums certain of equal amounts immediately payable are mutually extinguished by an agreed set-off, that amounts to payment for most common-law and statutory purposes. "Nothing is clearer than that if parties account with each other, and sums are stated to be due on one side, and sums to an equal amount due on the other side on that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A. to B., and then handing it back again by B. to A., if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing money backwards and forwards" (per Mellish L.J., Spargo's Case (1873) LR 8 Ch 407, at p 414 ): see Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. Ltd. (1929) 43 CLR 247 , at pp 263, 270, 271 ; Joseph v. Campbell (1933) 50 CLR 317 , at p 323. As yet, you have not made a decision about reimbursing any former shareholders. As far as you are aware, all of the shareholders would not be registered or required to be registered for GST in relation to their occupation of the home units. You have supplied a completed 'Application to cancel registration' form requesting that your GST registration be cancelled as at a specified date. This form indicates that your GST turnover is under $75,000.


Reasons for decision: Summary: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make. Under section 9-5 of the GST Act, you make a taxable supply if: • you make the supply for consideration • the supply is made in the course or furtherance of an enterprise that you carry on • the supply is connected with Australia, and • you are registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The first requirement to be satisfied is that there is a supply for consideration. Under subsection 9-10(1) of the GST Act a supply is any form of supply whatsoever and includes: • a grant, assignment or surrender of real property, and • a creation, grant, transfer, assignment or surrender of any right. The term 'real property' is defined in section 195-1 of the GST Act to include: • any interest in or right over land • a personal right to call for or be granted any interest in or right over land, or • a licence to occupy land or any other contractual right exercisable over or in relation to land. It is considered that the payments received from the invoices are payments made in connection with the supply of the right to use and occupy a home unit. Therefore, for the purposes of section 9-5 of the GST Act, you are making a supply for consideration. It is also considered that the other requirements of section 9-5 of the GST Act are met and therefore, your supply of the right to use and occupy a home unit will be subject to GST unless your supply is GST-free or input taxed. There is nothing in the GST Act to make your supply GST-free. However, your supply will be input taxed if the supply is a supply of residential premises by way of lease, hire or licence under section 40-35 of the GST Act. The term 'residential premises' is defined in section 195-1 of the GST Act to mean 'land or a building' that: • is occupied as a residence, or • is intended to be occupied and is capable of being occupied, as a residence. The home units are residential premises for the purposes of section 195-1 of the GST Act. To satisfy section 40-35 of the GST Act, the supply of residential premises must be by way of lease, hire or licence. In this case, the building is held under a 'company title' arrangement which is governed by your Constitution. As outlined in paragraph 44 of Goods and Services Tax Ruling GSTR 2003/3, the term 'company title' means: A type of title for multi-occupancy buildings (usually home units), common before the introduction of strata title. Under company title, a company owns the building, and the company's shares are divided into a number of blocks or classes, each block or class entitling the owner of the shares to exclusive occupation of a particular part of the building. This right of exclusive occupation is not a proprietary interest in the freehold, but is rather a contractual right against the company or sometimes a right to be granted a lease. While there may be no formal lease between you and the shareholders, it is considered that your supply of shares which entitles the holder to a right to use and occupy home units is in the nature of a licence granted by you to the shareholders. The word 'licence' is defined in part in Osborn's Concise Law Dictionary (ninth edition) as: … an authority to do something which would otherwise be inoperative, wrongful or illegal, eg to enter on land which would otherwise be a trespass. A licence to occupy land passes no interest in the land, in contrast with a lease. Therefore, by allowing your shareholders to use and occupy home units, you are making a supply of residential premises by way of a licence for the purposes of section 40-35 of the GST Act. As such, the supply of the right to use and occupy the home units is an input taxed supply. Under Division 40 of the GST Act, an input taxed supply is not subject to GST and you are also not entitled to an input tax credit for anything acquired or imported to make that supply. Consequently, you are not liable for GST on the charges levied on shareholders. However, it is considered that the specific administrative type services you occasionally supply, which are separate to your other supplies, are not input taxed and therefore, you will be liable for GST on these supplies