Private ruling: GST and new residential premises
Date of advice: 30 May 2018
Published: September 2018
Date scheme commenced: January 2018

Ruling: Q1: Will your sale of the Property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) subject to GST? | A1: Yes. | Q2: Are you entitled to claim GST credits for the building costs incurred for the Property under section 11-20 of the GST Act? | A2: Yes.

Relevant facts and circumstances: You are registered for GST from 1 January 2018. You are a self-managed super fund. You own a block of land (the Property) and are building a house on the Property for sale. You purchased the Property in YYYY as a vacant block of land concurrently with the purchase of the adjacent house which is used by the members as their primary residence. The Property has been sitting vacant and has not been used for anything. Your intention when purchasing the Property was that it would form part of the members retirement savings. You have not attempted to sell the Property as vacant land as you wanted to build a house on it that did not interrupt the view of your members at the residence next door. The estimated market value of the Property prior to construction of the house (vacant land) is $X. The estimated selling value of the house and land is $X. You have engaged a registered builder to complete the construction. You will finance the development. You will cancel your GST registration if you are not required to be registered in relation to the sale of the Property.

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 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

Reasons for decision: Summary: You have built new residential premises for sale and are liable for GST on the sale. | Detailed Reasoning - Detailed reasoning: Section 9-40 provides that you are liable for GST on any taxable supplies 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 the indirect tax zone (Australia), 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. For the supply of the Property to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In your case, you will be selling the Property in Australia for consideration and you are registered for GST. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied, and paragraphs 9-5(d) would also be satisfied however you have advised that you will cancel your registration if you are not required to be registered for GST as this was made in error. Further, the supply of the Property in your situation will neither be GST-free or input taxed. Accordingly, we must determine whether: (a) your sale of the Property is in the course or furtherance of an enterprise that you are carrying on, and (b) if so, confirm whether you are required to be registered for GST. Enterprise Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. 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 provides guidance on what activities will amount to an enterprise. Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a ‘business’ and those done in the form of ‘an adventure or concern in the nature of trade’. In particular: ● A business encompasses trade engaged in on a regular or continuous basis. ● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to a business: ● a significant commercial activity ● a purpose and intention of the taxpayer to engage in commercial activity ● an intention to make a profit from the activity ● the activity is or will be profitable ● the recurrent or regular nature of the activity ● the activity is carried on in a similar manner to that of other businesses in the same or similar trade ● activity is systematic, organised and carried on in a businesslike manner and records are kept ● the activities are of a reasonable size and scale ● a business plan exists ● commercial sales of product, and ● the entity has relevant knowledge or skill. Further the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: ● 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 ● buildings have been erected on the land. No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. We have reviewed your factual circumstances and have taken into consideration the following factors. Your intention when you purchased the Property (original vacant land) was that it would eventually form part of your retirement savings. You have not sought to sell the vacant land but made a decision to build residential premises on the land for the purpose of sale. You have taken systematic steps to bring this plan into fruition including engaging a registered builder to build the residential premises. Whilst we do not consider your activities are in the form of a business, we do consider that they are done in the form of an adventure or concern in the nature of trade. Your situation whilst not exactly on par with example 29 in MT 2006/1 (reproduced below), it does share similar traits including the carrying out the necessary steps to develop and sell the premises with a reasonable expectation of profit or gain: Example 29 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise. 276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units. We consider that the sale of the Property is in the course of an enterprise you are carrying on, therefore you will satisfy paragraph 9(b) in addition to satisfying paragraphs 9-5(a) and 9-5(c). New Residential Premises If you proceed with your intention to sell the Property you will make a supply of ‘new residential premises’ defined in section 40-75 to include, in summary, premises that have not previously been sold as residential premises. A sale of new residential premises will be taxable where all the requirements of section 9-5 are satisfied. GST Registration As you are carrying on an enterprise the proceeds from your sale of ‘new residential premises’ is included when calculating whether your turnover meets the GST registration turnover threshold. As the sale of the Property is likely to exceed $75,000 your turnover will meet the GST registration turnover threshold. You are required to be registered for GST. | Summary: You can claim GST credits for your construction costs and purchases related to the sale of the Property where the supply to you was a taxable supply (containing GST) and you were registered for GST. | Detailed Reasoning - Detailed reasoning: Section 11-20 states that you are entitled to an input tax credit (GST credit) for any creditable acquisition that you make. Section 11-5 provides that you make a creditable acquisition if all of the following criteria are satisfied: (a) you acquire anything solely or partly for a creditable purpose (ie to the extent you acquire the thing in carrying on your enterprise except to the extent the acquisition relates to making input taxed supplies or is of a private or domestic nature) (b) the supply to you was a taxable supply (c) you provide, or are liable to provide, consideration for the supply (d) you are registered or required to be registered. Your acquisitions (building costs) are acquired for creditable purpose and as such you will be entitled to claim GST credits for those building costs incurred for the Property where the supply to you was a taxable supply (containing GST) and you were registered for GST, that is from your registration date 1 January 2018.

Reasons for decision: In this reasoning, please note: | ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | ● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au | ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act