Private ruling: Goods and services tax (GST) and sale of property
Date of advice: 22 April 2016
Published: June 2016

Ruling: Q1: Is your sale of the property at location X input taxed? | A1: No. The supply is a taxable supply.

Relevant facts and circumstances: You are registered for GST. Your activities broadly are property investment. You purchased a property in Australia at location X (property X) with a house on the block many years ago. You leased out property X under a residential tenancy for the entire period from when you purchased the property to when the house was damaged many years ago. During this period you leased the property on a regular and continuous basis except for temporary periods of vacancy due to changes of tenancies. During these temporary periods of vacancy you sought new tenants. The zoning for property X is medium density residential. This was the zoning when you purchased the property which allowed for residential multi-dwellings so you hoped for some ultimate financial gain. You also purchased the adjoining property at location Y (property Y) with an old house located on the property many years ago. You procured DA approval over the two blocks for the development of many residential units. The process of obtaining DA approval commenced many years ago. DA approval over the two blocks was granted many years ago. You did hope to either sell the two blocks to a developer or to develop and sell the units built on the combined blocks in the future. However, build costs and the downturn in the economy did not allow this to happen. Many years ago, the Council ordered you to demolish the house on property X and clear the block. You employed your own team to demolish the house in a certain year as it was not viable to restore the house so this would make the property more attractive to a, would be purchaser. Further, in a certain year you removed the footings and cleared the block. Services are still available. You did not anticipate achieving profits on the land over recent years due to the downturn in the economy. You will make a loss on the sale of each of these properties as you purchased each property a certain number of years ago at a certain price each plus stamp duty and you are prepared to accept a certain price on property X and a certain price on property Y. You prefer to sell the two properties simultaneously either to the same purchaser or to two separate purchasers to fully free some funds against the loss of the properties. You do not want to be left with only one property negating the added possible incentive of the expense of a DA already accounted for to a future buyer as the DA only applies to the two properties combined. Your real estate agent is advertising the two properties as a potential residential unit development opportunity with DA approval for many residential units to indicate the full potential of the site, but the advertisement also suggests there is potential for a much smaller townhouse development. You have a potential buyer - an individual. You have agreed to a sale contract being issued to this individual. The properties are on separate titles zoned medium density residential. You have not developed property X. The house situated on property Y is in its original state as when it was purchased. Your contention As each property can be sold separately you do not think that combining the two blocks for a development is relevant even though this might have been a profitable outcome in the future. When you purchased property X it was already zoned for medium density residential so there is no increase in the potential today from the date of purchase.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35

Reasons for decision: Summary: Your sale of property X is not input taxed under subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because you have not used the property solely in connection with your supplies that are input taxed. GST is payable on your sale of this property because you meet all of the requirements of section 9-5 of the GST Act. | Detailed Reasoning - Detailed reasoning: GST is payable on any taxable supplies that you make. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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 the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in the GST Act) The indirect tax zone is Australia. You meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because: • you will supply property X for consideration • this supply will be made in the course or furtherance of your enterprise • the supply is connected with Australia (as the property is located in Australia), and • you are registered for GST. There are no provisions in the GST Act under which your sale of property X is GST-free. Therefore, what remains to be determined is whether your sale of the property will be input taxed. In accordance with section 40-35 of the GST Act, leasing out residential premises is an input taxed supply. Subsection 9-30(4) of the GST Act states: A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed and are not *financial supplies. ATO ID 2009/18 discusses whether an entity, a residential property owner, made an input taxed supply under subsection 9-30(4) of the GST Act when it sold its property as vacant land after demolishing a fire damaged house on the land. In the scenario considered in ATO ID 2009/18, the entity's enterprise involved activities of property development and activities of making supplies by way of lease. Up to the time when the house was damaged by fire the entity had used the property solely in connection with its leasing activities. To prepare the land for sale, the entity arranged for the demolition and removal of the fire damaged house as it was a health and safety risk. The entity sold the property as vacant land. Although the entity's enterprise involved property development, the entity had not held the property for the purpose of, or as part of, its activities of property development. The ninth paragraph of ATO ID 2009/18 discusses the term 'use' in the context of subsection 9-30(4) of the GST Act. It states: The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity: • how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party) • what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and • what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value). The tenth paragraph of ATO ID 2009/18 states: It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose. As you leased out residential premises, you made input taxed supplies under section 40-35 of the GST Act. Hence, you thereby used the property in connection with your input taxed supplies. These input taxed supplies were not financial supplies. However, as outlined in ATO ID 2009/18, in determining how a property has been 'used' for the purposes of subsection 9-30(4) of the GST Act, the entities purpose in holding the land is a relevant factor. In your case, although you leased out the property in question until it was damaged, you also held it for the purposes of development and trading, as: • you obtained DA approval to build units on the two lots in a certain year • you did hope to either sell the two blocks with the DA to a developer or even to develop and sell the units built on the combined blocks in the future, and • your real estate agent is currently advertising the two properties as a potential unit development opportunity and the advertisement mentions that there is a DA approval for development of many units. Your activity of obtaining DA approval to develop the two properties was not connected with your input taxed supplies (leasing out the residential premises that previously existed at property X). Your activity of obtaining DA approval related to your previous plan to sell the two blocks to a developer with the DA approval or build units on the combined blocks and then sell the new residential premises. Hence, for the purposes of subsection 9-30(4) of the GST Act, you have applied property X for a purpose other than making input taxed supplies. Therefore, you have not used property X solely in connection with your supplies that are input taxed throughout the period of your ownership of the property. This is the case even though you did not actually develop the property. Hence, your sale of property X is not input taxed under subsection 9-30(4) of the GST Act. There are no other provisions in the GST Act under which your sale of property X is input taxed. Therefore, as all of the requirements of section 9-5 of the GST Act are met, GST is payable on your sale of property X. This will be the case no matter who you sell the property to (a property development company, a private individual or otherwise) and regardless of whether or not you sell each of the two properties separately or together. You may be able to use the margin scheme to calculate GST on your sale of property X, subject to meeting certain requirements.