where you are registered or required to be registered for GST. As determined above, you are not liable for GST on the supplies that you make to your shareholders which are input taxed. However, you remitted GST to the ATO in relation to these supplies because, at the time, you were under the impression that all of your supplies were taxable supplies. You are now requesting a refund of the GST you remitted in error for the periods. In relation to a refund of GST remitted to the ATO there are now two provisions that need to be considered. Division 142 of the GST Act, which was recently introduced, now applies to tax periods starting on or after 31 May 2014. For quarterly taxpayers this means tax periods starting on 1 July 2014. For tax periods starting before 31 May 2014, section 105-65 of Schedule 1 to the TAA will still apply. In this case, Division 142 of the GST Act will apply to your claim for a refund of excess GST for the periods after 1 July 2014 while section 105-65 of Schedule 1 to the TAA will apply to your claim for a refund of overpaid GST for the period before 30 June 2014. Under Division 142 of the GST Act, an entity can self-assess its entitlement to a refund of excess GST by reference to objective conditions, rather than having to rely on the Commissioner to exercise his discretion under section 105-65 of Schedule 1 to the TAA. In relation to refunding the excess GST, section 142-10 of the GST Act provides that the excess GST that has been passed on to a recipient is taken to have always been payable and payable on a taxable supply, until the recipient has been reimbursed for the passed-on GST. This means that there is no entitlement to a refund of excess GST that has been passed on to the recipient until the recipient has been reimbursed. In this case, we consider that the excess GST has been passed on to your shareholders because the excess GST has been included on the tax invoices issued to them in accordance with your Constitution. However, you have not yet reimbursed any excess GST amounts to the shareholders but you are intending to do so, at least in relation to the current shareholders. Therefore, you will only be entitled to a refund of excess GST when you have reimbursed the shareholders for the passed-on GST. In relation to your claim for a refund of overpaid GST for the periods before 30 June 2014, subsection 105-65(1) of Schedule 1 to the TAA provides that where a supply was treated as a taxable supply to any extent and the supply is not a taxable supply to that extent, the Commissioner is not obliged to refund the overpaid amount unless: • the Commissioner is satisfied that the supplier has reimbursed the GST overpaid to the recipient of the supply, and • the recipient is not registered or required to be registered for GST. Where these conditions are not satisfied, the Commissioner is not obliged to refund, but does have a discretion to do so. In this case, you have not yet reimbursed any overpaid GST to the shareholders but you are intending to do so, at least in relation to the current shareholders. You have also advised that, as far as you are aware, the recipients, being the shareholders, are not registered or required to be registered for GST in relation to their use and occupation of the home units. Therefore, based on the information provided, you are only entitled to a refund of overpaid or excess GST for the quarterly tax periods when you have reimbursed the shareholders who are entitled to that reimbursement. It should be noted that, under section 105-55 of Schedule 1 to the TAA, an entitlement to a refund of overpaid GST expires four years after the end of the tax period to which it relates, unless the Commissioner is notified before that time. We consider that your private ruling application is a notification of entitlement to a GST refund or credit for the purposes of section 105-55 of Schedule 1 to the TAA. As determined in Question 2, you are not entitled to a refund of overpaid or excess GST under either Division 142 of the GST Act or section 105-65 of Schedule 1 to the TAA until you have reimbursed the shareholders. The term 'reimburse' is not defined in the GST legislation and therefore, it takes on its ordinary meaning. The Macquarie Dictionary defines 'reimburse' as: • to make repayment to for expense or loss incurred, and • to pay back, refund, repay. At this stage, you have not repaid any amounts to the shareholders but instead of making a payment of money to the current shareholders for the overpaid or excess GST, you are considering off-setting it against the amounts that they owe you. The Commissioners view on the reimbursement of an amount of overpaid GST by a journal entry is set out in ATO ID 2013/56. Essentially, the Commissioner will not be satisfied that an amount of overpaid GST has been reimbursed to a recipient when a supplier merely makes a journal entry in its accounts, unless the journal entry offsets a pre-existing liability owed by the recipient to the supplier. This is because a journal entry in the supplier's accounts which acknowledges a debt owed to the recipient is, at best, a promise to pay. It does not mean that the supplier has actually repaid, paid back or refunded an overpaid amount of GST to the recipient. While the view in ATO ID 2013/56 specifically relates to section 105-65 of Schedule 1 to the TAA it is also relevant to Division 