Private ruling: GST and required to be registered
Date of advice: 8 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will Entity A (you) make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when selling Lot A and Lot B? | A1: No. Issue 2 CGT implications - are you merely realising the sale of a capital asset? | Q2: Will the disposal of Lot A and Lot B by you give rise to income under section 6-10 and Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and not under section 6-5 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You have an ABN and are registered as an individual/sole trader but are not registered for GST. We requested further information about your registration and were told that you do not know why you registered for an ABN and your Accountant does not think the ABN has ever been used and proposes to cancel the ABN registration. Both you and your partner are retired. You were a consultant and not in any role related to construction or development. Your partner has never been in a trade or profession. You purchased with your partner two adjoining properties as tenants in common in equal shares. Lot B was purchased and settled in the XXXXs. The purchase was for the purpose of building a family residence and possibly to run a small farming operation after retirement. However, the running of a small farming operation did not eventuate. Lot B contained an old weatherboard cottage on it. Lot A was purchased as vacant land and settled in the XXXXs. After Lot A was purchased you had the boundaries of the Lots realigned. The new titles were issued in the 19X0's.This resulted in the weatherboard cottage now being part of Lot A. You and your partner then renovated the weatherboard cottage. This involved repairs and maintenance of re-wiring, replacing broken doors and windows, fixing the pump and plumbing and some minor problems with the roof. The cottage has been rented under a long term lease. You and your partner constructed a residential premise on Lot B. You engaged a builder for the construction of the house and you carried out the electrical and communications system wiring yourself. You and your partner used the property on a part-time basis from mid XXXXs until mid YYYYs. It became your principal place of residence from the end of the YYYYs. Other improvements were also undertaken such as machinery sheds, a second dam, fencing, pumps, and external services and lighting. You also established gardens including an orchard of which you provide produce to family and friends. Both you and your partner own other rental properties, jointly and separately, and derive rental income from those properties. However, neither you nor your partner, have previously been involved in property development. If sold individually or together the sale price of each of Lots A and B will exceed $75,000.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5, | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1), | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1), | Income Tax Assessment Act 1997 section 6-10, | Income Tax Assessment Act 1997 section 104-10, | Income Tax Assessment Act 1997 section 118-110, | Income Tax Assessment Act 1997 section 118-145, and | Income Tax Assessment Act 1997 section 118-170.

Reasons for decision: Detailed Reasoning - Taxable supply: You make a taxable supply if you satisfy section 9-5 of the GST Act. The section provides that you make a taxable supply were: (a) you make a supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise 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. Where you and your partner sell a property you will make a supply for consideration and the supply will be connected to the indirect tax zone as it will be sold in the indirect tax zone. Hence paragraphs 9-5 (a) and (c) will be satisfied. It remains to determine if your supply/ies will be made in the course or furtherance of an enterprise you carry on and if you are required to be registered for GST. So we are considering if paragraphs 9-5 (b) and (d) are satisfied. | Detailed Reasoning - Enterprise: Under section 9-20 of the GST Act it defines 'enterprise' as being an activity or a 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; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or (d) … However, enterprise does not include an activity, or series of activities, done: (a) by a person as an employee or…. (b) as a private recreational pursuit or hobby; or (c) by an individual… or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain, or (d) … Where you and your partner hold properties as tenants in common it is generally viewed as a partnership. More commonly as a tax law partnership. According to paragraph 25 of GSTR 2004/6, a Public Ruling titled, 'Goods and services tax: tax law partnerships and co-owners of property,' is relevant and provides: A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income. We consider that where you and your partner provide leases on a regular or continuous basis, for properties you hold as tenants in common, that it would amount to a series of activities that would be an enterprise. Therefore, you and your partner would be carrying on an enterprise if not as a common law partnership as a tax law partnership for the properties you are renting where you hold them as tenants in common. The renting of Lot A containing the weatherboard cottage is considered to be part of your enterprise, as the leasing of the residential premises is done on a continuous basis in the form of a lease and will satisfy paragraph 9-5(c) of the GST Act. Consequently, the sale of the weather board cottage will be made in the course of an enterprise you carry on as a capital asset due to it being rented. However, the purchase of Lot B and the building of a residential premise are not considered part of your enterprise activities. This is due to the fact that the purchase and building of the residential premises was done for a private purpose for you to live in as part of your plans to retire and not to lease out as a rental or sell once it was developed. Therefore, the sale of Lot B will not be part of an enterprise activity that you carry on and paragraph 9-5(c) of the GST Act will not be satisfied. Consequently, the sale of Lot B will be out of scope for GST. | Detailed Reasoning - Registration for GST: We now need to consider if in selling Lot A you and your partner would be required to be registered pursuant to section 23 of the GST Act. Section 23-5 of the GST Act provides you are required to be registered if you are carrying on an enterprise, and your GST turnover meets the registration turnover threshold. We have already established that renting Lot A is an enterprise activity therefore we need to consider if you or your partner would together or separately satisfy the GST turnover threshold. Whether an entity is required to be registered depends on if you have a GST turnover that meets a particular turnover threshold under subsection 188-10(1) of the GST Act. This occurs if: (a) 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 (b) your projected GST turnover is at or above the turnover threshold. However, under paragraph 188-15(1)(a) of the GST Act, supplies that are input taxed are not included in the current or projected turnover threshold. The sale of Lot A would have satisfied section 40-65 of the GST Act and been input taxed as the renovation would only amount to repairs and maintenance and therefore would not be a substantial renovation that would result in a new residential premise. Therefore, the sale of Lot A even though it would be greater than $75,000 is not included in the current GST turnover as it would be an input taxed supply. Subsection 188-15(1)(a) of the GST Act is not satisfied and you or your partner together or separately are not required to be registered for GST. Hence, paragraph 9-5(d) of the GST Act is not satisfied and the sale of Lot A is out of scope for GST. | Detailed Reasoning - Question 1: We agree with the position taken on the income tax issue in that the sale of Lot A, and Lot B are on capital account and taxed as a capital gain. We consider the disposal to be a mere realisation of a capital asset. For Lot B we also agree that the main residence exemption would apply to the extent it is relevant to apply taking into consideration that the property is held as tenants in common so where one of the owners (tenants in common) used Lot B for their main residence it is only that owner that can be eligible for the exemption (please refer to IT 2485).

Issue 1: Goods and Services Tax (GST) - Taxable supply