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1 Will you make a mixed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the Property?

1 Yes, you will make a mixed supply. Question 2 If the answer to Question 1 is yes, does the Commissioner accept that the proposed apportionment methodology to be fair and reasonable for calculating the GST payable amount pursuant to section 9-80 of the GST Act? Answer 2 No. Question 3 Does the purchaser have a GST withholding obligation under subdivision 14-E of Schedule 1 to the Taxation Administration Act 1953 when you sell the Property? Answer 3 No. This ruling applies for the following period : 25 October 20XX to 31 January 20XX The scheme commenced on: 25 October 20XX

The Property comprises a shopfront which was used as a milk bar and a separate residential area located at the rear of the Property. The Property was purchased as a 'Going Concern'. At the time of purchase the entire Property was leased. The Property was constructed in 1956. The residential premise was not a 'new residential premise' when you purchased it. Following settlement, the shopfront continued to operate as a milk bar. Several months later, the milk bar ceased trading. You then leased out the residential premise comprising three bedrooms, a kitchen, living room, powder room, shower, laundry and backyard. During the residential leasing period outlined above, you arranged for all the commercial electricity meters to be disconnected and for the gas supply to the shopfront to be terminated. Commercial kitchen equipment - including fryers, stoves, range hoods and refrigerators remain on the Property to date. The front section of the Property has not undergone any physical modifications that would alter its physical characteristics from those of a milk bar to residential premises to be used for residential accommodation.

You maintained your GST registration as you intended to redevelop (demolish and rebuild) the Property. Due to increasing construction costs and a decline in market demand in the area, you chose not to continue with the redevelopment. You subsequently entered into a contract to sell the Property. You engaged a qualified land surveyor to conduct a land survey to determine what proportion of the Property comprises the residential area and what proportion comprises the commercial area. You proposed to apportion the sale price of the Property based on floor area.

A New Tax System (Goods and Services Tax Act) 1999 section 9-5 A New Tax System (Goods and Services Tax Act) 1999 section 40-65 A New Tax System (Goods and Services Tax Act) 1999 section 9-80 Taxation Administration Act 1953 subsection 14-250(1) of Schedule 1

Question 1 Summary Your supply of the Property will be a mixed supply. The supply is partly input taxed (existing residential premises) and partly taxable (premises used in the operation of the milk bar). GST is only payable on the taxable part, that is the premise that has been used as a milk bar. Detailed reasoning Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make. Section 9-5 of the GST Act states that you make a taxable supply if: (a)          you make the supply for *consideration; and (b)          the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c)          the supply is *connected with the indirect tax zone; and (d)          you are *registered or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (* denotes a term defined in section 195-1 of the GST Act) Your supply of the Property is in Australia, for consideration, in the course or furtherance of your leasing enterprise and you are registered for GST. Therefore, your supply of the Property satisfies the requirements of section 9-5 of the GST Act.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 of the GST Act respectively. There are no provisions in Division 38 under which your sale of the Property would be GST free. Input taxed residential premises Section 40-65 of the GST Act discusses sales of residential premises and states: (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: (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. The Commissioner's view on whether premises are considered residential premises is provided in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5). The terms 'residence' and 'residential accommodation' are not defined in the GST Act and each term takes its ordinary meaning in context.

Paragraphs 9 and 10 of GSTR 2012/5 explain the single test that examines the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation, as follows: 9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. 10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

Paragraphs 15 and 20 of GSTR 2012/5 discuss the requirements of shelter, basic living facilities, and that premises must be fit for human habitation. 15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation. [...] 20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

The residential premise meets the requirements of residential premises to be used predominantly for residential accommodation under subsection 40-65(1) of the GST Act. It is neither commercial residential premises, nor is it new residential premises, and so is not excluded under subsection 40-65(2) of the GST Act from being input taxed residential premises. Supplies requiring apportionment GSTR 2012/5 states: 89. In some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. As paragraph 40-35(2)(a), subsection 40-65(1), and paragraph 40-70(1)(a) refer to the extent that the premises or property are to be used predominantly for residential accommodation, it is necessary that the value of the supply of such premises be apportioned.

90. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house. [...] The residential premise and any land to be enjoyed with the residential premise is an input taxed supply under section 40-65 of the GST Act. The commercial premise and any land to be enjoyed with the commercial premise, is a taxable supply under section 9-5 of the GST Act. As such, your supply of the Property is a mixed supply. Question 2 Summary The Commissioner does not accept that you proposed apportionment method is fair and reasonable for the purposes of section 9-80 of theGST Act. Detailed Reasoning Section 9-80 of the GST Act states: (1)          If a supply (the actual supply

) is: (a)          partly a *taxable supply; and (b)          partly a supply that is *GST-free or *input taxed; the value of the part of the actual supply that is a taxable supply the proportion of the value of the actual supply that the taxable supply represents. The Commissioners view on mixed supplies and apportionment is provided in the Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8). Paragraph 16 of GSTR 2001/8 provides that the term mixed supply is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. On this basis, reasonable apportionment is required under section 9-80 of the GST Act to distinguish between the value of the taxable and non-taxable parts of a supply. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable.

Under paragraphs 25 to 27 of GSTR 2001/8, you can use any reasonable basis to apportion the consideration and calculate the value of the taxable and non-taxable parts of a supply. Whichever method you choose should be supported by your business records. Section 9-80 of the GST Act prescribes a statutory method for calculating the value of a taxable supply that is part of a mixed supply. GSTR 2001/8 provides the following advice at paragraphs 93 to 97, and paragraphs 117 and 118, in relation to what would constitute a 'reasonable method of apportionment': Reasonable methods of apportionment 93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use. 94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed. 96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application. Direct Methods 97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include: •                    the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling)

•                    the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling) •                    the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling) •                    the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling), and •                    the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling). [...] 117. Section 9-80 provides the method for working out the value of the taxable part of a mixed supply that consists only of taxable and GST-free or input taxed parts. The section refers to such a supply as the actual supply. 118. To work out the taxable proportion a conclusion as to the value of the taxable part of the supply has to be made (see paragraphs 81F to 81O of this Ruling). Once that conclusion is made and you have established the value of the taxable part of the supply, you can simply calculate the GST payable as either: •                    10% of the GST-exclusive value of the taxable part; or

•                    1/11 of the GST inclusive value for the taxable part. Applying the above to your circumstances, you will need to determine the respective values of the residential area (input taxed component) and commercial area (taxable component) of the Property. Once you have determined the consideration for the taxable component of the supply of the Property, you can work out your GST liability. GSTR 2001/8 provides the following advice at paragraph 106, in relation to the use of Relative floor area in a supply of property:

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas. Paragraphs 107 to 108A then go on to provide the following example in relation to apportionment for commercial and residential premises: 107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts. 108A. The taxable proportion is therefore 50%. Applying the formula in section 9-80, the taxable value of the actual supply is calculated as ($2000 x 10)/(10 + 0.5). The value of the taxable part is $952.38, and the GST payable is $95.23. You engaged a registered land surveyor who provided a certified floor area drawing identifying the respective areas attributable to the residential and commercial areas of the Property. To work out the percentage of the Property that is commercial, you have divided the commercial floor area by the total floor area. This percentage has been applied to the sale price to determine the price attributable to the commercial premise.

We do not consider that the proposed methodology is fair and reasonable. There is no substantiating commercial evidence to show that you have considered the relative price of the different types of floor space to reach the above conclusion (for example, the value of leases or property sales in the area for commercial and residential properties). We accept that the measurements provided by the registered land surveyor provide an objective, verifiable and contemporaneous numerical foundation for apportionment, however without further consideration of commercial and residential land values in the area we do not accept that the proposed methodology is fair and reasonable. The Commissioner does not accept that your proposed apportionment method is fair and reasonable for the purposes of section 9-80 of theGST Act. Question 3 Summary The purchaser does not have a GST withholding obligation. Detailed Reasoning Subsection 14-250(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that you must pay an amount to the Commissioner if you are the recipient of a taxable supply of new residential premises. Paragraphs 17 and 18 of Law Companion Ruling LCR 2018/4

Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property provides that 'new residential premises' has the meaning given by the GST Act. As discussed in Question 1, you are not making a supply of new residential premises as defined in the GST Act. You are making a supply of a commercial premise and existing residential premise. As subsection 14-250(1) of Schedule 1 of the TAA is not met, the purchaser does not have an obligation to make a GST residential withholding payment under subdivision 14-E of the TAA.