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Five Year Rule for New Residential Premises

A residential premise includes houses, units and flats that are occupied or can be occupied as residences. It does not include vacant land.

When residential premises are sold they may be subject to GST on the sale proceeds. Whether GST is payable on the sale proceeds or not, depends on whether the residential premises are deemed to be ‘new’ residential premises.

The ATO defines residential premises as ‘new’ residential premises if they:

  • Have not previously been sold as residential premises (i.e. are newly constructed).
  • Have been created through substantial renovations of a building.
  • Have been, or contain a building that has been built, to replace demolished premises on the same land.

Normally ‘new’ residential premises are subject to GST on sale. The GST payable by the vendor could be as high as 1/11th of the sale price, but may be lower if the margin scheme applies (see Tax Tip 64). But in any case, the GST payable on the sale of ‘new’ residential premises is often large dollar amounts which reduce the vendor’s profits.

The ‘five year rule’ states that residential premises are not considered to be ‘new’ if they have been rented out as residential premises for five or more years since they first became residential premises, or were last built or substantially renovated. In this case, the sale of the property after being rented out is input taxed (GST free).