Property Law
When is the Sale of a Residential Premises a Taxable Supply?
Section 40-65 of the GST Act
November 2007
Introduction
Section 40-65 of the GST Act provides that sales
of residential premises are not subject to GST, if
the residential property is to be used
predominantly for residential accommodation.
In the 2006 case of Toyama Pty Ltd v Landmark
Building Developments Pty Ltd1, the NSW
Supreme Court held that the phrase ‘to be used
predominantly for residential accommodation’
indicates that the subjective intentions of the
purchaser are relevant when determining a
property’s use. The ATO, in contrast, has
consistently adopted the objective test that it is
the property’s physical characteristics alone that
are relevant.
GST Act
Section 40-65 of the GST Act states:
40-65 Sales of residential premises
(1) 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).
(2) However the sale is not input taxed
to the extent that the residential
premises are:
Summary
When a property is sold, consideration needs to
be given as to whether the sale will be subject to
GST. Sales of residential property are input
taxed and not subject to GST if the property is to
be ‘used predominantly for residential
accommodation’. The Australian Taxation Office
(ATO) and NSW Supreme Court have expressed
different views regarding the correct manner of
interpreting the residential accommodation
provisions in A New Tax System (Goods and
Services Tax) Act 1999 (GST Act).
These differing views have implications for
Government agencies selling properties that are
capable of being used both commercially and
residentially.
In this article (Jennifer McLean, Senior Solicitor
and Emily Heffernan, Article Clerk) consider the
relevant provisions in the GST Act, the ATO’s
view and recent decisions by the Federal Court
and the NSW Supreme Court..
(a) commercial residential premises; or
(b) new residential premises other than
those used for residential
accommodation (regardless of the term
of occupation) before 2 December 1998.
Page 2
Residential premises is defined in s 195-1 of the
GST Act:
residential premises means 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.
ATO’s interpretation of s 4065
In Goods and Services Tax Ruling 2000/20, the
ATO expressed the view that premises with
physical characteristics which provide the basic
facilities for daily living, even if for a short term
are ‘residential premises to be used
predominantly for residential accommodation’
for the purposes of s 40-65 of the GST Act.2
Where the physical characteristics of part of the
premises can be used for a commercial use rather
than exclusively for a residential use, the ATO
considers that the commercial part of the
premises are not ‘residential premises to be used
predominantly for residential accommodation’
and therefore taxable on sale. The part of the
property that has the physical characteristics to
support residential accommodation will be a sale
of residential premises to be used for residential
accommodation that is not taxable.3
Marana Holdings Pty Ltd v
Commissioner of Taxation
(2004) ALR 190
In the 2005 case of Marana Holdings4 the Full
Federal Court considered whether the sale of a
strata title residential unit that had been
developed from a motel was subject to GST. The
seller claimed that the sale of the property was
not taxable because it was a sale of ‘residential
premises to be used predominantly for residential
accommodation’. In reaching this decision the
Court considered the meaning of the phrase
‘residential premises’ pursuant to s 40-75 of the
GST Act in s 195-1 and ‘new residential
premises’ in s 40-75 of the GST Act.
The seller was a partnership (registered for GST)
and purchased the motel for $5.7 million in 2002.
Up until two days before settlement, the
premises operated as a motel. After settlement,
the partnership obtained planning approval to
use the property as residential units, and the
motel was converted to strata title units.
The partnership sold one of the units as a
residential apartment, for $229,000 and applied
to the Federal Court for a declaration that the
sale was of 'residential premises to be used
predominantly for residential accommodation'
(ie not a taxable supply). The court held it was a
taxable supply.
The partnership appealed to the Full Court of the
Federal Court. The Court considered the
meaning of the phrase ‘new residential premises’
as defined in s 40-75 and the meaning of
residential premises in s 195-1.
40-75 Meaning of new residential
premises
(1) Residential premises are new
residential premises if they:
(a) have not previously been sold as
residential premises (other than
commercial residential premises) and
have not previously been the subject of a
long-term lease; or
(b) have been created through
substantial renovations of a building; or
(c) have been built, or contain a building
that has been built, to replace
demolished premises on the same land.
