Private ruling: GST and sale of a new unit
Published: June 2013

Ruling: Q1: Is GST payable on the sale of the newly constructed unit? | A1: Yes, GST is payable on the sale of the unit.

Relevant facts and circumstances: You own a property in Australia. The property is in a residential area and contained a house. The property was purchased before 1 July 2000 and has been rented out until recently. Currently, this is the only investment property that you own. The house was old and in need of major renovations. Your plan is to demolish the house to erect several new units on the property. The land will be subdivided on a strata-title basis. You have engaged surveyors to carry out the subdivision work. You have attached a copy of the building permit with your ruling application. The construction of the units is to commence soon. The construction costs will be financed by a bank loan. You expect to sell one unit on completion, and keep the other units to be tenanted long term. The expected sale price for one unit is approximately $X. Development is planned to commence in this financial year. Completion and anticipated sale date is planned to be in the next financial year, market conditions permitting. Your day to day involvement will be the overseeing/supervising of the construction works. The old house is currently being demolished but no other work has commenced yet. This is a one-off investment decision and the sale of one unit is to help cover some of the building costs. You submit that this sale is not part of an enterprise involved in the selling of real estate. You have not been involved in any such developments previously and given your current circumstances, you do not plan to be involved in any similar projects in the future. You are not registered for the goods and services tax (GST). You submit that, if GST is applicable to the sale, then the margin scheme would apply due to the purchase date.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 7-1; | 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 section 9-40; | A New Tax System (Goods and Services Tax) Act 1999 section 23-5; | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1); | A New Tax System (Goods and Services Tax) Act 1999 section 188-15; | A New Tax System (Goods and Services Tax) Act 1999 section 188-20; | A New Tax System (Goods and Services Tax) Act 1999 section 188-25; and | A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision: Summary: GST is payable on taxable supplies. Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply you make. A supply is a taxable supply if all the requirements of section 9-5 of the GST Act are met. Section 9-5 of the GST Act states that you make a taxable supply if: · you make the supply for *consideration; and · the supply is made in the course or furtherance of an *enterprise that you *carry on; and · the supply is *connected with Australia; and · 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 section 195-1 of the GST Act. In your case, what needs to be determined is: · whether the sale of the unit will be in the course or furtherance of an enterprise carried on by you; and · whether you are required to be registered Are you carrying on an enterprise? Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition includes an activity or series of activities done in the form of a business; or 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, licence or other grant of an interest in the property. You have rented the property out until recently. As such, you have been carrying on an enterprise of leasing until that time. In your case, we also need to consider whether your activities of land subdivision, construction of the units and the sale of one of the new units constitute an enterprise. The definition of 'business' in section 195-1 of the GST Act is the same as that in section 995-1 of the Income Tax Assessment Act 1997 . The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. Some of those indicators are: · a significant commercial activity · a purpose and intention of the taxpayer to engage in commercial activity · an intention to make a profit from the activity · the activity is or will be profitable · the recurrent or regular nature of the activity · the activity is carried on in a similar manner to that of other businesses in the same or similar trade · activity is systematic, organised and carried on in a businesslike manner and records are kept · the activities are of a reasonable size and scale · a business plan exists · commercial sales of product, and · the entity has relevant knowledge or skill. There is no single test that determines whether a business is being carried on. To be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business. In your case, there is clearly an intention to make a profit. It is likely that the subdivision and construction of the units will be profitable. However, you have held the property and rented it out for many years. You have not developed land prior to this subdivision and the construction of new units. Therefore, based on the facts provided, we are satisfied that you are not in the business of land development. However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions, that do not amount to a business, but which have the characteristics of a business deal. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes. Paragraph 265 of MT2006/1 details a list of factors that provide assistance in determining whether activities are an adventure or concern in the nature of trade. If several of the following factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on. The factors are: · there is a change of purpose for which the land is held · additional land is acquired to be added to the original parcel of land · the parcel of land is brought into account as a business asset · there is a coherent plan for the subdivision of the land · there is a business organisation - for example a manager, office and letterhead · borrowed funds financed the acquisition or subdivision · interest on money borrowed to defray subdivisional costs was claimed as a business expense · there is a level of development of the land beyond that necessary to secure council approval for the subdivision · buildings have been erected on the land. In addition, paragraph 266 of MT 2006/1 states: In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. You acquired your entire interest in the land prior to 1 July 2000. The land contained a house which you have rented out until recently. However, the existing house is old and is in need of major renovations. You plan to demolish the house to erect several new units on the property. One of the units built on the land will be sold to help cover some of the building costs. As such, there is a change of purpose for which the land was previously held. The subdivision into several lots and the construction of units on the land, with one unit for sale and the others for long term lease, is more profitable than the sale of the property as one large block or the sale of the corresponding portion of the land without the construction of the unit. However, this fact alone is not detrimental to the conclusion that the sale may still be a mere realisation of a capital asset. The fact that you have not been involved in any other land subdivision or property development activities in the past is a relevant factor. The fact that the property has been