142 of the GST Act. In relation to the excess GST applicable to the period after 1 July 2014, you will only be entitled to a refund where the requirements in Division 142 of the GST Act have been satisfied. Draft Goods and Services Tax Ruling GSTR 2014/D4 explains the meaning of the term 'reimburse' for the purposes of Division 142 of the GST Act and discusses the circumstances in which the Commissioner considers an amount of excess GST, which has been passed on to another entity, has been reimbursed to that other entity. In relation to what constitutes reimbursement, paragraphs 69 to 71 of GSTR 2014/D4 state (emphasis added): 69. The Commissioner considers that, for the purposes of section 142-10, an amount of excess GST that has been passed on to the recipient is appropriately reimbursed when the recipient has been compensated an equivalent amount by the entity for the amount of excess GST passed on to the recipient . This reimbursement may be made voluntarily by the entity or in satisfaction of a contractual obligation. 70. Where the entity makes multiple supplies to many recipients and excess GST was passed on, all of the recipients must be compensated. The reimbursement to each recipient must be an equivalent amount to the passed-on excess GST they each paid. 71. For the purposes of section 142-10, an entity has reimbursed the recipient for the passed-on excess GST where: • the reimbursement takes the form of a payment of money, or the setting off of mutual liabilities; • the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved; • the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made , and is not merely planned to be made. Paragraph 70 of GSTR 2014/D4 indicates that where there are many recipients, all of the recipients must be compensated. However, paragraph 79 of GSTR 2014/D4 (and also Example 7) explains this view further and states (emphasis added): 79. Another situation where only part of the excess GST is reimbursed arises is when only some of the recipients are able to be identified, so that the excess GST can only be reimbursed to known recipients. Where this occurs, section 142-10 ceases to apply to that part of the excess GST which the entity was able to reimburse. The provision continues to apply the excess GST passed on but not reimbursed to the unidentified recipients. In relation to a reimbursement in a form other than a payment of money, paragraphs 155 and 156 of GSTR 2014/D4 state: 155. Reimbursement may not necessarily take the form of a payment of money. An entity may reimburse the recipient by offsetting the amount of passed-on excess GST against a liability that is presently payable by the recipient to the entity. 156. Reimbursement by set-off may be evidenced by way of a journal entry. However, the mere making of journal entries does not reflect reimbursement in the absence of an agreement to set-off between the parties. It is the agreement that is the legal basis for discharging the liabilities between the parties, not the journal entry. This means that to satisfy the requirements in section 142-10 of the GST Act any reimbursement by way of a set-off must be accompanied by an agreement. Plus, any reimbursement to a shareholder will need to correspond to the excess GST that was passed on to that shareholder. In other words, a current shareholder cannot be reimbursed excess GST that was actually incurred by another current shareholder or a former shareholder. In this case, section 142-10 of the GST Act will only cease to apply where the reimbursement by way of a set-off has been made pursuant to an agreement between you and the shareholders, the set-off is against a pre-existing liability and the amount of the set-off for each shareholder corresponds to the excess GST that was incurred by that shareholder. Where section 142-10 of the GST Act ceases to apply in respect of an amount of excess GST applicable to the tax periods from 1 July 2014, you will be entitled to claim a refund of that excess GST. Paragraph 18 of GSTR 2014/D4 provides that an adjustment event arises when an entity reimburses the recipient and therefore, the entity has a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to its recipient. Where the requirements of section 142-10 of the GST Act cannot be satisfied, you can request that the Commissioner exercise his discretion under section 142-15 of the GST Act to treat section 142-10 of the GST Act as not applying. In relation to the overpaid GST applicable to the period before 30 June 2014 any reimbursement will need to satisfy the requirements in section 105-65 of Schedule 1 to the TAA. You consider that the proposed set-off will satisfy the reimbursement requirements of section 105-65 of Schedule 1 to the TAA and you have referred to Dixon J in the Federal Commissioner of Taxation v Steeves Agnew & Co (Victoria) Pty Ltd (1951) 82 CLR 408 to support your view. Miscellaneous Taxation Ruling MT 2010/1 sets out the Commissioner's views in relation to restrictions on GST refunds under section 105-65 of Schedule 1 to the TAA. In particular, paragraph 18 of MT 2010/1 states: The term 'reimburse' encompasses not only an actual monetary payment but also crediting of the recipient's account such that it reduces the debt owed or offsetting the credit against liabilities. Also, of relevance to this case are the following paragraphs: 115. However if the supplier satisfies the Commissioner that it has reimbursed the recipient of the supply and the recipient of the supply is not registered or required to be registered the Commissioner has a prima facie obligation to pay the refund of overpaid GST under section 8AAZLF provided the supplier satisfies any other legislative conditions (for instance, the time limits contained in section 105-55). In all other cases section 105-65 provides that the Commissioner 'need not' give a refund. 