It is typical for people to consider stamp duty, land tax and income tax implications when they sell a property, but remember that it is equally important to consider whether the transaction will be subject to goods and services tax (GST). One important thing to remember is that there is now a single test that looks at the physical characteristics of a property to determine its suitability for residential accommodation, and as a result, its GST treatment.
Let us run through how the sale of your property may fall under one of these three categories:
- taxable supply – the seller is liable for GST on the sale and can claim GST credits for anything purchased or imported to make the sale (e.g. GST paid on real estate agent fees)
- GST-free supply – the seller is not liable for GST, but can still claim GST credits for anything purchased to make the sale, or
- input taxed supply – the seller is not liable for GST on the sale and also cannot claim any GST credits.
The sales of properties are input taxed, and not subject to GST, if they are used predominantly for residential accommodation. We address various issues below that determine whether residential premises can be considered residential accommodation or not. After that, we outline what happens when you sell commercial residential and new residential premises.
1. Buyer’s intention not relevant to the Tax Office’s assessment
The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the intention, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide “living accommodation” are residential premises – even if they are not used for accommodation on an extended basis or they are used for a purpose other than to provide accommodation, such as when premises are used as a business office.
The case study below, adapted from a Tax Office ruling, is an example of how a buyer’s intention is irrelevant.
Case study: Edward operates an enterprise which involves leasing a house on land which he owns. Subsequently, a developer approaches Edward and offers to purchase his property. The developer intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments.
However, the fact that the developer does not intend to use the house to provide residential accommodation is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accommodation. The buyer’s plans do not change the characteristics of the premises in the hands of the supplier. As a result, the sale of the house is input taxed.
2. Fit for human habitation
Residential premises are not fit for human habitation when they are in a dilapidated condition, which prevents them from being considered residential accommodation. They must also provide shelter and basic living facilities to be considered residential accommodation.
3. Sale of other facilities together with a residential unit
A supply of a residential apartment in a building may include a garage, car-parking space or storage area within the building complex. If these are supplied together within the residential unit, then the supply of these lots will be input taxed. If however they are sold separately, then they are not a sale of residential premises to be used predominantly for residential accommodation and will therefore be subject to GST.
4. Premises used both for residential accommodation and for business purposes
The supply of premises needs to be apportioned if part of it is not being used predominantly for residential accommodation. This is important for people running a business at home. For instance, if a residential premise is modified so that part of it is used as a business premise, the taxpayer will need to apportion the value of the supply of the premise between the taxable portion (that used for business) and the input taxed portion (the residential accommodation portion).
However, bear in mind that apportionment does not have to take place if merely one room of a residence is used for business purposes. For instance, if a room of a residential premise is used for office purposes without significant physical modification – like putting in furniture, shelving or communication lines – then this is not sufficient to require an apportionment. The whole of the sale or lease of these premises would be input taxed.
The case study that follows, again adapted from a Tax Office ruling, illustrates when a residential premise should be apportioned.
Case study: Sharon decides to partly modify her house to use in her line of work as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage space for the business.
The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises used predominantly for residential accommodation.
Alternatively, part of the premises is still designed predominantly for residential accommodation – comprising bedrooms, bathroom, kitchen, living room, lounge room and gardens.
If Sharon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply.
5. Land included with building used for residential purposes
There is no restriction on the area of land that can be included with a building to be considered residential premises. It differs according to circumstances. Taxpayers will need to look at the extent to which the physical characteristics of the land and building as a whole indicate that the land is part of the building for residential purposes.
However, vacant land cannot be residential premises because it is not capable of being occupied for residential accommodation as it does not provide shelter and basic living facilities.
As mentioned earlier, the sale of premises are input taxed to the extent that they are used predominantly for residential accommodation. However, sale of commercial residential premises and new residential premises – other than those used for residential accommodation before December 2, 1998 – are not input taxed and are therefore subject to GST.
Commercial residential premises
Commercial residential premises include the below:
a) a hotel, motel, inn, hostel or boarding house
b) premises used to provide accommodation in connection with a school
c) a ship that is mainly let out on hire
d) a ship that is mainly used for entertainment or transport or a marine at which one or more of the berths are occupied by ships used as residences
e) a caravan park or a camping ground, or
f) anything similar to the residential premises described in paragraphs (a) to (e).
Consult this office to find out more about the specific characteristics of the commercial residential premises. There are also variations on the places outlined that are still considered commercial residential premises, so be sure to seek advice.
New residential premises
A new residential premise is one that:
- has not been sold as a residential premise previously
- has been created through substantial renovations (consult this office to find out what constitutes “substantial renovation”), or
- is a new dwelling that has replaced an existing dwelling on the same land.
“Off the plan” sales and newly built homes are considered sales of new residential premises. Once the property has been continuously rented for five years however, it ceases to be a new residential premise.
Consult this office before selling a property, be it commercial or residential, to find out what the GST implications of the sale will be.