Compendium
The use of the phrase 'commercial part' in paragraph 27, could be misleading due to the definition of 'commercial residential premises' in the Act. The business use of the residence is not a defined item under the definition, 'commercial residential premises'. The terminology appears to suggest that the rooms excluded from input taxed treatment are commercial premises. Perhaps other wording should be used to avoid confusion. The division of part residential and part not residential appears to be at odds with the Sunchen principle.
The emphasis in the paragraphs is on the use. This appears contrary to the Sunchen principle. The rooms, which were changed in paragraph 26 of the example, may still have characteristics suitable for residential use. The room used as an operating theatre may become a home theatre room should the premises revert to a residence. It appears that the basic presumption should be that once used as a residence, it is always capable of being a residence.
The draft ruling appears to introduce a new concept that if the modifications are substantial then the property is no longer a residential premises. I believe that this requirement, which I call 'substantiality of modification', is not a requirement in the legislation to determine if the residence is to be used predominantly for residential purposes.
It appears that the basic presumption should be that once used as a residence, it is always capable of being a residence and therefore treated as input taxed.
Compendium
The ATO published responses to 34 submissions on this ruling in GSTR 2012/5EC. Outcome labels are heuristic — read the ATO response for the detail.
D2 1.1Physical characteristics The Draft Ruling begins with the statement in paragraph 6 that the requirement in sections 40-35, 40-65 and 40-70 that premises are residential premises to be used predominantly for residential accommodation is to be interpreted 'as a single test' that looks to the 'characteristics' of the property. In doing so, the Draft Ruling ignores various aspects of those sections which are important for a proper understanding of how the provisions work, for example, the definition of residential premises which is incorporated in each of those provisions and, in addition, issues surrounding apportionment.accepted
ATO response
A discussion on the definition of residential premises has been added to the Ruling - see paragraphs 6 - 8 and 61 - 64.
D2 1.2Physical characteristics The Draft Ruling should make it clear what are 'the characteristics of the property' that are referred to in the suggested single test as stated in paragraph 6. The comment identified wording within paragraphs 6 and 7 which created confusion concerning the expressed view.accepted
ATO response
The Ruling has been updated to clarify that it is the physical characteristics of the premises which is relevant in determining whether the premises are residential premises - see paragraphs 9 - 13 and 65 - 73.