Ask Ban Tacs Question
Am I deemed to be "An investor who is simply realising an asset in the most marketable way". And not a person/business who "acquired a property with the intention of improving it in some way to resell at profit?"
Can I deregister from GST and sell my property and be classed as the above investor description and not have to charge GST and can still claim the 50% CGT discount?
In May 26 2007 I bought (at auction – 3 moth settlement) a residential house (Edwardian built in 1903)in residential zone that had a commercial tenant (accountancy) since 1950s. I was and still am registered for gst but have no other business that requires I be registered. I claimed twice GST credits of the GST on Management fees but then have not made any GST Credits for the 4 years of ownership. The vendor was not registered for GST at time of that sale.
I want to sell the property now that the commercial tenant has vacated and the Real Estate agent advises it will be difficult to get another commercial tenant – too far from main street. It is 200m from University of Victoria though. I am still registed for GST for no reason, except for some accountants telling me I should be registered just in case I find my self in the position that I need to charge GST and won’t have that benefit if I deregister.
I have thought about renting the house out as a residential boarding house to students and have applied for a building permit to council to change the use of the house to class 1b boarding house. (gross annual rental projected to be 35k)
Once building permit is approved and the house is registered, does this qualify me as being in development business in the eyes of ATO if I sell the house advertising it as a boarding house. I have not had building permit approved yet or completed final registration so I can back out if necessary, I think if this helps.
ps. I asked Julia a simialar question answered by Julia 14 Jun 2008. Although this question is very specific to my current situation in which I am about to sell the property.
Question in summary. I want to deregister from gst before selling house as a residential house (with possible use as boarding house) so I won’t have to charge gst and can claim 50% CGT.
Answer
While the concepts applied to whether you are in business for GST or CGT purposes are based on the same principles it will be easier to address the CGT and GST questions separately.
CGT:
Changing the zoning will not make you a developer. As long as your original intention when you purchased the property was to hold it to earn rent then the question is have you now changed the purpose for which you hold the property, over to a business of profit making by sale. I say you are not because you are simply re zoning. It would be different if you pulled it down and constructed a new building. And even in that case it would only be the future gain that wouldn’t get the 50% discount not the gain to date because it is the market value that it will be bought into account for the business anyway (because you did not originally hold with the intention of reselling at a profit). The market value takes into account the potential for re zoning so there would be very little difference anyway.
Using an asset in the business of a boarding house will still allow it to be subject to CGT not normal income tax.
GST
If you are registered for GST in the enterprise that owns (and uses in the enterprise) something you are selling then you must charge GST on the sale if it is a taxable supply. So if you continue to be registered for GST you need to consider whether you are making a taxable supply (supplying an item that is subject to GST). When it is not the first sale of residential premises it is not subject to GST. We can safely assume that this property has been previously sold as residential premises, though it may have been before our time. So if you sell it as simply residential premises now no GST.
The rezoning does make a difference here. According to GSTR 2000/20 Boarding houses are commercial residential premises so GST has to be charged on their sale. I have included a link to and extracts from GSTR 2000/20 so that you can have a look at how they draw the line between lodgers and a boarding house. Maybe there is a gap for you but I don’t really think it is worth trying to duck and weave. You may as well just de register for GST.
I am assuming your business turnover of GSTable supplies is less than $75,000. Section 138 would require you to pay back any GST for which the adjustment period has not expired, when you de register but it sounds like there is nothing that will apply to so I see no reason for you to remain registered. You can still keep your ABN so you won’t ever have to apply for a number again. Should you ever need to register for GST again simply notify the ATO.
GSTR 2000/20 http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR200020/NAT/ATO/00001
12. As a general rule, where you make a taxable supply of commercial residential premises you will be liable for GST. The GST Act treats a supply of residential premises differently. Supplies of residential premises to be used predominantly for residential accommodation, other than new residential premises, are input taxed, regardless of your registration status.F3 A supply may be by way of sale, or of lease, hire or licence.
