Private ruling: Sale of new residential premises
Date of advice: 2 December 2020
Published: January 2021
Ruling period: Not applicable

Ruling: Q1: Is the sale of your residential premises which you have rented out since it was built subject to the goods and services tax at settlement? | A1: No. Consequently, GST is not required to be withheld at settlement by the purchaser in accordance with section 14-250 of Schedule 1 of the Tax Administration Act 1953 (TAA 1953). Section 14-255 of TAA 1953 provides that you will still need to give to the purchaser a written notice stating they are not required to withhold an amount at settlement in relation to the supply.

Relevant facts and circumstances: You purchased a residential development land from a developer. You are not registered for GST. You engaged a builder to build a house on the land. The property was rented out to the same tenant until the tenant ended the rental agreement. You engaged real estate agents to rent out the property over the said period. You have now decided to sell the property through a real estate agent. The sale of the property has been advertised. Your conveyancer has requested that you confirm if GST is required at settlement in accordance with section 14-255 of Schedule 1 of the Tax Administration Act 1953. You informed that it was your intention to keep the property for long term investment purposes by renting out the residential property to receive passive rental income. This is evident from the following facts: • You have engaged two separate estate agents to manage the property over the lease period. You terminated and replaced the first agent due to non-satisfactory services rendered to you. • You rented out the property to the same tenant over the lease period until the tenant on his own volition ended the rental contract. • You paid for the depreciation schedule with the intention to rent out the property over a long-term investment horizon. Due to the unforeseen occurrence of the Covid pandemic and its uncertain impact to the economy and the employment market you decided to sell the property to reduce your mortgage loan exposure in this uncertain time. You are concerned that having a large liability you may not be able to meet your financial obligations in the future. You informed that you have never been involved in the development of real property; have never built house for sale in the past and do not intend to do so in the future.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 9-5; 9-20; 23-5; 40-65; 40-75 and 188-10, 188-15; 188-20; 188-25 and195-1 | Taxation Administration Act 1953 section14-250 & 14-255 | Unless specifically quoted all references are to the GST Act

Reasons for decision: Summary: Section 9-5 provides that 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 to the indirect tax zone (Australia); and (d) you are registered or required to be registered for GST. However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed. In this case, the sale of the property will be made for consideration and is located in Australia. As such we need to consider whether the sale of the property is made in the course or furtherance of an enterprise that you carry on and if so, as you are not registered for GST, whether you are required to be registered. | Detailed Reasoning - In the course or furtherance of an enterprise: The term 'enterprise' is defined in section 9-20 and includes 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)). The leasing of the property would constitute an 'enterprise' under this limb of the definition in section 9-20. The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise. The building, renting and subsequent sale of the new residential property would all be considered to be done in the course or furtherance of an enterprise. | Detailed Reasoning - Registration: Section 23-5 provides that you are required to be registered for GST if: (a) you are carrying on an enterprise; and (b) your GST turnover meets the registration turnover threshold (currently $75,000). As discussed previously your activities fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above. The next issue to consider is whether your GST turnover is $75,000 or more. Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if: (a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or (b) your projected GST turnover is at or above $75,000. 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. Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. Your rental of the Property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises). As such, rental proceeds in relation to the rental of the property are not included in the calculations of your 'current GST turnover' or your 'projected GST turnover'. 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. Taking into account the facts of this case we consider the sale of the property would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating your projected GST turnover. The property was not intended to be acquired for the primary purpose of resale. Furthermore, you have derived rental income from the use of the property as opposed to the trading of properties. Given the above, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST. | Detailed Reasoning - Conclusion: The sale of the Property will be made in the course or furtherance of an enterprise you carry on, made for consideration and is located in Australia. However, you are neither registered nor required to be registered for GST. Consequently, you will not be making a 'taxable supply' when you sell the Property and the sale will not be subjected to GST.