Meaning of ‘residential
premises’
The Court considered that the test of whether a
property is ‘intended to be occupied and capable
of being occupied as a residence’ for the purposes
of s 195-1 is an objective assessment of whether
the physical characteristics of the property
support its use as a residence.
Page 3
The Court also commented that to constitute a
residence requires ‘… a degree of permanent or
long-term commitment to the occupation of the
premises in question’.5
basis that the trustee breached their duty in
marketing and mistakenly stating, in the
contract, that the sale was a taxable supply under
the GST Act.
The Court held that the sale was a taxable sale of
‘new residential premises’ because the property
had not previously been sold as ‘residential
premises’ and because at the time the motel was
sold to the partnership it:
White J considered s 40-65(1) (as amended), the
phrase ‘to be used predominantly for residential
accommodation’.
•
had not been occupied as residential
premises;
•
had not been intended to be occupied as
a residential premises; and
•
was not physically capable of being
occupied as a residential premises.
The Commonwealth’s
response to Marana
•
In 2006, the Commonwealth
introduced the Tax Laws Amendment
(2006 Measures No. 3) Act 2006, to
ensure that in the wake of the Marana
Holdings decision, certain types of real
property continued to be not taxable.6
•
The amendment made to s 40-65
stipulated that the length of any
previous occupation is to be ignored in
determining whether a supply is of
residential premises to be used
predominantly for residential
accommodation and is therefore not
taxable.
•
The amendment made to the definition
of ‘residential premises’ also stipulated
that the intended form of occupation
was not a factor for consideration.7
Toyama Pty Ltd v Landmark
Building Developments Pty
Ltd [2006] 197 FLR 74
In the Toyama Pty Ltd case, the New South
Wales Supreme Court considered a claim by
Landmark as the beneficiary of a trust for
compensation from the vendor trustees on the
The subject property had a house containing two
residences on part of the land and was marketed
as a development site, as the council had
approved a 14-unit development upon the land.
The Vendor trustees expected that the land
would be purchased by a developer, the house
demolished, and new units built on the site.
Unsure as to whether GST was payable in
relation to the sale, Landmark obtained a private
ruling from the ATO. The trustees’ accountant
subsequently provided additional information to
the ATO and obtained a second private ruling.
Both Landmark’s lawyers and the trustees’
accountant were advised by the ATO that a
taxable sale had not been made given the
premises were objectively a residence in nature,
and given that no 'enterprise' was being carried
on by the trustees.
Meaning of ‘to be used
predominantly for residential
accommodation’
In focusing on the meaning of the phrase ‘to be
used predominantly for residential
accommodation’ in s 40-65(1) of the GST Act,
White J rejected the ATO’s objective view that
the physical characteristics of the property
determine whether there is a non-taxable sale of
‘residential premises to be used predominantly
for residential accommodation’.
White J considered the proper construction of
the words ‘to be used predominantly for
residential accommodation’ to involve a
prediction of future use of the premises, and the
most important fact in such a prediction to be
the intention of the future owner of the
property.
In terms of the practical difficulties that arise
from requiring vendors to ascertain a purchaser’s
Page 4
subjective intentions, White J suggested vendors
protect themselves from liability through
inclusion of a contractual term in the Contract of
Sale, under which the purchaser agrees that the
property would not be used and represents that
the purchaser does not intend the property to be
used in a way that could make the sale a taxable
supply.8
The Court ultimately concluded that the sale was
a taxable supply and the trustees did not fail to
exercise the requisite standard of care to
constitute a breach of trust.