13. Generally, where you make a taxable supply of commercial accommodation in commercial residential premises, the supply is subject to GST. The GST payable is 10% of the value of the taxable supply.
Part one: Residential premises
16. To understand how the definition of commercial residential premises applies, it is first necessary to examine the concepts and application of GST to residential premises. Under the GST law, supplies of residential premises are input taxed, but only to the extent that they are to be used predominantly for residential accommodation. There are two major exceptions, these are:
•
sales of new residential premises; and
•
supplies of commercial residential premises including supplies of accommodation in these.F7
Residential premises is defined as land or a building that:
(a)
is occupied as a residence or for residential accommodation; or
(b)
is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of the occupation or intended occupation)
and includes a *floating home.F8
Meaning of ‘residential premises’, ‘residence’ and ‘to be used predominantly for residential accommodation’
18. To understand the use of these terms it is necessary to view their context in the definitions and structure of the GST Act. The definition of ‘commercial residential premises’ in paragraph (f) referring to ‘anything similar to *residential premises described in paragraphs (a) to (e)’ clearly indicates that the preceding paragraphs refer to things that are residential premises.F9 This suggests that the definition of residential premises and the use of residence in that definition have a broader meaning than those words may ordinarily have.
19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are ‘to be used predominantly for residential accommodation’ indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.
20. To be used for ‘residential accommodation’ or to be ‘occupied as a residence’, premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. This follows from the definition of commercial residential premises referred to in paragraph 18.
21. Some examples will indicate the differences that need to be understood in this context. If a building consists of a shop below and a flat above, the physical characteristics indicate that only part of the building is residential premises, that is, the flat. The shop is not residential premises and is taxable in the normal way when leased or sold.
22. The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor’s surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property.
23. Whether or not a particular room or part of a house or apartment is to be used predominantly for residential accommodation, as opposed to commercial purposes, is a question of fact and degree. A home office in a house will not generally be sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use will still be residential accommodation.
Characteristics of residential premises
24. The definition of ‘residential premises’ in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation or is intended and capable of being occupied as a residence or for residential accommodation.
25. The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.
26. The physical characteristics common to residential premises that provide accommodation are:
(i)
The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.
(ii)
The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.
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:
(i)
The purpose or context of the premises’ use is for personal accommodation, rather than another purpose, such as for a business.
(ii)
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.
(iii)
The status of the occupant is most commonly that of owner, tenant or lessee.F10 Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.
(iv)
The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.
Sleeping accommodation and facilities for human habitation
28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself.F11 The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.
29. Premises that lack these basic features, may not be either residential premises or commercial residential premises. Supplies of buildings or other structures without these characteristics are subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupied as some form of residence.
Form of the premises
30. The definition of commercial residential premises sets out types of premises to be covered. The definition of residential premises does not do this and from this it is clear that there is no intention to restrict the form or type of building or structure that can be ‘residential premises’, provided it is fit for accommodation and day to day living.F12
Purpose of premises
31. In some cases, the purpose for which the premises are to be used will be evident from their form or fit-out. This is most clearly the case where premises have been fabricated, or altered, to accommodate commercial or professional activities.
Services
32. It is usual for those who occupy residential premises to be largely responsible for their own care. That is, either they must cook, clean and launder for themselves, or provide for these things to be done by another, in some form of private arrangement (whether or not this is a paid arrangement). The salient factor is that these things are not arranged externally by the owner or manager of the premises, but privately by the occupant.
33. Exceptions exist in some premises that are residential in nature such as, dormitory or barrack style accommodation.
Status of the occupant
34. There are a variety of arrangements by which residential premises may be supplied. Typically, residential premises are owner occupied, or supplied under a residential tenancy agreement.F13 Under these agreements, tenants are entitled to quiet enjoyment of the premises.
