Private ruling: The supply of new residential premises in an isolated property transaction by an individual who was not registered for GST.
Published: February 2014

Ruling: Q1: Will your sale of Unit 2, be a taxable supply? | A1: Yes

Relevant facts and circumstances: You, purchased a property which had a very old, dilapidated house on it. You are not registered for GST. The property was located in Australia and comprised two titles of equal size. The house, which was located on number XX (Number XX), was not in suitable condition to rent to third parties. You lived in this house while you built your main residence on number XY (Number XY). You built this house as an owner builder and then moved into it. Once you moved into the new house on Number XY, the house on Number XX stayed vacant. During this time, you treated the entire property as your main residence. There was no internal fencing separating Number XX from XY. The ownership costs of holding a bigger block were becoming financially onerous. You were looking towards retirement, and wanted to downsize your residence. You were advised that the best way to realise the value of the main residence was to build two units on Number XX. You therefore decided to sell your larger home at Number XY and subdivide Number XX into two lots. You demolished the dilapidated house and built two units on Number XX. When the units were completed, you sold the house on Number XY and moved into Unit 1, Number XX as your main residence. You then sold Unit 2, Number XX. You have no history in real estate development or sales. No funds were borrowed to build the units. You engaged a builder to construct the units. You did not have a business plan. You have received an income tax ruling which has advised that your sale is assessable as ordinary income.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-5, | A New Tax System (Goods and Services Tax) Act 1999 9-20 and | A New Tax System (Goods and Services Tax) Act 1999 23-5.

Reasons for decision: Summary: In this ruling, please note: · All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise. · All terms marked by *asterisk are a defined term in the GST Act unless stated otherwise. You must pay the GST payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with Australia; 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. In your case, you made a supply of Unit 2, Number XX in Australia, for consideration thereby satisfying subsections 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in your circumstances. However, it is necessary to determine if the supply of Unit 2 was: · made in the course of an enterprise you carry on and · if you are required to be registered for GST. | Detailed Reasoning - Enterprise: Subsection 9-20(1) relevantly provides that: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade. 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 (MT 2006/1) considers the meaning of carrying on an enterprise. Paragraphs 262 and 263 of MT 2006/1 state: | Detailed Reasoning - Isolated transactions and sales of real property: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. ... Your activities proceeded in a number of steps. · You acquired an old house on a large block which comprised two titles. · You lived in the existing house on Number XX while you constructed a new house on Number XY. You subsequently moved into Number XY as your principle place of residence. · You then subdivided the block at Number XX and constructed 2 units thereon. · You sold your private house on Number XY and moved into Unit 1, Number XX. · Following this, you sold the remaining unit, Unit 2, Number XX. In this ruling, we consider the acquisition of the property and the construction of your principle place of residence at Number XY and then Unit 1 on Number XX not to be enterprise activities but carried out for private purposes. However, we consider the construction of Unit 2 for the purposes of sale not to be a private transaction and to be a 'one-off' or isolated real property transaction. Therefore we need to consider whether the construction and sale of Unit 2 amounts to an enterprise. Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities that are undertaken, are in the form of an 'adventure or concern in the nature of trade' and state: 264. The cases of Statham & Anor v. Federal Commissioner of Taxation … (Statham) and Casimaty v. FC of T … (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. From the 'Statham' and 'Casimaty' cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade… If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: … · 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; and · buildings have been erected on the land. 266. 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. … 269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience… Example 29 in MT 2006/1 sets out in paragraphs 273 to 276 the situation where an individual acquires a piece of land and constructs two units on that piece of land. He sells off one of the units and lives in the other. We consider that the following factors in your situation are similar. In particular, · there was a change of purpose for which the land was held · 2 units were erected on the land · there was an intention to live in one unit and sell the other; and · further, there is a reasonable expectation of profit or gain from the sale of Unit 2. These factors indicate that your activity amounts to more than the mere realisation of a capital asset and that you are carrying on an enterprise. Therefore, you satisfied paragraph 9-5(b) when you sold Unit 2, Number XX. We now need to consider whether you are required to be registered for GST (paragraph 9-5(d). | Detailed Reasoning - Registration: Section 23-5 of the GST Act provides that you are required to be registered if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. As set out above, the Commissioner has determined that you are carrying on an enterprise and therefore we will examine whether your GST turnover meets the registration threshold. Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if: § 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. The threshold for either current or projected turnover is currently $75,000. Your current GST turnover is the sum of the value of all supplies you have made or are likely to have been made in the current month and the previous 11 months excluding input taxed supplies, supplies that are not for consideration and are not taxable supplies under section 72-5 and supplies not made in connection with an enterprise you are carrying on. Your projected GST turnover at a time during a particular month is the sum of the values of all supplies that you have made or are likely to be make during that month and the next 11 months other than input taxed supplies, supplies that are not made for consideration and are not taxable supplies under section 72-5 and supplies not made in connection with an enterprise you are carrying on. Although section 188-25 requires you to also disregard supplies of capital assets in this calculation this is not relevant in your factual situation because we have made a finding that the nature of the asset (the property) has changed from a capital asset to trading stock. Your current GST turnover prior to the month before the sale was below the threshold and therefore you are required to determine when your projected GST turnover will exceed $75,000. As the value of the supply of the completed unit will be greater than $75,000 your projected GST turnover will exceed the GST turnover threshold. Consequently, when your projected GST turnover met or exceeded this threshold, you were required to be registered for GST. Based on the facts you have supplied it is expected that you would have been required to be registered 11 months before the settlement on Unit 2. | Detailed Reasoning - Conclusion: As you were required to be registered for GST with respect to your construction of Unit 2, Number XX, you will meet all the requirements of section 9-5 for of the GST Act and your supply of Unit 2 would have been a taxable supply. You will be required to report the GST on these taxable supplies. Generally, this will be equivalent to 1/11 th of the price for each lot. You will also be entitled to claim GST credits on any creditable acquisitions you made in constructing Unit 2.