GST Ruling 2003/3 - sale of new residential premises
by James Moir, Simon Bennett and Trang Nguyen
GST Ruling GSTR 2003/3 was first issued as draft ruling GSTR 2001/D3, it was re-issued as GSTR 2002/D4 and was finalised as GSTR 2003/03 on 5 March 2003. The ruling represents the views of the Federal Commissioner of Taxation ( Commissioner), as from 1 July 2000, on when a sale of property represents the supply of new residential premises, so that the supply will, if the vendor is registered or required to be registered, attract GST. Throughout this article we will assume the vendor is registered or required to be registered for GST. If a vendor is not registered or required to be registered then no supply will attract GST.
Under Section 40-75 of A New Tax System (Goods and Services Tax) Act 1999 ( GST Act), 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 longterm 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.
The premises only need to satisfy one of these criteria to be considered new residential premises. This article primarily focuses on what constitutes substantial renovations but will also look at the sale of residential premises that have not previously been sold as residential premises. To assist with the understanding of these principles, specific examples relating to both subdivisions and renovations have also been
Section 195-1 of the GST Act provides that substantial renovations occur where all or substantially all of a building is removed or replaced. The Commissioner, in GSTR 2003/ 3, has expanded this definition so that the renovations must also affect the building as a whole. The Commissioner has further provided that the renovations must have been carried out by or on behalf of the vendor and progressive renovations over months or even years will usually be cumulated.
Renovations are defined as structural (foundations, roof, supporting walls, staircases), non-structural (replacing wiring, removing non-supporting walls, plastering or rendering walls, replacing kitchen cupboards or bathroom fixtures) and cosmetic (painting, sanding floors, replacing light fittings, curtains or carpets).
Whilst structural and non-structural work by themselves can constitute substantial renovations, cosmetic work on its own, even if it is done in every room, will not constitute substantial renovations. Replacing a kitchen and bathroom with only cosmetic work done to other rooms would constitute substantial renovations and, it should also be noted that the Commissioner does not consider landscaping to constitute renovations.
For renovations to be substantial, they must directly affect most rooms in a building. Additionally, as the definition of substantial renovations only refers to removal or replacement, additions which are done with the renovations are not considered to be renovations.
Not previously sold as residential premises
The Commissioner has stated that he will look at land and building as a package and consider the physical characteristics of the building on the land.
The Commissioner provides in the ruling that, when considering whether land not previously sold as residential premises is new residential premises, subdivision of land, of itself, does not create new residential premises, so where a block of units is on one title and is then strata titled, the sale of the individual units will not, unless the units are substantially renovated, attract GST.
Subdividing vacant land will not render a sale liable to GST, however, as vacant land cannot be occupied as a residence, it is not residential premises (regardless of zoning) and the sale of vacant land will attract GST.
The Commissioner has given numerous examples to highlight when a sale of premises will constitute the sale of new residential premises. These examples are listed below.
Not previous sold as residential premises
1. A house on a large block is subdivided so that the house is on a smaller block and there are two other lots of vacant land for sale. The sale of the house and land block will not (assuming there have not been substantial renovations to the house) attract GST as they have been sold as a “package” before (albeit with other land too). The sale of the two vacant lots will attract GST as they cannot be occupied as a residence and are not therefore, residential premises.
2. A block of land with an existing house has further land added to it, the lots are consolidated and that consolidated block (with the house) is sold. The house and original block will not attract GST as they have been sold as a “package” before, however the additional vacant land will attract GST. The total price will therefore require an apportionment.
1. A developer buys a terrace and replaces the old kitchen (cupboards and appliances); removes the wall between the kitchen and old bathroom so it becomes an eat-in kitchen, replaces the door and back window of the kitchen with French doors opening out to the courtyard, replaces the dilapidated slate roof tiles with tiles and replaces the floorboards, joists and bearers in all ground floor rooms due to water damage. This kitchen and flooring work would not constitute substantial renovations as the lounge room and bedrooms are largely untouched.
If, however, a wall between the lounge room and sunroom was removed and all the bedrooms were re-plastered and painted and had skylights and new carpet installed, there would be substantial renovations. The ruling does not state what would be the view if, with the kitchen and flooring work, all bedrooms had only cosmetic work done such as repainting and new carpets and light fittings, however, considering the previous statements regarding cosmetic work, there is an argument that this would not constitute substantial renovations.
2. A developer buys an old federation house. He replaces the kitchen, patches some gyprock walls in the bedrooms and repaints the house, inside and out. The Commissioner’s view is that this does not constitute substantial renovations as whilst the work affects all or most rooms, it is largely cosmetic in nature.
3. A developer buys a house and knocks down the back half of the house, replacing it with open plan living areas. The bedrooms at the front of the house are untouched except for some painting. The Commissioner’s view is that this would not constitute substantial renovations but if the wall between two of the bedrooms is removed to make a walk-in robe and ensuite, then non-structural (and not only cosmetic) work has been done and most or all of the rooms are affected.
If there is any doubt as to whether or not a sale will constitute the supply of new residential premises, a private ruling is recommended. After comparing this ruling with the previous draft version, it appears that the Commissioner’s viewpoints are more vendor or developer friendly than previously, this being in evidence from (above all) the Commissioner’s interpretation of the factual circumstances set out in the examples. It would be hoped that the Commissioner’s vendor friendly views would continue when determining private rulings.