Private ruling: GST and sale of property
Date of advice: 7 January 2016
Published: March 2016

Ruling: Q1: Is the sale of your properties a taxable supply? | A1: No, the supply of the properties will be an input taxed supply of real property being residential premises to be used predominately for residential accommodation pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 .

Relevant facts and circumstances: You are registered for GST. You purchased adjoining properties located at a specified address approximately 30 years ago. The properties are on separate titles. The properties were pre 1900 era type premises. Prior to your purchase the premises were occupied as private residences. Following your acquisition of the properties you used the premises as your offices making alterations to facilitate this purpose. Alterations included removing sections of the common wall to allow access between the two properties. Doors were inserted in some sections with other sections removed remaining open. The following other alterations to the Property were carried out: • The flooring was raised in the kitchen to accommodate more easily as a servery to the boardroom • X phone points installed. • X power points and data points installed. • A server room installed. • Cable data wiring installed. • X phone lines and PABX system installed. • X fixed desk workstations (built in) installed. • Shower was built into ground floor toilet area. • All rooms have commercial fluorescent strip lighting. • Demountable office walling inserted into one of the floors creating more office usable space. • Library walling inserted. • One of the rooms has been fitted out as a mail processing room with, scales, extra data points. • A sealed car park was constructed with a courtyard/bike storage area. All above alterations were done prior to 2 December 1998. Following the alterations, the properties retained their overall character and appearance including bedrooms with original period fireplaces, lounge rooms, dining rooms, kitchens and bathrooms. You are in the process of selling the properties.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-40 | Section 9-5 | Section 40-65 | Section 40-75

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply if: • you make the supply for consideration; and • the supply is made in the course or furtherance of an enterprise that you carry on; and • the supply is connected with the Indirect Tax Zone (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 issue in this case is whether the supply of the properties is an input taxed supply. Section 40-65 provides that the sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent the premises are 'commercial residential premises' or 'new residential premises' (other than those used for residential accommodation before 2 December 1998). Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises. Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 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. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. In this case the properties will satisfy the definition of 'residential premises' as the premises provide shelter and basic living facilities. Examples 8 and 9 at paragraphs 41 to 45 of GSTR 2012/5 illustrate cases of alterations/modifications done to residential premises and whether those changes are sufficient to modify the physical characteristics of the premises. Whilst the examples illustrate the principle in respect to premises being partly converted for business use and whether apportionment is required, the concept is also applicable to cases where the entire premises have been subject to modifications. In this case, we consider that the alterations carried out shortly after the properties were acquired are not sufficient to modify the physical characteristics of the premises from that for which they were originally designed and built (i.e. residential premises used predominately for residential accommodation). The alterations, whilst facilitating the purpose for which you have used the premises, do not diminish the ability of the premises to be used for residential accommodation. The next step is to consider whether your supply falls within the exclusions in subsection 40-65(2) of being a supply of 'commercial residential premises' or 'new residential premises'. In this case, we do not consider the premises to satisfy the definition of 'commercial residential premises' for GST purposes. As such, we need to consider whether the premises are 'new residential premises'. The concept of when real property is new residential premises is discussed in 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). Paragraph 53 of GSTR 2003/3 provides that 'new residential premises' may be created through substantial renovations of a building. A sale of new residential premises may be a taxable supply if the requirements for the making of a taxable supply are satisfied. Where, however, the substantial renovations occurred before 2 December 1998 and the premises have been used for residential accommodation before that date, a sale of the premises is not a taxable supply. It is an input taxed supply. In this case, as the renovations were done prior to 2 December 1998 and the premises were used for residential accommodation before that date, the premises do not fall within the exclusion in paragraph 40-65(2)(b). As such, the sale of the properties will be an input taxed supply of residential premises pursuant to section 40-65.