Private ruling: GST and sale of property
Published: September 2017
Ruling period: NA
Date scheme commenced: NA

Ruling: Q1: Are you liable to pay the goods and services tax (GST) on the sale of the properties. | A1: Yes. Where the properties are sold within five years of construction and/or substantial renovations have been made, you are liable to pay the GST on their sale.

Relevant facts and circumstances: You initially purchased an old house on a large residential block. You then commenced renting this house and decided to sub-divide the block to enable you to build a new residence on the land towards the back of the block. Building on the “new residence” at the back of the block commenced and was completed in 20xx. This was then rented out through an agent. Initially it was your intention to retain the properties as a long term investment. However your circumstances have changed and you are looking to sell both properties. You do not have a history of developing properties and so given that you were looking to hold these for at least 5 years you did not register for GST. Hence you have not claimed any GST credits in relation to the development costs. You will not engage into any new development in the future. You are ceasing your leasing enterprise and selling the properties.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 9-5, 9-20, 23-5, 40-65, 40-75,195-1.

Reasons for decision: Summary: A taxable supply is made under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if the supply is made for consideration, in the course or furtherance of an enterprise that is carried on by the supplier, the supply is connected with the indirect tax zone (Australia), and the supplier is registered or required to be registered for GST. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. In this case you initially purchased an old house on a large residential block in. You then substantially renovated the house and commenced renting it. You also built a new house at the back of the property for renting. Goods and Services Tax Ruling (GSTR 2003/3) explains what is a 'sale' for the purposes of section 40-65 and when real property is new residential premises pursuant to section 40-75 of the GST Act. Paragraphs 60 &61 of GSTR 2003/3 have been reproduced below: | Detailed Reasoning - Criteria for substantial renovations: 60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances. 61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial: (i) the renovations need to affect the building as a whole; and (ii) the renovations need to result in the removal or replacement of all or substantially all of the building. In this case we are of the view that the renovations affect the building as a whole thus resulting in the creation of a new residential property. | Detailed Reasoning - Enterprises and Disposal of Capital Assets: Section 9-20 of the GST Act provides that an enterprise is an activity or series of activities conducted in the form of a business, an adventure or concern in the nature of trade or on a regular or continuous basis in the form of a lease. Section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. The definition of the term 'enterp rise' for GST purposes and what activities constitute an enterprise are discussed in the following two publications which are available on our website www.ato.gov.au ● 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) ● 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 ? (GSTD 2006/6) Therefore the construction of the residential house, the substantial renovation of the old house, the leasing of the properties and the sale of the properties are viewed as constituting an enterprise and the disposal of the properties by way of sale would constitute a supply made in the course or furtherance of terminating your enterprise. | Detailed Reasoning - Taxable Supplies of Residential Premises: There are no provisions in Division 38 of the GST Act which allow the supply of residential premises by way of sale to be GST-free. Subsection 40-65(1) of the GST Act provides that the sale of residential premises is an input taxed supply. However, subsection 40-65(2) of the GST Act excludes the supply of new residential premises from being an input taxed supply. Subsection 40-75(2) of the GST Act provides that premises are not new residential premises if they have been used for a period of at least five years to make input taxed supplies of residential premises by way of lease, hire or licence under section 40-35 of the GST Act. However, in this case the properties will be sold before the five year period has expired. This means that they will be considered to be new residential premises. Thus, when you sell the renovated property and the constructed residential house, you will make a supply of new residential premises to the purchasers. As the supply of new residential premises is not input taxed, your supply of new residential premises to the purchasers will be taxable. | Detailed Reasoning - GST Registration: Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. Currently the registration turnover threshold (unless you are a non-profit body) is $75,000. Therefore, if your annual turnover meets the relevant turnover threshold, you will be required to register for GST. In this case your annual turnover will be over the registration turnover threshold of $75,000 in the month you sell the properties. You will therefore be required to be registered for GST. Note: As you make input taxed supplies of residential premises you will need to apportion your input tax credits on any acquisitions or importations that were used to make those supplies.