Private ruling: GST and sale of property
Date of advice: 24 September 2020
Published: November 2020
Ruling period: 1 July 20XX - 30 June 20XX

Ruling: Q1: Are you liable to pay GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the recently constructed duplex known as Unit 1? | A1: No

Relevant facts and circumstances: You are not registered for GST. In yyyy you purchased property (the Property). Your intention when acquiring the Property was to hold the Property as a long-term investment for rental purposes. Following your acquisition the Property was rented immediately. In yyyy, following the existing tenants vacating the Property, the Property had been left in an extremely bad condition. The Property was unable to be rented again without conducting extensive repairs. You made the decision to demolish the existing residential dwelling and build a set of duplexes (rather than spend money of repairs). You considered this approach would be a far better return on investment (i.e.to rent a new set of duplexes, rather than trying to rent out an old house). The existing residential dwelling was demolished in approximately mm/yyyy. Construction of the new dwellings commenced around mm/yyyy. Construction of the duplex houses (Unit 1 and Unit 2) was completed around mm/yyyy. You financed the construction through a 'Construction loan' however this was changed to an 'investment loan' in yyyy. Unit 1 was leased commencing from dd/mm/yyyy for a term of 26 weeks. At the time you acquired the Property you were employed full-time. Your duties involved managing the store design and construction team and the property portfolio. In yyyy you established ABC Pty Ltd (ABC). You are the sole Director of ABC with your role being Project Manager and Retail Consultant. Your duties involve assisting retailers with site location negotiations and providing guidance on construction. Due to the following circumstances that have significantly impacted your financial position you have decided to sell the duplex known as Unit 1: · In late mm/yyyy (a few weeks after the existing dwelling at the Property was demolished) you were made redundant from your full-time salary and wage position. · On dd/mm/yyyy you entered into a 'Binding Financial Agreement' (the Agreement) as prescribed for under the Family Law Act 1975. Under the Agreement you were required to pay an amount of $xxx,xxxx to your ex-spouse. · COVID 19 has significantly reduced your current work at ABC which has resulted in you being in receipt of the JobKeeper payment as an eligible business participant. You also own three other properties: 1. Location 1 acquired in yyyy. Prior to the separation with your spouse in yyyy, this property was used as your primary place of residence with your spouse and two children. Following the separation, your spouse and children continued to reside at this location until construction of Unit 2 was completed and they moved to this address. Subsequently Location 1 was leased to a third party from dd/mm/yyyy. 2. Location 2 acquired in yyyy as an investment. This property currently leased for a 12-month period commencing dd/mm/yyyy. 3. Location 3 acquired in yyyy. This property was acquired as an investment and is also currently leased.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Paragraph 9-5(d) | Section 9-20 | Paragraph 9-20(1)(c) | Section 9-40 | Section 23-5 | Section 40-35 | Subsection 188-10(1) | Section 188-15 | Paragraph 188-15(1)(a) | Section 188-20 | Paragraph 188-20(1)(a) | Section 188-25 | Section 195-1

Reasons for decision: Summary: In this ruling, · unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) · all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. · all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides 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 for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The issue in this case is whether the sale of the duplex known as Unit 1 when sold, is in the course or furtherance of an enterprise you carry on. If so, as you are not currently registered for GST, we will consider whether you are required to be registered. | Detailed Reasoning - Enterprise: The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)). Section 195-1 clarifies that the phrase 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise. 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 , which in accordance with paragraph 20 is also applicable to the construction of the term 'enterprise' in the GST Act, provides guidance as to when an enterprise is considered to be carried on. This approach is confirmed in 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? Paragraphs 303 to 322 of MT 2006/1 discusses activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents. In this case you own multiple properties which have been acquired over a number of years. The properties have been acquired for the purpose of generating rental income and capital growth. These activities constitute an 'enterprise' as defined for GST purposes. The sale of a rental property (in this case Unit 1) will fall within the scope of being 'made in the course or furtherance of an enterprise that you carry on'. | Detailed Reasoning - GST registration: Section 23-5 provides that you are required to register for GST if you are carrying on an enterprise and your GST turnover meets the GST registration turnover threshold (currently $75,000 unless you are a non-profit body). As discussed above, you are considered to be carrying on an enterprise. Therefore, if your GST turnover is $75,000 or more you will be required to register for GST. Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if: (a) your current 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 (b) your projected GST turnover is at or above the turnover threshold. Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months. Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months. Paragraph 188-15(1)(a) and paragraph 188-20(1)(a) provide that input taxed supplies are not taken into account when calculating your current and projected turnovers respectively. Section 40-35 provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) is input taxed. Therefore, your turnover generated from the rental of your residential properties is not included in the calculation of your current or projected GST turnover. In addition, section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours. Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue. The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7: Meaning of 'capital assets' 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. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling. 36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose provides guidance on issues relevant to this case. Whilst GSTR 2009/4 is discussed in the context of the application of Division 129, the principles contained are relevant in this case. Paragraph 39 of GSTR 2009/4 provides that a distinction can be made between things that are being held for the purpose of sale (revenue asset) as part of an enterprise being carried on by an entity, and things such as business plant and machinery (capital asset) used by an entity in carrying on an enterprise. Paragraph 41 of GSTR 2009/4 contains a number of indicators or characteristics to assist in determining whether an entity holds a thing for the purpose of sale (revenue asset) including: · the subject matter - if a thing provides either a regular or periodic income (such as through rental income) or personal enjoyment to the owner it is more likely to be an investment rather than a trading asset; however, a large quantity of goods is likely to point towards trade; · the length of period of ownership - trading assets are generally traded within a short time after acquisition; · the frequency or number of similar transactions - the greater the frequency of transactions the greater the likelihood of trade; · improving a property beyond merely preparing it for sale - this suggests an element of trade; · the circumstances responsible for a sale; and · motive (if an objective assessment of the other factors is not conclusive). In your circumstances you have acquired multiple residential properties over several years. The properties are held for the purpose deriving income through the rental/leasing of the properties. Given the above and in the absence of history to the contrary, we consider that your residential properties are held for investment purposes and as such regarded as 'capital assets'. Therefore in this case, the proceeds from the sale of Unit 1 will not be included in the calculation of your projected GST turnover pursuant to section 188-25. In these circumstances, your GST turnover will not meet the registration turnover threshold of $75,000 and you are not required to be registered in accordance with section 23-5. | Detailed Reasoning - Conclusion: The sale of Unit 1 does not satisfy all of the criteria of the definition of a 'taxable supply' (specifically paragraph 9-5(d)) and therefore you are not liable for GST in relation to the sale in accordance with section 9-40. Please note however that whilst the sale of Unit 1 is not a taxable supply in this instance, in the situation you carry on similar activities in the future (i.e. construction and sale of new residential premises), the outcome for GST purposes may be different.