Whether or not a property is considered 'residential
premises' for GST purposes is an important question for both
sellers and buyers alike. The full Federal Court recently
overturned the decision in the Sunchen case, removing a degree of
uncertainty for taxpayers who are party to residential property
Key takeaways from this case
Both sellers and buyers must carefully consider the GST
consequences of every property transaction, and not simply rely on
past assumptions about how much money needs to be set aside for
GST. Even subtle differences between a current transaction and one
you have entered into in the past may mean that its tax treatment
It is critical that GST issues are dealt with when preparing a
sale contract to avoid incurring unexpected costs after the
Sunchen Pty Ltd v Commissioner of Taxation considered
what may be residential property for GST purposes.
Sunchen purchased a property at Port Macquarie, which, at the
time of settlement, included a tenanted house. The company had
plans to develop the property, but these were not at an advanced
stage when the property was purchased. In the purchase contract,
Sunchen stated that it did not intend to change the use of the
property, which, at the time, was predominantly for residential
purposes. The contract further provided that if Sunchen changed the
use of the property, the vendor would be indemnified from any GST
liability this caused.
Sunchen was registered for GST. The company claimed an input tax
credit (ITC), but the Australian Taxation Office
disallowed the ITC claim. While the ATO was successful before both
the Administrative Appeals Tribunal and a single judge of the
Federal Court, the legal reasoning created substantial uncertainty
about the GST treatment of very common property transactions.
The legal reasoning used
Generally, residential premises (other than 'new'
premises) are not subject to GST. Whether an ITC is available
depends on whether the sale is a taxable supply. This is based on
whether the land is premises to be used predominantly for
residential accommodation. If property is considered residential
premises, no ITC is available.
In the full Federal Court, Justices Edmonds and Gilmour both
said that whether a property was to be used for residential
accommodation was an objective test that depended on the
property's characteristics, not on the intention of the future
owner. In the Sunchen case, the intention appeared to be to develop
the house into a block of units at some time in the future, even
though the property was being rented as a residence for at least
six months after Sunchen acquired it.
This is in contrast to the earlier decision of the single judge,
which followed the NSW Supreme Court decision of Toyama Pty Ltd
v Landmark Building & Developments Pty Ltd. The finding in
this case was that the intentions of the buyer were relevant (at
least to some extent) in determining if a property was to be used
predominantly for residential accommodation or whether the sale was
a taxable supply.
This decision shows that GST law can be a lot more complex than
business people may think. On a positive note, it does remove some
uncertainty for taxpayers who are party to property transactions. A
buyer should now not be able to change the seller's GST
outcomes simply by claiming a particular 'intention'.
For more information about this case or the GST consequences of
property transactions, please contact HopgoodGanim's Taxation
and Revenue practice.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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