Property Law When is the Sale of a Residential Premises a Taxable Supply? Section 40-65 of the GST Act November 2007 Introduction Section 40-65 of the GST Act provides that sales of residential premises are not subject to GST, if the residential property is to be used accommodation. In the 2006 case of Toyama Pty Ltd v Landmark Building Developments Pty Ltd 1, the NSW Supreme Court held that the phrase to be used accommodation indicates that the subjective intentions of the purchaser are relevant when determining a property s use. The ATO, in contrast, has consistently adopted the objective test that it is the property s physical characteristics alone that are relevant. GST Act Section 40-65 of the GST Act states: 40-65 Sales of residential premises (1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used accommodation (regardless of the term of occupation). (2) However the sale is not input taxed to the extent that the residential premises are: Summary When a property is sold, consideration needs to be given as to whether the sale will be subject to GST. Sales of residential property are input taxed and not subject to GST if the property is to be used accommodation. The Australian Taxation Office (ATO) and NSW Supreme Court have expressed different views regarding the correct manner of interpreting the residential accommodation provisions in A New Tax System (Goods and Services Tax) Act 1999 (GST Act). These differing views have implications for Government agencies selling properties that are capable of being used both commercially and residentially. In this article (Jennifer McLean, Senior Solicitor and Emily Heffernan, Article Clerk) consider the relevant provisions in the GST Act, the ATO s view and recent decisions by the Federal Court and the NSW Supreme Court.. (a) commercial residential premises; or (b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.
Residential premises is defined in s 195-1 of the GST Act: residential premises means 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. ATO s interpretation of s 40-65 In Goods and Services Tax Ruling 2000/20, the ATO expressed the view that premises with physical characteristics which provide the basic facilities for daily living, even if for a short term are residential premises to be used accommodation for the purposes of s 40-65 of the GST Act. 2 Where the physical characteristics of part of the premises can be used for a commercial use rather than exclusively for a residential use, the ATO considers that the commercial part of the premises are not residential premises to be used accommodation and therefore taxable on sale. The part of the property that has the physical characteristics to support residential accommodation will be a sale of residential premises to be used for residential accommodation that is not taxable. 3 Marana Holdings Pty Ltd v Commissioner of Taxation (2004) ALR 190 In the 2005 case of Marana Holdings 4 the Full Federal Court considered whether the sale of a strata title residential unit that had been developed from a motel was subject to GST. The seller claimed that the sale of the property was not taxable because it was a sale of residential premises to be used accommodation. In reaching this decision the Court considered the meaning of the phrase residential premises pursuant to s 40-75 of the GST Act in s 195-1 and new residential premises in s 40-75 of the GST Act. Page 2 The seller was a partnership (registered for GST) and purchased the motel for $5.7 million in 2002. Up until two days before settlement, the premises operated as a motel. After settlement, the partnership obtained planning approval to use the property as residential units, and the motel was converted to strata title units. The partnership sold one of the units as a residential apartment, for $229,000 and applied to the Federal Court for a declaration that the sale was of 'residential premises to be used accommodation' (ie not a taxable supply). The court held it was a taxable supply. The partnership appealed to the Full Court of the Federal Court. The Court considered the meaning of the phrase new residential premises as defined in s 40-75 and the meaning of residential premises in s 195-1. 40-75 Meaning of new residential premises (1) Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term 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. Meaning of residential premises The Court considered that the test of whether a property is intended to be occupied and capable of being occupied as a residence for the purposes of s 195-1 is an objective assessment of whether the physical characteristics of the property support its use as a residence.