115A. In cases where the recipient is not registered or required to be registered, taxpayers can consider (that is self-assess) that the Commissioner will be satisfied that the recipient has been appropriately reimbursed (and that therefore section 105-65 will not apply) where: • the recipient can be specifically identified; • the amount of the reimbursement corresponds exactly to the amount of the GST overcharged to the recipient and the method of reimbursement ensures this is achieved; • the reimbursement is in money, or if made through a journal entry, to the extent that the journal entry offsets the recipient's pre-existing liability to the taxpayer; and • the reimbursement or journal entry has actually been made, and is not merely planned to be made. Even though there is no mention in MT 2010/1 of the need for an agreement in relation to a reimbursement by way of a set-off we consider that to satisfy the requirements in section 105-65 of Schedule 1 to the TAA any set-off needs to be done pursuant to an agreement. In addition, as outlined in ATO ID 2013/56, a reimbursement by a journal entry will only satisfy the requirements in section 105-65 of Schedule 1 to the TAA where the journal entry offsets a pre-existing liability owed by the recipient to the supplier. You have advised that the proposed set-off will be against the amounts that the current shareholders owe to you. A set-off against a pre-existing liability will satisfy the requirements of section 105-65 of Schedule 1 to the TAA. Therefore, based on the information provided, you will be entitled to a refund of overpaid GST where the reimbursement by way of a set-off has been made pursuant to an agreement between you and the shareholders, the set-off is against a pre-existing liability and the amount of the set-off for each shareholder corresponds to the overpaid GST that was incurred by that shareholder. You have advised that, at this stage, reimbursements will only be made to current shareholders. It is assumed that not all of the overpaid or excess GST remitted to the ATO during the period was paid by the current shareholders. This means that you will not be entitled to a refund of overpaid or excess GST applicable to the former shareholders unless the former shareholders are reimbursed the overpaid or excess GST that relates to them. Also, it is expected that any reimbursement to a former shareholder would need to be a monetary payment as they would generally not have any pre-existing liability with you. In addition, you will need to keep an accurate and complete record of the reimbursement made to each shareholder and you will also need to cancel the original tax invoices and reissue new tax invoices to the affected shareholders. Please note, GSTR 2014/D4 is a draft for public comment. It represents the Commissioners preliminary view about the way the law applies. If the final ruling differs materially from the draft, the final ruling will prevail. This may affect the GST treatment of the issues in this advice. Therefore, we recommend that you monitor our website for the release of the final ruling and consider its effect on your treatment of the refund of the excess GST. Section 25-55 of the GST Act provides that the Commissioner must cancel your GST registration if: • you have applied in the approved form • at the time that you applied, you have been registered for GST for at least 12 months, and • the Commissioner is satisfied that you are not required to be registered for GST. In this case, you have applied in the approved form, being the Application to cancel registration form , and you have been registered for GST since 1 July 2000. In relation to the third requirement, section 23-5 of the GST provides that you are required to be registered for GST if: • you are carrying on an enterprise, and • your GST turnover meets the registration turnover threshold of $75,000. The term 'GST turnover' includes both current GST turnover and projected GST turnover. From the information provided, you are carrying on an enterprise but most of the supplies made by you in respect of this enterprise are input taxed supplies. According to sections 188-15 and 188-20 of the GST Act, input taxed supplies are not included in the calculation of either current GST turnover or projected GST turnover. Therefore, as your GST turnover is now under $75,000, you are not required to be registered for GST. As all of the requirements of section 25-55 of the GST Act are satisfied, the Commissioner must cancel your GST registration. Section 25-60 of the GST Act provides that the Commissioner must determine the date of effect of this cancellation. In your application form, you have requested that your GST registration be cancelled as at a specified date. This date is acceptable to the Commissioner. Therefore, you can cancel your GST registration. Your application form has been forwarded to the appropriate area for processing.