Private ruling: GST and sale of property
Date of advice: 23 January 2019
Published: May 2019
Ruling period: 1 July 2018 – 30 June 2019
Date scheme commenced: 24 October 2015

Ruling: Q1: Will the sale of your properties situated at a specified location be input taxed supplies pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes

Relevant facts and circumstances: You are registered for GST. You carry on an enterprise of property development. You acquired property situated at a specified location (Property 1) on xx/xx/xxxx. At the time of acquisition, Property 1 contained a two bedroom residential house. You acquired an adjoining property (Property 2) on xx/xx/xxxx. At the time of acquisition, Property 2 contained two, two bedroom residential apartments. You acquired the Property 1 and Property 2 (collectively referred to as the ‘Properties’) with the intention of demolition and development. Your intention was to demolish the buildings, combine the titles and construct apartments for individual sale. You obtained planning permits, incurred architects and other development consultant fees and undertook a feasibility study. Due to a change in market conditions, you decided that you will not progress with the demolition and development. Instead, you intend to sell the Properties with the existing buildings and plans attached. In the interim, you have entered into residential lease agreements with a tenant (Tenant) for the House and both Apartments as follows: ● The Apartment lease was entered into on xx/xx/xxxx for an initial term of eight months, and on a month to month basis following the expiration. ● The House lease was entered into on xx/xx/xxxx for an initial term of three months, and on a month to month basis following the expiration. You and the Tenant are not associates. The leases require the Tenant to obtain your (as Landlord) consent prior to assigning or sub-letting the Properties. Pursuant to this lease term, the Tenant verbally requested your consent to allow other occupants to use the Properties. It is understood that the Tenant lists the Properties on Facebook and Flatmates.com.au and makes each bedroom available to occupants for a minimum term of three months. The Tenant and each occupant enter into a residential tenancy agreement prior to the occupant moving in. The Tenant supplies the accommodation to the occupants of the Properties in their own right and is not supplying the accommodation as your agent. The physical characteristics of the Properties are purely residential. No modifications have been made to the Properties since your acquisition. For example, there is no reception area, office or commercial kitchen.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 40-65 | Subsection 40-75(1) | Section 195-1

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 40-65 provides that 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, the sale is not input taxed to the extent that the residential premises are: ● commercial residential premises; or ● new reside ntial premises. The definition of the term ‘real property’ is contained in section 195-1 and includes any interest in or right over land. ‘Residential premises’ is also defined in section 195-1 as land or a building that: ● is occupied as a residence or for residential accommodation; or ● is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation). Goods and Services Tax Ruling GSTR 2012/5; Goods and services tax: residential premises considers how section 40-65 applies to supplies of residential premises. Paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-65 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. Paragraph 15 of GSTR 2012/5 states that in order to satisfy the definition of ‘residential premises’ premises must provide shelter and basic living facilities. This includes bedroom, bathroom, kitchen and living facilities. In this case we consider the Properties satisfy the definition of ‘residential premises’. The next issue to consider is whether the Properties fall within the definition of ‘commercial residential premises’ or ‘new residential premises’. If so, the sale of the Properties will fall within the exclusions in section 40-65 and the sale of the Properties will not be input taxed. | Detailed Reasoning - Commercial residential premises: The term ‘commercial residential premises’ is defined in section 195-1 to include, amongst other things: (a) a hotel, motel, inn, hostel or boarding house; or (b) … … (f) anything similar to residential premises described in paragraphs (a) to (e). However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises sets out the ATO view on how GST applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises. The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary 5 th Edition provides the following definitions: Hotel a building in which accommodation and food, and alcoholic drinks are available Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles. Inn a small hotel that provides lodging, food etc., for travellers and others Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc. Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc. a dwelling, usually a private house, in which board and lodging are provided for payment In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are ‘similar’ to the class of establishments described in paragraphs (a) to (e). Premises that are ‘similar’ to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described. Paragraph 12 of GSTR 2012/6 lists the following eight characteristics that are considered to be common to operating hotels, motels, inns, hostels and boarding houses: ● commercial intention ● multiple occupancy ● holding out to the public ● accommodation is the main purpose ● central management ● management offers accommodation in its own right ● provision of, or arrangement for, services, and ● occupants have the status of guests. Paragraphs 13 to 40 of GSTR 2012/6 discuss features typically exhibited in hotels, motels, inns, hostels and boarding houses. However ultimately, in determining whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors (paragraph 41 of GSTR 2012/6). Paragraph 95 of GSTR 2012/6 provides that in addition to living accommodation, 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. | Detailed Reasoning - Application to your situation: You carry on an enterprise of property development and acquired adjoining residential premises with the intention to demolish the existing dwellings, combine the titles and construct apartments for individual sale. You subsequently abandoned your original plan and have decided to sell the Properties. In the interim you have leased the Properties to a single tenant. The characteristics of hotels, motels, inns, hostels and boarding houses listed above with reference to paragraph 12 of GSTR 2012/6 are not on display when considering your supplies of both your leasing of the Properties to the Tenant and your prospective sale of the Properties. You have not modified the Properties in any way since your acquisition of the Properties. Furthermore the Properties do not contain sufficient infrastructure typically required for the operation of a hotel, motel, inn, hostel or boarding house. In this case we do not consider the Properties fall within the definition of ‘commercial residential premises’. | Detailed Reasoning - New residential premises: Subsection 40-75(1) provides that residential premises are new residential premises if they: (a) have not previously been sold as 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. In this case, none of the categories above are satisfied. Therefore your sale of the Properties will not be the sale of ‘new residential premises’. | Detailed Reasoning - Conclusion: Your sale of the Properties will be an input taxed supply of residential premises pursuant to section 40-65. The sale is neither the sale of ‘commercial residential premises’ nor ‘new residential premises’.