13 February 2013

Meaning of “residential premises” for GST purposes - New GST ruling released

The Australian Taxation Office (“ATO”) has varied its view as to the meaning of “residential premises” in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”).

The ATO’s new interpretation of the term “residential premises” as used for GST purposes is contained in GSTR 2012/5. It replaces GSTR 2000/20 and can be accessed here.

GST Act definition

Under the current provisions in the GST Act, GST is payable in respect of the supply of any premises by way of sale, lease, hire or licence other than “residential premises” to be used predominantly for residential accommodation. Where premises are “residential premises” to be used predominantly for residential accommodation, the supply of those premises will be input taxed (and therefore not subject to GST).

Section 195-1 of the GST Act clarifies what is meant by “residential premises”. That section provides that the term “residential premises” refers to any land or building that:

  • is occupied as a residence or for residential accommodation
  • 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.

Previous ATO position – holistic approach

Prior to the release of GST 2012/5, the ATO recognised that the actual use by a seller of premises as a residence or for residential accommodation is relevant to determining whether the first limb of the definition of “residential premises” is satisfied in particular circumstances.

In respect of the second limb of the definition, the ATO’s position was that in determining whether premises are intended to be occupied and are capable of being occupied as a residence or for residential accommodation, a number of factors should be considered. These included, amongst other things:

  • The physical characteristics of the premises
  • The purpose or context of the premises’ use
  • Whether the tasks of day to day living (such as preparing food, cleaning, laundering etc) have historically been performed on the premises
  • The status of the occupant (i.e. whether as owner, tenant or guest)
  • The zoning of the area in which the premises is located

Neither of the above factors was considered by the ATO to be determinative in classifying specific premises as residential or otherwise. This view was consistent with case law indicating that both the actual and the intended use of premises is relevant under the second limb of the definition of “residential premises” (see Sunchen Pty Ltd v Commissioner of Taxation (2010) 190 FCR 38).

New ATO position - focus on “physical characteristics”

In GST 2012/5, the ATO has revised its interpretation of the second limb of the definition of “residential premises”.

In particular, the ATO stated that it no longer considers that the subjective intended use of premises is relevant in determining whether the premises is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. Rather, the ATO has stated that the second limb of the definition of “residential premises”:

“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…The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person.”: paras 9 and 10

The ATO’s reasoning appears to be based on the Full Federal Court decision in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299. In that case, it was held that the intention to occupy premises referred to in the second limb of the “residential premises” definition is not the subjective intention of any particular entity. Rather, the intention referred to is the objective intention with which the particular premises are designed, built or modified.

Effect of new position

The ATO’s new view as to what constitutes “residential premises” for GST purposes has the effect of broadening the circumstances in which a supply of residential premises (by way of sale, lease, hire or licence) will be treated as input taxed.

For example, premises that have all the trappings of residential premises and which are being sold in preparation for demolition would be input taxed under the new GST ruling. Similarly, the sale of premises which resemble residential accommodation but which are actually being used for commercial purposes (e.g. a display home that is not zoned for residential purposes) will also be input taxed under the ATO’s new policy.

In the main, the ATO’s new view is beneficial to taxpayers. It provides significant benefits to taxpayers who would, under the previous GST ruling, be contractually liable to pay GST on an acquisition of premises:

  • That is not intended to be occupied as a residence but that resembles residential accommodation in the physical sense
  • That would not give rise to an input tax credit (for instance, because the acquirer of the premises is not registered or required to be registered for GST purposes)

Notwithstanding, taxpayers should be wary of relying solely on the ATO’s view as to what amounts to “residential premises” for GST purposes. This is because the ATO’s view as expressed in GSTR 2012/5 is not entirely consistent with judicial authority.

To this end, the effect of the new ruling may be to create some uncertainty as to the correct GST treatment of supplies of residential premises. Such uncertainty has recently arisen in light of the decision of the Federal Court of Australia in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 (“MBI Properties”), which considered the application of increasing adjustments to the acquisition of “residential premises” supplied as a GST-free supply of a going concern.

In that case, Griffiths J held that an increasing adjustment applied under section 135-5 of the GST Act to the acquisition by the taxpayer (on a going concern basis) of certain serviced apartments that were subject to leases. An increasing adjustment was found to apply because the taxpayer was taken by the Court to intend that some input taxed supplies, being the leasing of “residential premises”, would be made as part of the running of the serviced apartment business that was acquired as a going concern. This was held to be the case even though the taxpayer was not the entity that had entered into the input taxed leases of the relevant “residential premises”.

The decision in MBI Properties reinforces the importance of considering all relevant circumstances when supplying or acquiring (whether by way of sale, lease, hire or licence) “residential premises”, particularly through a GST-free supply of a going concern. Please contact King & Wood Mallesons if you would like advice on this issue (or more broadly).

Who does this affect?

Any entity dealing in the sale, purchase, lease, hire or licence of residential premises.

What do you need to do?

Review the ATO’s new interpretation of what amounts to “residential premises” for GST purposes and consider how the changes may impact your existing or proposed dealings in real property.

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