The ATO’s response to
Toyama
Whilst White J’s interpretation of the phrase ‘to
be used predominantly for residential
accommodation’ is of significant interest, it is
important to note that he conceded that his
interpretation of the phrase is not binding upon
the Commissioner of Taxation, enabling the ATO
to continue to apply its views, in making private
rulings stating:
[It was] submitted that it would not be
open to the Court to entertain a
submission that the private rulings of
the ATO were wrong, in the absence of
the Commissioner being joined to the
proceedings … In the present case, a
decision that the sale was a taxable
supply would resolve the issues between
the present parties. Such a decision
would not bind the Commissioner, but
that is not relevant.9
The ATO responded to the Toyama decision by
issuing the following statement:
The Tax Office is concerned that the
approach outlined by his Honour may
cause difficulties to vendors in particular
cases as a result of the liability of the
vendor being determined on the basis of
the subjective intention of the purchaser
which may not be known to the vendor.
As a practical matter, the vendor may
not be aware of a relevant change in the
purchaser's intention which may impact
upon the vendor's GST liability and
contractual remedies may not always be
effective for any misrepresentations that
may be made.
The Tax Office notes that the
considerations that led to the
interpretation by the Full Federal Court,
in the decision in Marana Holdings Pty
Ltd v Commissioner of Taxation [2004]
FCAFC 307, of the word 'intended' in
the definition of residential premises
also apply in respect of the phrase 'to be
used predominantly for residential
accommodation'. In particular, the
person having the relevant intention is
not identified in the Act.
For these reasons, the Tax Office
respectfully prefers the view that an
objective approach is required to the
interpretation of the phrase 'to be used
predominantly for residential
accommodation'. Accordingly, the Tax
Office will continue to administer the
provisions in accordance with the views
in GSTR 2000/20 pending further
judicial clarification.
While the Tax Office will continue to
administer the legislation on this basis, it
will also seek further judicial
clarification of the issues if an
opportunity arises in other litigation.
The Tax Office would consider
providing test case funding for an
appropriate case to clarify the law in this
area through its usual test case funding
processes.
His Honour’s conclusion is contrary to
the view published by the Tax Office in
Goods and Services Tax Ruling GSTR
2000/20; Goods and Services Tax:
commercial residential premises that the
expression 'to be used predominantly for
residential accommodation' is to be
applied objectively by reference to the
characteristics of the premises. Entities
making supplies of residential premises
that rely on the Ruling continue to be
protected where s 105-60 of the
Taxation Administration Act 1953
applies.
The following Tax Office precedential
decisions have been reviewed and it is
not considered that they require
amendment as a result of this decision:
GSTR 2000/20.10
Page 5
The ATO have not yet found a suitable test case,
to fund.
For further information
VGSO’s suggested
contractual position
For further information or legal advice on any
issues concerning GST on property sales and
purchases please contact:
VGSO recommends that government agencies,
when selling a residential property, continue to
follow the ATO’s objective approach, under
which the sale of real property is not a taxable
supply pursuant to s 40-65 of the GST Act, where
the premises is either:
•
Occupied as a residence or for
residential accommodation; or
•
Has the physical characteristics to
support its uses as a residence, where it
is permissible to use the premises as a
residence
(regardless of the term of the occupation as a
residence or future use of the property).
1
(2006) 197 FLR 74
ATO GST Ruling 2000/20 paragraph 20
3
Ibid at paragraphs 21 – 23
4
Marana Holdings Pty Ltd v Commissioner of Taxation
(2004) 214 ALR 190
5
Ibid at p.201
6
Explanatory Memorandum, Tax Laws Amendment
(2006 Measures No.3) Bill 2006 p.109
7
Ibid at p.112
8
Ibid at 93
9
Ibid at 83
10
ATO-; Decision Impact Statement: Toyama Pty Ltd v
Landmark Building Developments Pty Ltd (29
November 2006)
2
Sue Nolen on 8684 0402
Assistant Victorian Government Solicitor
Rowan Ingpen on 8684 0401
Managing Principal Solicitor
Margaret Marotti on 8684 0403
Principal Solicitor
Jennifer McLean on 8684 0422
Senior Solicitor
The VGSO is the primary source of legal services
to the Victorian state government and its
statutory authorities, providing strategic advice
and practical legal solutions.