In a decision of the Australian Administrative Tribunal, the Member in the Dals Property Trust Case clarified the application of the '5-year rule' used to determine whether residential premises are 'new residential premises' and are therefore subject to GST.
Ordinarily, the sale of 'new residential premises' is subject to GST. However, the sale of new residential premises may not trigger GST if the premises have been leased to residential tenants for a continuous period of at least 5 years prior to the sale. In the Dals Property Trust Case, the Commissioner successfully argued that the 5-year rule was broken when the developer started to actively market the premises for sale.
The ATO has now published its Decision Impact Statement (DIS) which outlines its position on the interpretation of the 5-year rule, including when 'new residential premises' are no longer exclusively used for residential rental purposes, when the 5-year period may commence and when GST mistakenly paid to the Commissioner by a taxpayer can be refunded.
This article will summarise the key facts and findings of the Dals Property Trust Case, provide insights on the DIS and outline what this may mean for you.Tristram Feder, Maddocks Lawyers
While generally the sale of ‘new residential premises’ is subject to GST, the sale of such premises will not trigger GST if the premises have only been used for residential leasing purposes for a continuous period of at least 5 years prior to the sale (known as the ‘5-year rule’).
In Domestic Property Developments Pty Ltd as trustee for the Dals Property Trust and Commissioner of Taxation , the developer (Dals) constructed a residential property development, but failed to sell two of the units (Unit 1 and Unit 3). Dals subsequently leased Unit 1 and Unit 3 to residential tenants. Before 5 years passed since the units were constructed, Dals began to actively market Unit 1 for sale. Dals later sold both units and paid GST from the sales to the Commissioner.
However, Dals later took the view that the GST it has paid was excessive, on the basis that:
The Tribunal decided in favour of the Commissioner, finding that the proceeds received from the sale of Unit 1 were not exempt from GST as the 5-year rule had been broken. The Tribunal was clear that the 5-year rule required that the 5 year lease period must be unbroken but that in the circumstances of the case:
Further, the Tribunal held that even if the sales satisfied the 5-year rule and were exempt from GST, Dals was not entitled to a refund as Dals had already ‘passed on’ the GST burden to the purchaser.
Active marketing of Unit 1
The Tribunal decided that Unit 1 was not used only for residential leasing purposes as Dal’s marketing of Unit 1 for sale was also a ‘use’ of those premises. While it was accepted by the Tribunal that actively marketing a property is generally not considered a ‘use’ of land, the Member decided that in the context of a property developer carrying on a property development enterprise, marketing for the sale of premises was an important part of its business operations.
Eligibility for refund
While the parties accepted that Unit 3 had passed the 5-year rule and was exempt from GST, the Tribunal considered that Dals was ineligible for a refund.
If the economic burden of GST is deemed to have been ‘passed on’ to the purchaser, a vendor taxpayer is not eligible for a refund of GST. This is to prevent the vendor from making a windfall gain on GST amounts. To ensure this outcome, the taxpayer bears the burden of proving that it did not pass on the incorrect GST amount.
In this case, the Tribunal found that Dals failed to prove that it did not recover an amount referable to GST from the purchaser. The Member noted that:
In the DIS, the Commissioner has accepted the Tribunal’s interpretation of the law. In particular, the Commissioner has outlined that it will:
On the basis of the Tribunal’s decision and the DIS, you should consider:
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Commercial team.
Alisha Wright is an Associate in Maddocks’ Commercial Team.
Alisha advises extensively in a range of matters including:
Alisha has recently assisted with providing advice to SMSFs in relation to their compliance obligations and the drafting of bespoke shareholders agreements.
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