Private ruling: GST and sale of property
Published: March 2015

Ruling: Q1: Is your supply of property a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, to the extent the supply of the property is not an input taxed supply. Your supply of the property is a mixed supply containing a taxable and an input taxed component.

Relevant facts and circumstances: You are registered for GST and carry on an enterprise of property development and property investment. You purchased property (the Property) in a specified year with the original intention of holding the property for investment with the future possibility of subdividing and developing the Property and selling the developed lots. The Property is approximately 2 hectares (5 acres) with an existing dwelling containing bedrooms, bathroom, kitchen and living areas. The Property also contained a number of garages. The Property was acquired from an unregistered individual and as such you did not claim an input tax credit in respect of the acquisition. The subdivision and development of the Property did not eventuate and you decided to sell the Property. You did not conduct any works on the property and did not subdivide the land. The Property was tenanted during the period you owned the Property. During your ownership of the Property, approximately X acre of the Y acre Property which included the house was leased to a residential tenant. A fixed term residential tenancy agreement (the tenancy agreement) was entered into for a fixed period. The tenancy agreement provides that at the end of the term the tenant may stay in the premises under the same terms (subject to rent increases in accordance with the Residential Tenancies Act 1997) until the agreement is ended. You and the tenant continued under this arrangement through to the date of settlement of the Property. A condition of the tenancy agreement provides that the lease includes X acre of land surrounding the property only and that the locked gate to the paddock is not to be accessed by the tenant or any other person. The remaining Z acres of the Property were leased to a primary producer for the purpose of cattle breeding and grazing. The Z acres of the Property was leased to the primary producer up until approximately one year prior to settlement. Since that time there has been no primary production activity carried on at the property. You entered into a contract to sell the Property. The contract indicates that the sale of the Property is a taxable supply and that the margin scheme will not be used. The contract also provides that the sale was subject to existing tenancies. The consideration you received for the Property included a GST component and this amount was reported on your business activity statement (BAS) and also paid to the ATO before the due date for the relevant tax period.

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

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 supply you make. The term 'taxable supply' is defined in section 9-5. You make a taxable supply if: a) you make the supply for consideration; and b) the supply is made in the course or furtherance of an enterprise that you carry on; and c) the supply is connected with 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. Your supply of the Property satisfies the requirements of section 9-5. The issue in this case being whether the supply of the Property is input taxed either in full or in part. | Detailed Reasoning - Input taxed supply of residential premises by way of sale: Subsection 40-65(1) 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, subsection 40-65(2) provides that 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 used for residential accommodation (regardless of the term of occupation) before 2 December 1998. The exclusions provided in subsection 40-65(2) are not relevant in this case. The term 'residential premises' is defined in section 195-1 to mean land or a building that: a) is occupied as a residence or for residential accommodation; or b) 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) and includes a floating home. Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) contains the ATO view on the application of Subdivisions 40-B and 40-C to supplies of residential premises. Paragraph 9 of GSTR 2012/5 provides that the test of whether premises are 'residential premises' is a single test that looks at the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/15 continues stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. This may include bedrooms, bathroom, kitchen, living areas, etc. In this case the dwelling on the Property contains bedrooms, bathroom, kitchen and living areas together with two garages and is considered to satisfy the definition of 'residential premises' for the purposes of section 195-1. Where land is supplied with a building, paragraph 46 of GSTR 2012/5 states the following: 46.There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises. In this case the periodic tenancy agreement in place at the time of settlement contained a special condition limiting the area under the lease to one acre surrounding the residential dwelling. The remaining portion of the Property was only accessible via a locked gate with the tenant prohibited from accessing. As such, we consider that the sale of the land covered by the residential tenancy agreement (one acre) to be an input taxed supply of residential premises. Paragraphs 47 and 92 of GSTR 2012/5 provides that vacant land will not meet the definition of 'residential premises' as vacant land is not capable of being occupied as a residence or for residential accommodation. Furthermore, vacant land, of itself, does not provide shelter and basic living facilities and cannot therefore be occupied as a residence or for residential accommodation. Given the above we do not consider the supply of the four acres of vacant land to be an input taxed supply of residential premises. As the supply of the vacant land satisfies the positive limbs of section 9-5 and is not a GST-free supply, the portion of the supply of the Property consisting of the vacant land will be a taxable supply. In conclusion, the supply of the Property will be a mixed supply containing a taxable component and input taxed component. | Detailed Reasoning - Additional information: Supplies that contain both a taxable and non-taxable part (mixed supply) are discussed in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8). GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You are required to apportion the consideration for a mixed supply between the taxable and non-taxable parts of the supply to establish the consideration for the taxable component. Paragraph 92 of GSTR 2001/8 provides that you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense. Paragraphs 93 to 113 of GSTR 2001/8 discuss reasonable methods of apportionment including direct and indirect methods of apportionment and situations where a method may not be reasonable.