Jan 2017 3 Minutes

GST dual purpose – Rental properties still ‘New Residential Premise’

In a recent tax case the Tribunal held that four rental properties where held for the dual purposes of leasing and to make taxable supplies of new residential premises and as a result the 'five year rule' treating a residential property as not being new residential premises after they had been leased for “at least” a five year period did not apply.

This meant that GST applied on the sale of the four properties that had been built and leased for four years, then sold.  It also held that the Taxpayer was not entitled to apply the margin scheme concession to reduce the GST payable.


Between November 2003 and August 2007, an individual taxpayer acquired four properties, built residential dwellings on these properties and leased them when construction was completed.  She then sold the properties between January 2011 and August 2012.

Input tax credits (ITCs) where claimed by the Taxpayer in her March 2011 quarter BAS.  Following an ATO audit the ATO determined that she was not carrying on an enterprise and her ABN and GST registration were cancelled.  However, after the Taxpayer objected to these decisions, the ATO determined that her GST registration should be reinstated, but that the sales of the four properties in question should be treated as taxable supplies of new residential premises.

The ATO’s decision was determined on the basis that some of the dwellings had been simultaneously marketed for sale whilst being leased and that there were some periods where the dwellings were without a tenant.  Due to the properties being held for a “dual purpose”, the ATO argued that none of the dwellings were used only for making input taxed supplies (of residential rent) for a five year period.

The taxpayer’s fall back argument was that if the disposals were treated as taxable supplies that they were subject to the margin scheme.  However, the AAT held that the margin scheme did not apply as the Taxpayer was unable to satisfy the requirement for written evidence of agreements between the purchasers and Taxpayer for the margin scheme to apply.


Under the 'five year rule' a sale of new premises is not subject to GST if the property is not considered “new residential premises”.  For this to apply, the residential premises need to have been applied only for making input taxed supplies (eg. leased) for at least a five year period.  This five year period commences from the time the residence is intended to be occupied and is capable of being occupied as a residence.

In this case, the Taxpayer did not meet these conditions and the sale of the properties was held to be taxable supplies and subject to GST.  She was however entitled to claim the ITCs on the construction costs of the property.

Importantly, property developers holding leased property they had initially intended to build and sell need to review the actual current use of the property against their intended use and determine if they are holding the property for a “dual purpose”.  If so, GST will be payable when they eventually sell the property, but on the flipside they are entitled to retain ITCs they have claimed, subject to adjustments for the changes of intended use).

Where a developer is not holding the property for a dual purpose, it will need to repay ITCs it has claimed and on the sale of the premises, determine if it will be making input taxed residential premises where no GST is payable.

This area is a Hot Audit target for the ATO.