GST: 5 Year Rule

Why it doesn’t apply to NDIS providers and endorsed charities

A.             Overview

The sale of a “new residential premises” by a GST-registered vendor conducting an enterprise is a taxable supply and subject to GST.  In contrast, the sale of a pre-owned residential premises is an input taxed supply and not subject to GST.

As a concession, residential premises will cease to be “new residential premises” (and will be treated as pre-owned residential premises) if the vendor has used the premises to make input taxed supplies of residential accommodation for at least five years prior to the first sale.  This is often referred to as the “five-year rule”.

However, due to a drafting anomaly, the five-year rule does not apply to residential premises used by endorsed charities or NDIS providers to make GST-free supplies of accommodation.  Consequently, the first sale of new residential premises used exclusively to make GST-free supplies of affordable housing, social housing, retirement living, or Specialist Disability Accommodation will be subject to GST, even if the residential premises have been leased to eligible tenants for more than five years.

To correct this anomaly, a legislative amendment is required.  For some charities, an option may be to acquire the new residential premises on a turnkey basis from a third party, rather than having the premises constructed on land owned by the charity.  This ensures the residential premises are pre-owned and GST won’t apply to a future sale.  However, for this to be viable, the charity must be exempt from transfer duty on its acquisition of the residential premises.

This option is unlikely to be viable for NDIS providers that are not charities and are ineligible for a transfer duty exemption.

B.             What are the requirements of the five-year rule?

The relevant provision is section 40-75(2) of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”).  It states (my emphasis in bold and underline):

“However, the residential premises are not new residential premises if, for the period of at least 5 years since:

(a)     if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) – the premises first became residential premises;

(b)    if paragraph (1)(b) applies – the premises were last substantially renovated; or

(c)     if paragraph (1)(c) applies – the premises were last built;

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).”

Endorsed charities and NDIS providers face an issue because their supplies of residential accommodation may be GST-free under certain provisions in the GST Act, not input taxed under section 40-35(1)(a).  Specifically:

• Social and affordable housing

  A supply of accommodation by an endorsed charity for less than 75% of market value is GST-free under section 38-250(1). 

• Retirement living

  A supply of accommodation by an endorsed charity that operates a qualifying retirement village to an eligible resident of the retirement village is GST-free under section 38-260.

• Specialist Disability Accommodation

  A supply of Specialist Disability Accommodation by a NDIS provider to a NDIS participant is GST-free under section 38-38.

Since section 40-75(2) refers to residential premises that “have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a)”, it cannot apply to supplies that are GST-free under another section of the GST Act.

C.            New residential premises purchased on a turnkey basis

As noted above, one option for some endorsed charities is to purchase new residential premises on a turnkey basis from a third party.

While the first sale of new residential premises to the endorsed charity will be a taxable supply and subject to GST, the endorsed charity will be entitled to a full input tax credit (GST credit) for that GST if the residential premises will be used exclusively to make GST-free supplies of accommodation.  Additionally, the endorsed charity may also be entitled to a transfer duty exemption if all eligibility requirements under the applicable duty laws of the relevant State or Territory are satisfied.

After acquiring the residential premises on a turnkey basis, the premises will be considered pre-owned, and GST will not apply to any subsequent sale.

This option is unlikely to be viable for NDIS providers which are not charities.  While a full input tax credit (GST credit) should be available if new residential premises are acquired solely to make GST-free supplies of Specialist Disability Accommodation, a transfer duty exemption is unlikely to be available.

D.            Worked Example

Assume SpecialistCo is an approved NDIS provider, that is not an endorsed charity, which provides Specialist Disability Accommodation.

SpecialistCo acquired land in New South Wales for $2 million, plus $200,000 GST, in January 2025. A further $8 million, plus $800,000 GST, will be spent on constructing eight new residential premises which will be used exclusively for Specialist Disability Accommodation. The market value of the eight residential premises on completion will be $10 million, excluding GST.

SpecialistCo will be entitled to $1 million of input tax credits for the GST referrable to the land acquisition and construction costs, on the basis the development will be used solely to make GST-free supplies of accommodation for 15 years.  However, transfer duty of $92,409 is payable on the acquisition of the land.

After 15 years, SpecialistCo decides to subdivide the eight residential premises and sell them individually for market value.  Those sales will be taxable supplies of “new residential premises” and subject to GST, notwithstanding the premises may have been used for more than five years to provide residential accommodation.

As an alternative, SpecialistCo could have arranged for a related company to buy the land and undertake the development of the new residential premises.  SpecialistCo could then have acquired those new residential premises through a taxable supply from the related company for a purchase price of $11 million (including $1 million GST). Any future sale of those premises by Specialist Co would be input taxed and not subject to GST.

In this alternative scenario, SpecialistCo would be entitled to a $1 million input tax credit for the GST paid to the related company.  However, SpecialistCo would also be liable for transfer duty of $587,409 based on the $11 million price.  This is in addition to the transfer duty of $92,409 that would have been payable by the related company on the initial acquisition of the land.  These transfer duty costs may make the alternative scenario unviable.

Note these transfer duty estimates are based on the rates applicable in January 2025 and assume premium rates and surcharge purchaser duty is not applicable.

If this example instead involved an endorsed charity that is eligible for a transfer duty exemption, the alternative scenario may be viable.  To ensure there is no risk that the GST general anti-avoidance provisions could apply, the charity may consider it appropriate to obtain an advance ATO private ruling on the proposed transaction structure.

E.             Concluding Remarks

The anomaly could be addressed through a legislative amendment to section 40-75(2) so that it applies to residential premises which have only been used to supply residential accommodation which is input taxed or GST-free.

PowerHousing Australia, an industry group representing Community Housing Providers, has previously made a submission to Treasury calling for a legislative amendment.  However, the timing of that submission coincided with the outbreak of Covid-19 and the issue was never progressed.  It is an issue that warrants further advocacy to obtain a permanent legislative fix.