The Court also commented that to constitute a residence requires a degree of permanent or long-term commitment to the occupation of the premises in question. 5 The Court held that the sale was a taxable sale of new residential premises because the property had not previously been sold as residential premises and because at the time the motel was sold to the partnership it: had not been occupied as residential premises; had not been intended to be occupied as a residential premises; and was not physically capable of being occupied as a residential premises. The Commonwealth s response to Marana In 2006, the Commonwealth introduced the Tax Laws Amendment (2006 Measures No. 3) Act 2006, to ensure that in the wake of the Marana Holdings decision, certain types of real property continued to be not taxable. 6 The amendment made to s 40-65 stipulated that the length of any previous occupation is to be ignored in determining whether a supply is of residential premises to be used accommodation and is therefore not taxable. The amendment made to the definition of residential premises also stipulated that the intended form of occupation was not a factor for consideration. 7 Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] 197 FLR 74 In the Toyama Pty Ltd case, the New South Wales Supreme Court considered a claim by Landmark as the beneficiary of a trust for compensation from the vendor trustees on the Page 3 basis that the trustee breached their duty in marketing and mistakenly stating, in the contract, that the sale was a taxable supply under the GST Act. White J considered s 40-65(1) (as amended), the phrase to be used accommodation. The subject property had a house containing two residences on part of the land and was marketed as a development site, as the council had approved a 14-unit development upon the land. The Vendor trustees expected that the land would be purchased by a developer, the house demolished, and new units built on the site. Unsure as to whether GST was payable in relation to the sale, Landmark obtained a private ruling from the ATO. The trustees accountant subsequently provided additional information to the ATO and obtained a second private ruling. Both Landmark s lawyers and the trustees accountant were advised by the ATO that a taxable sale had not been made given the premises were objectively a residence in nature, and given that no 'enterprise' was being carried on by the trustees. Meaning of to be used accommodation In focusing on the meaning of the phrase to be used accommodation in s 40-65(1) of the GST Act, White J rejected the ATO s objective view that the physical characteristics of the property determine whether there is a non-taxable sale of residential premises to be used predominantly for residential accommodation. White J considered the proper construction of the words to be used predominantly for residential accommodation to involve a prediction of future use of the premises, and the most important fact in such a prediction to be the intention of the future owner of the property. In terms of the practical difficulties that arise from requiring vendors to ascertain a purchaser s
subjective intentions, White J suggested vendors protect themselves from liability through inclusion of a contractual term in the Contract of Sale, under which the purchaser agrees that the property would not be used and represents that the purchaser does not intend the property to be used in a way that could make the sale a taxable supply. 8 The Court ultimately concluded that the sale was a taxable supply and the trustees did not fail to exercise the requisite standard of care to constitute a breach of trust. The ATO s response to Toyama Whilst White J s interpretation of the phrase to be used accommodation is of significant interest, it is important to note that he conceded that his interpretation of the phrase is not binding upon the Commissioner of Taxation, enabling the ATO to continue to apply its views, in making private rulings stating: [It was] submitted that it would not be open to the Court to entertain a submission that the private rulings of the ATO were wrong, in the absence of the Commissioner being joined to the proceedings In the present case, a decision that the sale was a taxable supply would resolve the issues between the present parties. Such a decision would not bind the Commissioner, but that is not relevant. 9 The ATO responded to the Toyama decision by issuing the following statement: The Tax Office is concerned that the approach outlined by his Honour may cause difficulties to vendors in particular cases as a result of the liability of the vendor being determined on the basis of the subjective intention of the purchaser which may not be known to the vendor. As a practical matter, the vendor may not be aware of a relevant change in the purchaser's intention which may impact upon the vendor's GST liability and contractual remedies may not always be effective for any misrepresentations that may be made. The Tax Office notes that the considerations that led to the interpretation by the Full Federal Court, in the decision in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307, of the word 'intended' in the definition of residential premises also apply in respect of the phrase 'to be used accommodation'. In particular, the person having the relevant intention is not identified in the Act. For these reasons, the Tax Office respectfully prefers the view that an objective approach is required to the interpretation of the phrase 'to be used accommodation'. Accordingly, the Tax Office will continue to administer the provisions in accordance with the views in GSTR 2000/20 pending further judicial clarification. While the Tax Office will continue to administer the legislation on this basis, it will also seek further judicial clarification of the issues if an opportunity arises in other litigation. The Tax Office would consider providing test case funding for an appropriate case to clarify the law in this area through its usual test case funding processes. His Honour s conclusion is contrary to the view published by the Tax Office in Goods and Services Tax Ruling GSTR 2000/20; Goods and Services Tax: commercial residential premises that the expression 'to be used predominantly for residential accommodation' is to be applied objectively by reference to the characteristics of the premises. Entities making supplies of residential premises that rely on the Ruling continue to be protected where s 105-60 of the Taxation Administration Act 1953 applies. The following Tax Office precedential decisions have been reviewed and it is not considered that they require amendment as a result of this decision: GSTR 2000/20. 10 Page 4
The ATO have not yet found a suitable test case, to fund. VGSO s suggested contractual position VGSO recommends that government agencies, when selling a residential property, continue to follow the ATO s objective approach, under which the sale of real property is not a taxable supply pursuant to s 40-65 of the GST Act, where the premises is either: Occupied as a residence or for residential accommodation; or Has the physical characteristics to support its uses as a residence, where it is permissible to use the premises as a residence (regardless of the term of the occupation as a residence or future use of the property). For further information For further information or legal advice on any issues concerning GST on property sales and purchases please contact: Sue Nolen on 8684 0402 Assistant Victorian Government Solicitor Rowan Ingpen on 8684 0401 Managing Principal Solicitor Margaret Marotti on 8684 0403 Principal Solicitor Jennifer McLean on 8684 0422 Senior Solicitor Page 5 The VGSO is the primary source of legal services to the Victorian state government and its statutory authorities, providing strategic advice and practical legal solutions. 1 (2006) 197 FLR 74 2 ATO GST Ruling 2000/20 paragraph 20 3 Ibid at paragraphs 21 23 4 Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 214 ALR 190 5 Ibid at p.201 6 Explanatory Memorandum, Tax Laws Amendment (2006 Measures No.3) Bill 2006 p.109 7 Ibid at p.112 8 Ibid at 93 9 Ibid at 83 10 ATO-; Decision Impact Statement: Toyama Pty Ltd v Landmark Building Developments Pty Ltd (29 November 2006)