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  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
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
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  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  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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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