When is a residence not a residence?

A recent decision of the Full Court of the Federal Court of Australia has provided some much needed clarity in relation to the application of GST to residential (or what appear to be residential) property transactions.

In Australia, GST does not apply to the supply of residential property (other than new dwellings), that is, it is not a taxable supply. Accordingly, no input tax credit is available to a purchaser.

The taxpayer, Sunchen Pty Ltd, purchased a property which included a tenanted house. Although the company had plans to develop the property by building a block of units, these were not at an advanced stage when it purchased the property. Based on its intention to develop the property, Sunchen claimed an input tax credit. The claim was denied by the Australian Taxation Office and the decision was affirmed by subsequent hearings before the Administrative Appeals Tribunal and a single judge of the Federal Court. However the reasoning used in these decisions created some uncertainty. In addition, the NSW Supreme Court decision in Toyama Pty Ltd v Landmark Building & Developments Pty Ltd suggested that to some extent, the intentions of the buyer were a relevant factor in determining if a property was to be used predominantly for residential accommodation.

In the Full Court, the Court said that it was an objective test whether a property was to be used for residential accommodation. That is, it depended on the characteristics of the property rather than the intention of the buyer.

This decision highlights the fact that even 10 years into the GST, issues can arise with respect to the treatment of relatively common property transactions. As always it pays to have the GST treatment of the property determined as much as possible prior to contract and for adequate provisions concerning GST to be contained within the contract.

For advice on the treatment of GST in property transactions please contact Certus Legal Group.