The ATO has changed its position on residential premises in its new public ruling, GSTR 2012/5, in which the ATO asserts that you only look to the physical characteristics to determine whether premises are residential premises. This will lead to some unexpected and unusual GST results.
How has the ATO view on residential premises changed?
The ATO view used to be that all objective factors, including the physical characteristics of a property, had to be examined to determine whether a property was residential premises.
In the GST Act, the test is whether premises are intended to be occupied, and capable of being occupied, as a residence or for residential accommodation (regardless of the term of occupation).
The actual use of the premises was acknowledged as a relevant factor in the now withdrawn GSTR 2000/20, which stated:
27. In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics given in paragraph 26. These often, but not always, include:
- The purpose or context of the premises' use is for personal accommodation, rather than another purpose, such as for a business.
- The tasks of day to day living, such as, preparing food, cleaning and laundering, are performed by the occupant, or by others under private arrangements.
It is not clear why the Commissioner has moved away from his previous public ruling. That ruling was largely consistent with the law, as subsequently set out in the Full Federal Court decision in Sunchen Pty Ltd v Commissioner of Taxation. In Sunchen, the majority agreed the actual use of the premises was a relevant consideration:
Once it is accepted that the relevant words are not referring to use by any particular person, the intention of the future owner, even if determined solely by reference to objective circumstances and without regard to his stated intention, is totally irrelevant. That is not to say that actual use of the property will necessarily be irrelevant; as the Full Court (Bowen CJ, Deane and Fisher JJ) said in the Hamilton Island Enterprises case: '[T]he use to which an item is actually put will ordinarily be illustrative of at least some aspects of its character.'
Who is affected by the ATO's changed view?
Consider an example where a building adjacent to a large commercial shopping centre and on a busy main road is owned by the trustee of a trust. The trustee leases the building to a related company that carries on a business of selling widgets from the premises.
The building was originally constructed as a house, but has not been lived in for 10 years. No substantial modifications have been done: there is commercial signage out the front, the area of the building used by customers is petitioned off with temporary walls and the products are displayed in glass cabinets.
The trustee sells the property with vacant possession to a purchaser, who in turn leases it to a related party to operate a business selling different types of widgets.
The ATO view, based on GSTR 2012/5, is that the sale is an input taxed supply of residential premises. Sunchen tells us that the purchaser's subjective intention on how it will use the property is irrelevant. But the ATO view now goes further – and requires us to disregard all relevant information on how the premises have been used and look only at its physical characteristics.
This method produces the unusual result that the purchaser acquires the property as an input taxed supply of residential premises (despite nobody living in it). The purchaser cannot claim any input tax credits in relation to its acquisition.
The ATO view also generates odd results on the subsequent lease of the building to the company carrying on the business. The ATO thinks that the lease is also an input taxed supply of residential premises because the test for residential premises is the same for both sales and leases.
This application of the law is well beyond the reason leases of residential premises were input taxed in the first place – to put tenants in a roughly equivalent position as owner-occupiers. It is strange that commercial operations are now potentially caught in input taxed supply chains.
Apart from the unusual GST results, what's the issue?
Purchasers, in particular, need to be wary of the ATO position.
The risk is that the parties think the supply is taxable and the purchaser pays GST to the vendor and claims an input tax credit for the GST. We have seen a number of instances of the ATO amending the purchaser's BAS to deny the input tax credits claimed. The purchaser was not able to recover the GST from the vendor.
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