Below are frequently asked questions in regards to new residential property issues. Click on the question below to view answer.
Usually the margin scheme is applied to the sale of new residential premises to reduce the amount of GST payable. It does not matter if the purchaser is registered for GST as they cannot claim back the GST on the purchase of new residential property regardless of whether full GST or the margin scheme is used as the property will not have been acquired for a “creditable purpose” (see s.11-15).
The answer is predicated on the assumption that the house is in the name of the client as an individual and not the client’s building company.
Certainly the supply of new residential premises attracts GST, but only where the supplier is registered or required to register for GST and the supply is in the course or furtherance of an enterprise.
The question of the application of GST in this case will be determined by the intention of the client at the time of construction, including the preparatory/planning phase, as well as the actual construction phase: if, at those times, the client intended the residence to serve as his/her own residence, then the supply will not be in the course or furtherance of an enterprise and will not attract GST.
That said, however, the client will have to be prepared to satisfy the ATO that his intention was that the residence would be a private or domestic asset, and anything in the circumstances surrounding the construction giving a contrary impression (such as the claiming of input tax credits in relation to building costs) would present a problem for the client.
If the property was in the name of a company, there would be an inference that the company was engaged in something with a business flavour as the residence would be constructed for the occupation of a third party – after all, a company cannot have a personal residence or private or domestic assets.
It is important to characterise the premises correctly to determine whether they are commercial residential premises, or merely residential premises. An individual serviced apartment is treated by the ATO as ‘residential premises’ other than ‘commercial residential premises’ (see paragraphs 51 to 55 of GSTR 2000/20). Consequently, if the sale is the first sale since construction (or subsequent ‘substantial renovation’), the sale will attract GST as the supply of ‘new residential premises’; if it is not, the supply will be input taxed under section 40-65. Notwithstanding that the apartment is let, the going concern exemption should not be applied as the first payment of rent after the date of supply would trigger an increasing adjustment equal to full GST on the sale.
If the vendor is registered or required to be registered for GST then the GST outcome will be determined by the nature of the premises themselves. If they have been sold previously since construction or any subsequent ‘substantial renovation’, they will be treated as existing rather than ‘new’ residential premises and supply will be input taxed. If, however, this is the first sale, they will be new residential premises and supply will be taxable.
The current position is that the ATO does not look at the intention of the purchaser in determining whether s.40-65 (input taxed treatment) applies, considering instead that whether premises are ‘residential premises to be used predominantly for residential accommodation’ will be determined by the physical characteristics of the premises themselves: that is, whether they possess the usual amenities for sleeping, eating and bathing, and not by the subjective intention of the purchaser; that view is in line with the current state of the authorities (see Sunchen Pty Ltd v Commissioner of Taxation  FCA 21).
If the vendor is neither registered nor required to be registered for GST, the supply will not be taxable, and no GST will be payable. If the property consists of premises that:
- have been sold previously and have not been ‘substantially renovated’ since;
- possess the characteristics of a residence as discussed in draft ruling GSTR 2012/D1;
- are fit for human habitation; and
- may lawfully be used for residential purposes,
the supply will be input taxed (that is, no GST is payable) even if the vendor was registered or required to register.
The decided cases support the view of the ATO that the question of whether premises are “residential premises to be used predominantly for residential accommodation” is determined objectively by reference to the physical characteristics of the building and not by reference to the subjective intentions of the parties.
If the land was not acquired for the purpose of resale (e.g. to subdivide, build units on and sell) or for use in connection with the business (e.g. for expansion of the car wash) but was only ever intended to be used for private or domestic use (e.g. the land was bought with the intention of building a home on it but for various reasons the owners changed their minds and decided to sell it) that would not be in the course or furtherance of an enterprise.
When considering whether a supply is in the course or furtherance of an enterprise, it is important not to assume that, if a person has a car wash business (as an example), only supplies related to that business will be considered to be in the course or furtherance of the person’s enterprise. An entity can only have one enterprise and only one GST registration (if you exclude trustee activities) and all business activities will be considered to be connected to that enterprise and activities could include dealings with land and any other business activities that are not input taxed (such as financial supplies or residential lettings).
Vacant land can never be considered to be residential premises. GST will be payable because the sale is a supply by a GST-registered entity, for consideration and in the course or furtherance of an enterprise, and so will be a taxable supply.
According to the ATO view, as expressed in ruling GSTR 2000/20 , it is the nature of the premises rather than any subjective intention of the purchaser that determines whether or not the supply of existing residential premises will be input taxed. The attitude of the ATO appears to be that where premises possess the physical characteristics of residential premises, the intention of the purchaser will not change the GST status of the supply. This position appears to be supported by the balance of authorities on the point.
