The Full Federal Court has handed down its decision in Sunchen Pty Ltd v Commissioner of Taxation [2010] FCAFC 138. In essence, the issue before the Court was whether land purchased by the taxpayer, Sunchen Pty Ltd, was a residential premises to be used predominantly for residential accommodation. The Court held that the answer to this question was to be determined by reference to the objective characteristics of the property, and not by reference to the subjective intentions of the taxpayer when purchasing the property. This is a positive result for property developers, as it means that the correct GST treatment can be determined by examining the physical attributes of a property rather than having to determine the subjective intention of the purchaser. It also confirms the correctness of long standing industry practice and the ATO view expressed in GSTR 2000/20.
Background to the decision
Sunchen Pty Ltd, a property developer, purchased a property intending to develop it into a block of apartments. As the purchaser intended to develop the land rather than use it for residential accommodation, both the vendor and Sunchen agreed that the sale was a taxable supply. On this basis, Sunchen claimed an input tax credit on the purchase. At the time of sale the property was subject to a residential lease, and bore all the normal physical characteristics of a residential property. The Commissioner disallowed the taxpayers claim on the basis that the supply was a sale of residential premises and hence an input taxed supply.
The Commissioner's decision was based on section 40-65 of A New Tax System (Goods and Services Tax) Act 1999 (the "GST Act") which provides that the supply of premises is input taxed, but only to the extent that the premises is to be used predominantly for residential accommodation. "Residential accommodation" is defined in section 195-1 of the Act as a land or building that is occupied as residential accommodation, or is intended to be used , and is capable of being occupied as residential accommodation. The taxpayer argued that this definition required an examination of its subjective intentions. As these were to develop, rather than occupy the property, it argued the supply was subject to GST and it was entitled to an input tax credit.
This argument was initially successful in the Administrative Appeals Tribunal and the Federal Court, as they both felt obliged (albeit reluctantly) to follow the earlier New South Wales Supreme Court decision in Toyama Pty Ltd v Commissioner of Taxation, which held that a purchaser's subjective intentions were a relevant consideration.
Had these decisions stood they would have imposed impractical obligations on vendors, as the GST treatment of property sales would be determined by the subjective intentions of purchasers when buying the property. Vendors might have been liable for GST even if they sold properties which had all the physical attributes of a normal residential dwelling.
The Full Federal Court decision
However the Full Federal Court rejected Sunchen's argument, and held that the definition of residential premises requires an examination of the objective characteristics of a property rather than the purchaser's subjective intentions. The Court considered that the words "to be used predominately for residential accommodation" required an examination of the physical attributes of the property. Neither the phrases "to be used" nor "intended to be used" require a prediction as to the future uses of the property by an actual purchaser.
Importantly the Court did not consider it relevant that both parties had considered the transaction to be a taxable supply.
Implications of the decision
This decision confirms the correctness of GSTR 2000/20 "Goods and Service Tax: commercial residential premises', which states that a residential premises is one with the physical characteristics enabling it to be occupied by people for sleeping and day to day living. Taxpayers who have followed the approach in this ruling can continue to do so.
Although the taxpayer was unsuccessful in this case, the decision is arguably a commonsense approach. Vendors will be able to rely on the physical characteristics of a property to determine the correct GST treatment, and will not need to predict the actual use of the property by each individual purchaser. This will help provide certainty to property transactions.
For further information on a GST-related tax matter please contact the authors or your Moore Stephens Relationship Partner.
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