Australia: To be used or not to be used – that is the question

For the purposes of GST, a sale of real property is input taxed if it is residential premises to be used predominantly for residential accommodation.  Does this mean the purchaser must intend to use it for residential accommodation?  Or that the property must be capable of being used for residential accommodation?  On 8 December 2010 the Full Federal Court held in the case of Sunchen Pty Ltd v FCT [2010] FCAFC 138 that the purchaser's intentions need not be considered.

Facts of the case

Sunchen is an Australian company registered for GST.  It acquired a property under a contract of sale for $525,000 inclusive of GST.  Settlement occurred on 20 September 2006.  The purchase was subject to an existing residential tenancy that continued for at least 2 months after settlement.

Sunchen claimed an input tax credit of $47,727 in respect of its purchase of the property on the basis that it was a taxable supply because Sunchen's intention as at the date of settlement was to redevelop the site into 10 units.

The Commissioner denied the claim on the basis that the supply of the property was an input taxed supply because the property was residential premises to be used predominantly for residential accommodation.

The parties agreed that at the time of settlement the property was residential premises, as a house with carport was located on the property and the property was tenanted.  Therefore, the only issue in dispute was whether the premises were "to be used predominantly for residential accommodation".

What is an input taxed supply?

Most sales of residential property (not being new residential property) are input taxed, meaning that the vendor is not required to remit any GST to the ATO on account of the sale, but is also not entitled to claim input tax credits for any GST it has paid in making acquisitions that relate to the sale of the property.  For example, if the vendor renovates the bathroom and pays a tiler $3000 plus GST of $300, and acquires a new bathroom vanity for $2000 plus GST of $200, it is unable to claim input tax credits for the $500 GST it has outlaid in the renovations.

When is the sale of residential accommodation input taxed?

A sale of residential accommodation is input taxed provided the requirements of section 40-65 of the GST Act are met.  Section 40-65 of the GST Act states that:

"A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)."

The Full Federal Court (Edmonds, Jessup and Gilmour JJ) in Sunchen's case was required to determine whether the intended use of the property by the purchaser is a relevant consideration under section 40-65.

The Court considered the case of Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 where a single judge of the NSW Supreme Court held that section 40-65 requires a prediction as to the future use of the premises which, in the case of a sale, would depend on the purchaser's intentions.

The Court contrasted this with the decision in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307 where the Full Federal Court, in considering the definition of "residential premises" in section 195-1 of the GST Act, held that the words "land or a building that is intended to be occupied as a residence" did not require a determination of the intentions of the purchaser, but rather required an objective determination of the purpose for which the property is suitable.

The Court preferred the decision in Marana, and chose to overrule the decision in Toyama.  The Court stated that the words "to be used" require a determination of the objective physical suitability of the premises being supplied.  Jessup J delivered a minority judgement which indicated that the intentions of the purchaser at the time of settlement, determined objectively, are a relevant consideration.  However, the majority judgement did not take this view.

The court was persuaded by the impracticability of a tax imposed on a vendor that is dependent on a purchaser's intentions.  The court also found a test based on intentions to be unworkable, because there is no guidance as to how far into the future the predictions should be made.

What this means?

The decision is good news for vendors, as it provides more certainty as to the GST treatment of a sale, without the need to delve into the intentions of the purchaser.  Previously, some contracts have included warranties from the purchaser as to intended use.  Such mechanisms will no longer be necessary.

Please contact us should you require advice regarding the correct GST treatment of a real property transaction, or should you require an appropriate GST clause.

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