Section 195-1 provides that substantial renovations are renovations in which all, or substantially all, of a building is removed or replaced but that the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. This means it is possible to have ‘substantial renovations’ without doing any structural works.
A final ruling GSTR 2003/3 has been released on this topic. Some important points to note are:
- The renovations need to affect the building as a whole and must result in the removal or replacement of all or substantially all of the building.
- Whether the substantial renovations have occurred is based on the building in its entirety. Major renovations to the kitchen and bathroom where only minor work is done to the rest of the building will generally not constitute substantial renovations.
- Cosmetic work by itself (e.g. painting, sanding of floors, replacement of floor coverings) does not amount to substantial renovations.
- Only renovations by the current owner are relevant.
- Works not attributable to the building itself are disregarded (eg landscaping).
If the renovations qualify as ‘substantial renovations’ the premises would be ‘new residential premises’ since this would be the first sale after completion of the renovations. However, unless the clients are:
- registered or required to be registered for GST;
- the sale is in the course or furtherance of an enterprise,
The supply will not be taxable. If any doubt exists as to the application of the criteria, a margin scheme clause should be included in the contract. The sale of one’s own home is usually not in the course of furtherance of an enterprise.
No, the sale of residential real estate (unless new residential premises or commercial residential premises) will not attract GST despite the fact that it generates business income for the owner. The position would be the same even if the vendor's sole source of income was rent from tenanted houses.
The supply of residential premises, not being new residential premises or commercial residential premises, is input taxed. No GST is payable but the supplier cannot claim input tax credits for GST incurred in connection with the making of the supply. This is so even if the supplier is registered for GST and even if the supplier is a developer whose enterprise consists of, or includes dealing in residential property.
To determine whether the premises being sold are residential premises eligible for input taxed treatment, you need to refer to paragraphs 9 to 45 of ruling GSTR 2012/5, which is the Commissioner’s ruling on residential premises. You will note that physical characteristics are more important than use, although premises must be capable, both physically and in planning terms, of use for residential accommodation to be considered residential premises.
The ATO considers that whether premises are “residential premises to be used predominantly for residential accommodation” (s.40-65, GST Act) is to be determined objectively by reference to the physical characteristics of the premises rather than the subjective intentions of the parties. If the premises are still residential premises and are not new residential premises, supply of the dwelling will be input taxed under s.40-65 of the GST Act despite the fact that a permit to redevelop is supplied and despite the intention of the purchaser to demolish and redevelop.
There are two issues to consider here:
Nature of premises
To determine if the property is residential premises and eligible for input taxed treatment, you need to refer to ruling GSTR 2012/5, particularly paragraphs 9 to 45. The ATO considers whether premises are ‘residential premises to be used predominantly for residential accommodation’ (s.40-65, GST Act) is to be determined objectively by reference to the physical characteristics of the premises rather than the subjective intentions of the parties. The premises must also be capable of lawful use as a residence to be residential premises
It is not so much a question of what is the current or past use but whether the alterations made to enable use of the building as consulting suites have so altered the physical characteristics of the building that it can no longer be regarded (when viewed objectively) as being residential premises to be used predominantly for residential accommodation.
If the premises are still ‘residential premises’ and are not ‘new residential premises’, supply will be input taxed under s.40-65 of the GST Act but, if they have lost that essential residential character, supply will be taxable except to the extent that the supply can be treated as the supply of a going concern.
The ATO treats a supply of a tenanted property to the sitting tenant as not qualifying for the going concern exemption. In this case two areas are not leased to the purchaser and so those areas could be treated as going concerns and the supply would be a mixed supply. You could insert ‘plus GST’ and ‘going concern’ in the relevant boxes and include a special condition explaining that the supply is the supply of a going concern as to the areas occupied by areas x and y and a taxable supply as to the supply of the area tenanted by the purchaser.
If the purchase was by a different entity to the purchaser, there would be no need to apportion since the whole supply could qualify.
The supply of residential premises (not being new residential premises or commercial residential premises) is input taxed by virtue of s.40-65 of the GST Act, regardless of whether the supplier is registered for GST or in the business of residential sales. No GST treatment is required and the contract should not be treated as a going concern.
If the property sold consists of residential premises that are not new residential premises, that is, they have been sold since construction or any subsequent substantial renovations, then supply would not be taxable even if the vendor’s sole enterprise was buying and selling houses – the supply of existing residential premises is never a taxable supply. The use of a residential premises as an investment property does not make it a commercial residential property.
Commercial residential premises are typically characterised as hotels, motels, inns or hostels. For a further description of commercial residential premises see Goods and Services Tax Ruling GSTR 2000/20, paragraphs 51 to 55.
If a supply is not taxable, there can be no withholding obligation, although the notification obligation remains. See LPLC bulletin Some purchasers required to withhold GST from 1 July 2018.