Private ruling: Whether sale of renovated property is a taxable supply.
Date of advice: 13 December 2019
Published: February 2020

Ruling: Q1: Is the sale of a newly renovated unit a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ? (GST Act). | A1: No

Relevant facts and circumstances: You are an owners' corporation which is registered for GST. The property under the strata place is located at X (the Complex). The Complex was constructed in X for over 55's under the then SEPP 5 guidelines (Seniors and people with a disability requirement). The Complex contains a residential flat building most of which is two storeys high. It comprises X dwellings plus the caretakers unit (the Unit). The Unit is on the ground floor of a section designated Block X. It is part of the common area of the strata plan. It currently comprises an office, kitchen, bathroom, bedroom, living room and balcony and is linked to another kitchen used by the facility to provide meals to all residents. The Complex provides residential accommodation to people over 55 years of age with a disability under the then SEPP guidelines and is regulated under the Strata Schemes Management Act NSW 2015 . You charge residents levies for an administrative fund and a capital works fund to pay for the maintenance of common property. Most of the residents of the Complex are on government pensions. In X you successfully applied to the local council to have the requirement for a live in caretaker removed. You are planning to completely renovate the Unit and sell it. The Unit is in a structure that is an addition to the original house. It is lower than the floor of the original house. The kitchen of the Unit was in the original house and was therefore higher than the rest of the Unit. Different floor levels do not comply with current SEPP requirements without a ramp. To satisfy the current SEPP requirements the Unit must be as open as possible to allow for wheelchair circulation. Following the renovation you will strata the Unit to exclude it from the common property and then sell it. The Strata Committee are budgeting to spend between $X and $Y renovating the Unit. Real estate agents have estimated the Unit will sell for between $Z and $W. You will undertake this activity to generate funds to use to pay for repairs and maintenance of the common property of the Complex to strata the Unit from common property. Renovations to the Unit will involve the following: · removal of load bearing brick walls near the existing entry and their replacement with steel support beams for the unit above. The steel support beams will replace walls removed from the kitchen and another will be installed between the bedroom and the living room, extending toward the kitchen; · blocking up existing wall openings which currently allow access to the common kitchen; · removal and relocation of the existing kitchen and bathroom; · the kitchen walls will be removed and a bedroom wall will be moved to enable it to be enlarged; · enlargement of the bathroom to Xmm to allow for wheelchair circulation into the existing laundry space and doorway widened for wheelchair access; · new wiring and plumbing; · enlargement of the bedroom by 460mm to allow for wheelchair circulation; · total separation of the Unit from common kitchen and dining areas; · inclusion of a new plasterboard lined bedroom stud wall; and · removal of an existing door in the living room and replacement with a new entry door and window. The end result will be a residential unit with no more additional floor space, but larger rooms, fewer walls, a large kitchen space and no office. The Unit will change from being an ordinary unit to one which is SEPP compliant. After the renovations there will be no access from the Unit directly to the common kitchen and dining room.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 , section40-65 | 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: Under section 40-65, a sale of residential premises is input taxed but, relevantly not to the extent that the residential premises are 'new residential premises '. Residential premises are 'new residential premises' if amongst other things they have been created through substantial renovations of a building. 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? considers substantial renovations. 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 is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. The above definition is exhaustive. Renovations are "substantial renovations" of a building if, and only if, they are renovations "in which all, or substantially all, of a building is removed or replaced". The question, ultimately, is whether in the renovations which will be carried out, "all, or substantially all, of the Unit will be "removed or replaced". That requires a consideration of: · what constitutes the "building"; · how much of it will be "removed" or "replaced"; and · whether the extent to which the building, or parts of it, will be "removed" or "replaced", amounts to "all, or substantially all, of the building. The Commissioner of Taxation considers that each individual strata title unit is a 'building' in its own right and its structure is enclosed within the external walls of the unit, rather than the entire Complex. It is only necessary to consider if there have been substantial renovations if: · the renovations affect the building as a whole (in this case, the Unit); and · the renovations result in the removal or replacement of all or substantially all of the building. Paragraphs 68 to 79 of GSTR 2003/3 consider the extent to which parts of a building are removed or replaced and in summary for renovations to result in the removal or replacement of all or substantially all of the building there must be a removal or replacement of a substantial part of the: · structural components of the building, or · non-structural components of the building. · Structural work includes: · altering, or replacing of, foundations · replacing, removing or altering of floors or supporting walls, or parts thereof · 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). Non-structural work includes: · replacing electrical wiring · replacing, removing or altering non-supporting walls, or parts thereof · 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 · 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 there is considered to be cosmetic work and includes: · painting · sanding floors · removing and replacing worn or out of date fittings such as light fittings · replacing curtains or carpets. Paragraph 60 of GSTR 2003/3 provides that whether the renovations are substantial is to be determined in the light of all the facts and circumstances. The question is one of fact and degree. The modifications you intend to make to the Unit will involve some structural work, including the following: · removal of some walls; · insertion of some steel beams; · bricking up of some openings; · insertion of 1 stud wall; and · changes in the dimensions of some rooms. Much of the non-structural works are as follows: · replacement of pipes and wiring in some areas; · replacing, removing or altering non-supporting walls, or parts thereof; · removing or replacing kitchen cupboards, bathroom fixtures; · creation of a new laundry cupboard; and · painting. On the information you have provided, we consider that although several substantial modifications will be made to the Unit, "substantially all" of the Unit will not be removed or replaced. Therefore the completed Unit will not be new residential premises as defined in subsection 40-75 (1) and therefore will not be a taxable supply but an input taxed supply pursuant to section 40-65 when sold.