Manufacturer exemption only for first-time construction of objects?

Overview

In its decision of 22 February 2022, Ra 2020/15/0001, the Administrative High Court dealt with the question of whether an addition to the first two upper floors and the attic of a property qualifies as a "self-manufactured building" and thus the constituent elements for claiming the manufacturer's exemption can be considered fulfilled.

Facts

In the mid-1970s, the complainant built an annex on top of an already existing building. The property shares of the complainant included residential premises on the first two upper floors and the attic. In 2012, the real estate shares were sold by the complainant and the manufacturer's exemption for self-manufactured buildings was claimed. Due to the failure to submit appropriate documents to prove the conditions of the manufacturer's exemption, the tax exemption was not taken into account by the tax office, which is why the special tax rate of 25 % (applicable real estate tax until 31 December 2015) was applied. The complainant filed an appeal against the income tax assessment, arguing that he had built the annex himself and had borne the financial risk. Due to this and due to the use as main residence since completion, he was entitled to the tax exemption for self-manufactured buildings. In its response to the appeal, the tax office stated that the documents submitted (building permit) showed that it had the authority to construct the annex, but not whether the complainant had borne the financial construction risk. In its decision, the Tax Appeals Court stated that it was evident from the submitted building permit that the applicant had acted as a builder vis-à-vis the authorities and that, based on his assertion, it could be assumed that he had borne the financial risk with regard to the "construction expenses". The Tax Appeals Court estimated the share of the total purchase price attributable to the building at 80 % and applied the tax exemption to it. Due to an extraordinary appeal filed by the tax authorities against the ruling of the Tax Appeals Court, the Administrative High Court subsequently dealt with the facts of the case.

Decision of the Austrian Administrative High Court

The Administrative High Court stated at the outset that the manufacturer's exemption is a tax exemption of income from the sale of self-manufactured buildings. According to the Income Tax Act, the sale of self-constructed buildings is exempt from taxation on the sale of private real estate, as far as they have not served to generate income within the last ten years. The tax exemption is a pure exemption for the building. Therefore, the sale of the land has to be treated as taxable. In order to qualify for the tax exemption, the taxpayer must be a builder, which means that the person bears a significant (financial) construction risk. Another requirement is that the construction measures lead to the erection of a building, thus to the construction of a house. In this context, the Administrative High Court cited its previous rulings and stated that construction measures which, as production expenses, lead to a change in the nature of a building do not meet the definition of a "self-constructed building “ yet, since according to the prevailing opinion, only the construction of a building, ie the "construction of a house", can be regarded as a self-constructed building. Furthermore, the Administrative High Court stated that, in principle, only the first construction of an object is covered by the exemption clause. In addition, the Administrative High Court clarified in a 2004 ruling that an attic conversion and the associated creation of new residential units do not meet the requirements for the "manufacturer's exemption", since the revitalization and expansion of an existing building do not make a different asset out of what already exists. A "house construction" in the sense of the first-time construction of a building object does not represent the attic conversion or the production of attic apartments even if the "entire roof cladding" and the roof truss of the previous building had to be removed for this purpose. Since the Tax Appeals Court's ruling, despite the duty to investigate by the authorities, does not assess whether the addition built in the 1970s in relation to the existing building qualifies as a house construction within the meaning of the case law of the Administrative High Court, the ruling in question was overturned by the Administrative High Court on the grounds of illegality due to procedural errors.

Conclusion

In its ruling, the Administrative High Court summarized the requirements for the application of the manufacturer's exemption according to previous case law and stated that the incurring of manufacturing expenses is not sufficient to be considered a "self-manufactured building” yet. It was also noted that the Tax Appeals Court is subject to an official duty of investigation, which is why it is not sufficient to assume that the financial construction risk is borne just because the building permit states that it is an annex.