09 Dec 10 Claim for input tax credit on residential premises denied - Sunchen
The Full Federal Court (Edmonds, Jessup and Gilmour JJ) has dismissed the taxapayer's appeal from the decision of Perram J who had in turned dismissed the taxpayer's appeal from the AAT. Both the AAT and Perram J upheld the Commissioner's denial of an input tax credit claimed by the taxpayer in respect of the purchase of a property being used as residential premises.
The property was purchased subject to a lease in favour of a sitting tenant whose right of occupation then had some four months to run. The property was also the subject of an approval for its development into a five storey residential flat building with strata subdivision. Evidence given on behalf of the taxpayer was that the taxpayer intended to develop the property by constructing residential units.
The issue before the Court was whether s 40-65(1) of the GST Act applied to deny the taxpayer an input tax credit because the purchase was "input taxed". That section provided:
"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)."
Sunchen contended that the question of whether residential premises are to be used predominantly for residential accommodation is to be determined principally by reference to the subjective intentions of the purchaser. Sunchen’s submission on the proper test to be applied is based upon observations of White J in Toyama Pty Ltd v Landmark Building Developments Pty Ltd  NSWSC 83; (2006) 197 FLR 74.
The Commissioner contended that the operation of s 40-65(1) does not turn upon the subjective intentions of the purchaser. He submitted that whether premises are ‘to be used predominantly for residential accommodation’ should be determined objectively by reference to the physical characteristics of the property as at the date of acquisition. According to the Commissioner, this contention is consistent with the approach adopted by the Full Court in Marana Holdings Pty Ltd v FCT  FCAFC 307; (2004) 141 FCR 299 to a related, but differently worded, provision of the GST Act.
The Full Court held that the question of whether residential premises are "to be used predominately for residential accommodation" should be determined objectively by reference to the physical characteristics of the property as at the date of acquisition. On this basis, the property in question was to be used predominately for residential accommodation.
Edmonds and Gilmour JJ said, at para 41:
"...in the present case, the words 'to be used predominantly for residential accommodation', is not referring to use by any particular person, but to describe the attributes of the property to which its use is suited. Once it is accepted that the relevant words are not referring to use by any particular person, the intention of the future owner, even if determined solely by reference to objective circumstances and without regard to his stated intention, is totally irrelevant. That is not to say that actual use of the property will necessarily be irrelevant; as the Full Court (Bowen CJ, Deane and Fisher JJ) said in the Hamilton Island Enterprises case: '[T]he use to which an item is actually put will ordinarily be illustrative of at least some aspects of its character.'"
Sunchen Pty Ltd v FCT  FCAFC 138 (Full Federal Court; Edmonds, Jessup and Gilmour JJ; 8 December 2010).