🏠 GST and Mixed-Use Properties: When Is a Shopfront Residential?

Mr. Kevin To owns a two-level property in Mascot. The ground floor was originally constructed as a retail shopfront, while the upstairs has always been a three-bedroom apartment.

Although the council zoning permitted “mixed commercial and residential use,” for over 10 years Mr. To and his family lived in both levels — using the upstairs as bedrooms and the ground floor as their living and dining area. The shopfront was never leased or operated as a business.

Now, as he prepares to sell, Mr. To believes there should be no GST on the sale, since the property has been used solely as his main residence. But does the ATO agree?

Legal Framework

• s 40-65 GST Act → sale is input taxed if the premises are “residential premises to be used predominantly for residential accommodation.”

• GSTR 2012/5 → “residential premises” are determined by physical characteristics (bedrooms, bathroom, kitchen, living areas).

• GSTR 2006/9 (paras 222–246) → a supply may be:

  • Composite (one supply with incidental parts); or

  • Mixed (distinct supplies, each retaining its character).

• Key point: Owner-occupation is not determinative — the GST treatment depends on the essential character of the premises.

  
  

Conversion into Residential Premises

If the ground floor has been genuinely converted into a dwelling (bedrooms, kitchen, bathroom, laundry) and all retail/shopfront features have been removed, then:

• It has the physical characteristics of a residential premises (s 40-65, GSTR 2012/5).

• Provided it is not classed as new residential premises (s 40-75), the sale will be input taxed (no GST).

  
  

What the ATO Will Look At

The ATO will not rely on the owner’s word alone. They will want evidence that the ground floor is truly residential:

• Physical layout: Does it function as a self-contained residence (bedrooms, kitchen, bathroom, laundry)?

• Approvals: Was council approval obtained for a change of use from commercial to residential?

• Fit-out: Is the design consistent with a home, or do commercial features remain (shopfront glazing, roller shutters, open-plan layout)?

  
  

Council Approval – Is It Essential?

• Legislation: Council approval is not explicitly required under the GST Act. The test remains whether the property is “capable of being occupied as a residence.”

• ATO practice: Approval is powerful evidence. Without it, the ATO may argue that the premises legally remain commercial in character.

• Reality: Without approval, it is often difficult to convince the ATO that the property has been transformed into residential premises.

  
  

Two Scenarios for Kevin To

Scenario 1 – Ground floor retains commercial character (Mixed Supply)

• Facts: Ground floor still resembles a shop (glass frontage, open plan, no approval).

• Application:

  • Upstairs → residential premises → input taxed (s 40-65).

  • Ground floor → commercial premises → taxable supply.

  • Outcome = mixed supply (GSTR 2006/9). Apportionment required by valuation.

• Tax Consequence: GST payable on the ground floor portion. Input tax credits may be available. Margin scheme (Div 75) could reduce the GST liability if conditions are met.

  
  

Scenario 2 – Ground floor converted into residential (Composite Supply)

• Facts: Ground floor structurally converted into a self-contained dwelling (bedrooms, kitchen, bathroom, laundry), with council approval for change of use.

• Application:

  • Entire building now has residential characteristics.

  • Outcome = composite supply of residential premises (GSTR 2006/9).

• Tax Consequence:

  • Sale is input taxed in full, unless classified as “new residential premises” under s 40-75 (in which case the whole sale would be taxable).

    
    

💡 Lesson

It’s not about how you used the property, or even how it’s zoned. What matters is the character of the building itself. Living in a shop does not automatically make it a house in the eyes of the ATO.