Private ruling: Carrying on an enterprise versus one off isolated transaction/ margin scheme
Date of advice: 28 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020

Ruling: Q1: Am I carrying on an enterprise of property development and therefore required to apply for an Australian Business Number and register for GST? | A1: Yes | Q2: Can the margin scheme apply to the sale of the apartments? | A2: Yes

Relevant facts and circumstances: Several year ago, you purchased land with a dwelling, the land was zoned R40. Your intentions were to use the property for investment purposes and sell the property when the land value improved as part of a long term investment. The council bought back a portion of the land in for road widening. After this incurred you decided the best way to maximise your return was to knock down the existing dwelling and build apartments on the land. The council approved the application for the development of the residential apartment complex. Schedule of particulars was signed by the builder and yourself this included a payment plan for the complex. Valuation report of the development was approved allowing borrowing of additional funds. Building permit for your hired builder was approved and valid for two years. An application for occupancy strata permit was submitted to the council and approved two months later.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 75-5

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered for GST. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*denotes a term defined in section 195-1 of the GST Act.) Based on the information provided, the sale of the units satisfies the requirements of paragraphs 9-5(a) to 9-5(c) of the GST Act. That is, you will supply the units for consideration and the supply is connected with the indirect tax zone as the apartments are located in Australia. You are not registered for GST. Furthermore, the sales of the apartments are not GST free. It remains to be determined whether the sale of the apartments is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST. | Detailed Reasoning - Are you carrying on an enterprise?: The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done: ● in the form of a business, ● in the form of an adventure or concern in the nature of trade, ● or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number , and Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999?. The principles outlined in these public rulings have been applied to your circumstances. Based on the facts provided, you purchased the property for long term investment purposes. Your intention changed due the sale on a part of the land, now the land has been completely transformed into a strata complex. We consider the development and sale of the new residential apartments are in the course of an enterprise and more than the mere realisation of capital assets due to the following factors: Your intention for investment return changed and the development has completely transformed the land. You had a coherent plan for the development with the assistance of professional personnel. Development plans were required to be submitted to council. You have borrowed funds for the development which has been approved by a valuation report for income returning reliability. The related expenses to the development are a significant amount. You have retained budget spread sheets of all expenses and projected profit for the development. | Summary: In conclusion, on the basis of all factors taken into a combination, these activities indicate a commercial approach and there is a clear intention maximising profit return. The activities undertaken in the development of the apartments have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sale of the new residential apartments will satisfy the requirements of paragraph 9-5(b) of the GST Act. | Detailed Reasoning - Are you required to be registered for GST?: As you are not currently registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the property development and the sale activities that will take place. Section 23-5 of the GST Act requires you to be registered for GST if: a) you are carrying on an enterprise and b) your GST turnover meets or exceeds the registration turnover threshold. (The current registration turnover threshold is $75,000.) As set out above we consider that: you are carrying on a property development enterprise and the supplies in this enterprise will be supplies of the apartments which resulted from converting your land a capital asset, to a revenue asset used in your enterprise. Therefore the value of the supply of the apartments will be included in your turnover threshold. As the sale value exceeds $75,000 you are required to be registered for GST. You satisfy the requirements of paragraph 9-5(d) of the GST Act. Therefore the supply of the apartments satisfies all the requirements of section 9-5 of the GST Act and is subject to GST. | Detailed Reasoning - Can the margin scheme be applied to the taxable supply?: Under subsection 75-5(1) of the GST Act, the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply.