Private ruling: GST and the sale of property
Date of advice: 23 December 2015
Published: March 2016

Ruling: Q1: Is the supply of the property by you subject to goods and services tax (GST)? | A1: No. The supply of the property is not a taxable supply under the section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sale of the property is an input taxed supply under subsection 40-65(1) of the GST Act and not subject to GST.


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 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 129

Reasons for decision: Summary: You are liable for GST on any taxable supply that you make. A supply is a taxable supply under section 9-5 of the GST Act if: (a) you make the supply for consideration; (b) the supply is made in the course of an enterprise that you carry on; (c) the supply is connected with the indirect tax zone (Australia), and (d) 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. Input taxed supplies include a supply for residential rent and a sale of residential premises under sections 40-35 and 40-65 of the GST Act, respectively. Based on the information provided your sale of the property satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as below: a) you make the supply for consideration; and b) the supply is made in the course of the property business that you carry on; and c) the supply is connected with Australia as the house is located in Australia; and d) you are registered for GST. However your supply was not a taxable supply to the extent that it was GST-free or input taxed. Input taxed supply Under subsection 40-65(1) of the GST Act, 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). However, under subsection 40-65(2) of the GST Act, 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 occupation) before 2 December 1998. From the facts given, subsection 40-65(2) of the GST Act is not applicable to you since the house is not a commercial residential premise. We need to determine whether your supply of property is 'new residential premises'. New residential premises' Section 40-75 of the GST Act defines the term 'new residential premises' and includes residential premises that have been created through substantial renovation of a building (paragraph 40-75(1)(b) of the GST Act). The term 'substantial renovations' is defined in section 195-1 of the GST Act as: substantial renovations of a building are renovations in which all, or substantially all, of a building is removed, replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. The definition of 'substantial renovations' requires consideration of what work has been done to the building since it was acquired by the current owner. Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when substantial renovations apply in practice. Paragraph 61 of GSTR 2003/3 provides that, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria: i. The renovations need to affect the building as a whole. ii. The renovations need to result in the removal or replacement of all or substantially all of the building. Renovations need to affect the building as a whole. Paragraphs 63, 64 and 66 of GSTR 2003/3 state: 63. Under this heading we 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. 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. From the facts given, the entire house has been affected by the renovations. This condition has been satisfied. Further the works done outside the house were not directly attributable to the house itself and therefore were not renovations of the house. 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. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced to be substantial. 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. Paragraphs 70, 74 and 77 of GSTR 2003/3 state: 70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as: • 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). 74. Non-structural building work includes: • 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 (e.g 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 system. 77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. 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. Cosmetic work may be undertaken to obtain a better price when selling a property (sometime referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as substantial renovations. Paragraphs 109 and 110 of GSTR 2003/3 provide an example of non-substantial renovations where the renovations are largely cosmetic: 109. Bob, a property speculator is registered for GST. He acquires Tangalooma, a historic federation style residence, in July 2000. Bob does not live in the house and immediately patches some of the walls in a few of the bedrooms with gyprock cement, repaints the whole house, inside and out, and replaces the kitchen. 110. Although Bob has made changes to all the rooms the work done is largely cosmetic in nature. We do not consider that Bob has substantially renovated Tangalooma. The sale of the property will be an input taxed supply. Whether or not a person resides in the premises does not alter the analysis. Further paragraph 118 of GSTR 2003/3 states: 118. Where the restoration work affects most of the rooms in the house, but is largely cosmetic in nature (for example, replastering and repainting) and only the kitchen and bathroom are replaced, we consider there have not been substantial renovations. Based on the facts provided, the structure of the house has not been affected by the renovations. The major part of the renovations involves the replacement of the kitchen and bathroom which are considered to be non-structural work. The balance of the renovations is cosmetic in nature. The extent of renovations done in the house has more in common with paragraphs 109,110 and 118 of GSTR 2003/3, which leads to the conclusion that the house has not been substantially renovated. Accordingly, the renovations to the house were not substantial renovations of a building despite the fact the entire house was affected by the renovations. The renovated house on the property is therefore not new residential premises under paragraph 40-75(1)(b) of the GST Act. Summary Accordingly, the sale of the property would be input taxed under subsection 40-65(1) of the GST Act since the house is residential premises to be predominantly used for residential accommodation. Summary The sale of the property including the renovated house is not a taxable supply for GST purposes. Your sale of the property will be an input taxed supply under subsection 40-65(1) of the GST Act. | Detailed Reasoning - Additional information: Changes in the extent of creditable purpose Division 129 of the GST Act deals with the scenario that after an acquisition is made, the extent to which it is actually applied or used for a creditable purpose may be different from the planned use. Adjustments for such changes in the extent of creditable purpose are subject to the provisions of Division 129 of the GST Act . However, an adjustment does not arise under Division 129 of the GST Act for an acquisition (that does not relate to business finance) unless the acquisition had a GST-exclusive value of more than $1,000. Goods and Services Tax Ruling GSTR 2000/24 Division 129 - making adjustments for changes in extent of creditable purpose explains the Taxation Office view on adjustment periods. This ruling is available at our website www.ato.gov.au Time limits on unpaid net amounts Section 105-55 of Schedule 1 to the Tax Administration Act 1953 (TAA) states that any unpaid amount of indirect tax, together with any relevant general interest charge under section 105-80 of Schedule 1 to the TAA, ceases to be payable four years after it became payable by an entity unless the Commissioner has required payment of the amount by giving you a notice, or the Commissioner is satisfied that the payment of the amount was avoided by fraud or evasion.

Relevant facts: You are an Australian entity and registered for GST as a partnership. | You purchased a property in XXXX. The property is a residential house on XX acres of land. | The vendor of the property was not registered for GST and therefore, no GST was included in the price on your purchase . | The intention at the time of the purchase of the property was to renovate the house and subdivide the vacant land for sale. | You have claimed legal fees incurred in relation to acquisition of the property. In your income tax return, you also claimed bank interest on the finance obtained to purchase the property. | You have partially renovated the entire house on the property. You added a new garage, renovated kitchen, laundry and bathrooms. You also added a new bathroom to the house and replaced some windows and doors. No air conditioning or security system was added. | You did not replace any interior or exterior supporting walls. No foundations were altered or replaced. No existing roof has been lifted or modified. Some windows and doors of the house were replaced. | The work was carried out by you over the period of ownership. You have not claimed any renovation costs in your income tax return. Approximately X% of the house has been subject to renovation. However, only Y% renovation is only completed. | You have claimed GST in your activity statements for the above costs of renovations. | You did not claim any tax deductions in your income tax returns in relation to the sub-division of the property. | Preliminary plans to subdivide the land in X0 lots had been drawn and soil tests were undertaken. | The house on the property was vacant for X to X years of your ownership for renovations. For last X years, one of the partners has occupied the house as their primary residence after the marriage break down. | There has been no income derived from the property. | Due to personal reasons and soil contamination issues, you have decided to sell the property. | Estimated sale price is approximately $X00, 000 to $XX0, 000. | You as a partnership receive rental income from other commercial properties and vacant land.