35. Other arrangements, less formal than tenancy agreements, also exist. People frequently occupy residential premises as guests or lodgers. There is a distinction between these arrangements and those in commercial residential premises. Guests, even paying guests, in residential premises usually have an informal, private arrangement for occupation which does not amount to tenancy.
Example 1
Helen is a university student, who rents a large house and provides 3 rooms to other students to help cover the costs. All are responsible for their own cooking and cleaning. Although the other students are lodgers, their arrangements with Helen are private. The property is not a boarding house or similar to one. The house is residential premises .
Zoning
36. For premises to be residential, it must be legal for them to be used for accommodation. As the concepts of ‘residential’ are given a broad treatment under GST, it is only necessary that the land on which premises stand is zoned by the Council or Shire in a way that contemplates human habitation or accommodation, even if only for short term occupancy. A certain zoning, or a change of zoning cannot, by itself, alter the character of premises.
Part two: Commercial residential premises
Definition of commercial residential premises
62. The definition of commercial residential premises in section 195-1 is central to the interpretation of Subdivisions 40-B and 40-C and the special rules for long term accommodation in Division 87. This Ruling focuses on paragraphs (a), (e) and (f) of the definition.
63. Paragraphs 64 to 74 contain a brief overview of the interpretation of each element of the definition. Key concepts in the definition are dealt with in detail in the sections that follow.
‘a hotel, motel, inn, hostel or boarding house’ (paragraph (a))
64. These premises are discussed under the subheading ‘ Hotels, motels, inns , hostels and boarding houses’ .
‘premises used to provide accommodation in connection with a school’ (paragraph (b))
65. The boarding facilities provided by schools, or by another organisation on behalf of or in connection with a school or schools, are commercial residential premises.
66. This does not necessarily mean that supplies of accommodation for students undertaking school courses will be subject to GST. Section 38-105 makes supplies of student accommodation to those undertaking primary, secondary or special education courses GST-free, where:
•
the supplier of the accommodation also supplies the course; or
•
the accommodation is provided in a hostel whose primary purpose is to supply such accommodation to students from rural or remote locations.
67. Other supplies of accommodation you make in boarding facilities or hostels are subject to the basic and special rules as they apply to commercial residential premises.F25 This includes taxable supplies of accommodation made to teachers and staff.
‘a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire’ (paragraph (c))
68. Where you let out a ship, such as a charter vessel, on a long or short term basis, the supply is subject to GST.
69. A lease or hire of a ship for 28 days or more is the supply of long-term accommodation, eligible for the special treatment given in Division 87. This applies despite the fact that ships are not residential premises. Their inclusion in the definition of commercial residential premises ensures that section 87-15 applies to make the hiring-out of such a ship, a supply of commercial accommodation.
‘a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport’ (paragraph (d))
70. The special treatment for long-term (28 days or more) stays applies to accommodation offered on ships used for entertainment or transport. Cruise ships, for example, fall into this category.
‘a caravan park or a camping ground’ (paragraph (e))
71. These premises are more fully discussed under the subheading ‘ Caravan parks and camping grounds’ .
‘anything similar to residential premises described in paragraphs (a) to (e)’ (paragraph (f))
72. Paragraph (f) includes in the definition of commercial residential premises, anything similar to the residential premises described in paragraphs (a) to (e). This means that to be considered under paragraph (f), the premises must be similar to a hotel, motel, inn, hostel, boarding house, premises used to provide accommodation in connection with a school, caravan park or camping ground. The ships in paragraphs (c) and (d) are not considered under this paragraph as they are not ‘residential premises’, as defined in section 195-1.
73. Paragraph (f) is discussed below under the subheading ‘ Residential premises similar to hotels, motels, inns, hostels and boarding houses’ .
‘However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school.’ (exclusion to the definition)
74. This paragraph excludes from the definition premises such as residential colleges or halls of residence on university campuses.
170. residential premises means land or a building that:
(a)
is occupied as a residence or for residential accommodation; or
(b)
(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of occupation or intended occupation)
and includes a floating home.F65
.