used to provide residential rental accommodation is also relevant. We refer to paragraph 244 of MT 2006/1 which states: An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature... Specialist subcontractors would be engaged to carry out the subdivision and construction work. Buildings will be erected on the land. As such, there is a coherent plan for subdivision of the land and there is a level of development of the land beyond that necessary to secure council approval for subdivision. You have borrowed substantial funds from the bank to finance the subdivision and construction. The scale of the activities undertaken suggests that the subdivision and development of the property has a commercial character. The development of the property and the subsequent sale of the newly constructed unit are activities that would constitute an enterprise. Having applied all the principles listed above to your circumstances, we conclude that in subdividing the land and constructing units on the land you are carrying on an enterprise. Are you required to be registered for GST? Under section 23-5 of the GST Act, an entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. As you are not registered for GST, we need to consider whether your GST turnover will meet the registration turnover threshold such that you are required to register for GST in relation to your activities in connection with that land. Does your GST turnover meet the registration turnover threshold? Currently, the registration turnover threshold is $75,000 (or $150,000 for a non-profit body). You have a GST turnover that meets the turnover threshold under subsection 188-10(1) of the GST Act when: · your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or · your projected GST turnover is at or above the turnover threshold. Section 188-15 of the GST Act defines 'current GST turnover'. The 'current GST turnover' at any time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during the current month and the preceding 11 months. Section 188-20 of the GST Act defines 'projected GST turnover'. The 'projected GST turnover' at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months. Generally, the following supplies are excluded from the calculation of current GST turnover and projected GST turnover: · supplies that are input taxed; · supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act); · supplies not made in connection with an enterprise that you carry on; · supplies that are not connected with Australia. Section 188-25 of the GST Act provides for the exclusion of certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover: · any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and · any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an *enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). Therefore, in your case, we need to consider whether the sale of one of the new units is in connection with an enterprise that you carry on; whether the sale is by way of transfer of ownership of a capital asset of yours and whether either paragraph (a) or (b) above applies to the sale. You have carried on an enterprise of leasing on the land that contained the house that is being demolished. As discussed above, your activities of land subdivision, construction of the units and the subsequent sale of one of the units also constitute an enterprise. As such, the sale of the unit will be in the course or furtherance of your enterprise. The relevant issue for consideration is whether the sale of the unit is the transfer of ownership of a capital asset of yours, such that it can be excluded from the calculation of your projected GST turnover. Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) refers to the meaning of GST turnover. Paragraphs 31-32 of GSTR 2001/7 state: 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. You have carried on an enterprise of leasing on the land that contained the house that is being demolished. As such, the property was a capital asset that made up 'the profit yielding subject' of your leasing enterprise. However, as discussed above, there is a change of purpose from which the land was previously held. The issue for consideration is whether you will be transferring ownership of a capital asset of yours when you sell one of the units. Over the period that an asset is held by an entity, its character may change from capital to revenue or vice versa. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply. When you sell the developed land containing one of the units, that property will not be a capital asset at the time of the sale as the unit has not previously been used as the 'profit yielding subject' of an enterprise. At the time of sale, the unit assumes the character of a trading asset of an enterprise. You will make the supply in the course or furtherance of a property development enterprise. The sale would not be solely as a consequence of substantially and permanently reducing the size or scale of your leasing enterprise as you will now be leasing a number of units instead of the one house that was previously tenanted. In fact, it can be seen that there will be an increase in the scale of your leasing enterprise. The sale would also not be solely as a consequence of ceasing to carry on the leasing enterprise, as you will still be carrying on your leasing enterprise in respect of the other units. Moreover, the sale of the unit at the completion of the land development enterprise is not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances, the enterprise ceases as a consequence of the disposal of the unit rather than the unit being disposed of in consequence of the ceasing to carry on the enterprise. Accordingly, the sale of the unit will not be disregarded when calculating your projected GST turnover. Consequently, the GST exclusive value of the unit will be included when working out your projected GST turnover. The sale price of the new unit is expected to be over the registration turnover threshold amount. When you sell the unit, your projected GST turnover will be above the registration turnover threshold. Therefore, you will have a GST turnover that meets the turnover threshold under subsection 188-10(1) of the GST Act and paragraph 23-5(b) of the GST Act will be satisfied. You will be required to be registered for GST. Sale of the newly constructed unit As you will be required to be registered for GST, paragraph 9-5(d) of the GST Act will be satisfied. Accordingly, when you sell the unit, you will satisfy all the requirements of section 9-5 of the GST Act. The sale of the unit will be a taxable supply and you will be liable for the GST payable on that sale. The GST payable is 1/11th of the sale price. However, as you bought the property before 1 July 2000 (the start of GST), you can use the margin scheme if you and the purchaser have agreed in writing that the margin scheme is to apply. Under the margin scheme, the GST payable is 1/11th of the margin for the supply. Information on the margin scheme is available on our website at www.ato.gov.au. Please also note that section 40-35 of the GST Act provides that a supply of premises that is by way of lease, hire or licence is input taxed. If a supply is input taxed there is no GST payable on the supply and there are no entitlements to input tax credits for anything acquired to make the supply. Therefore, you cannot claim input tax credits on the units constructed for leasing.