Private ruling: GST and the sale of real property
Date of advice: 6 July 2022
Published: October 2022
Date scheme commenced: The date of issue of this private ruling

Ruling: Q1: Was the sale of the Property by you a transfer of ownership of a capital asset for the purposes of paragraph 188-25(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No. | Q2: If the answer to Question 1 is No, was the sale of the Property by you made solely as a consequence of: (a) ceasing to carry on an enterprise; or (b) substantially and permanently reducing the size or scale of an enterprise for the purposes of paragraph 188-25(b) of the GST Act? | A2: No. | Q3: At the time of the supply of the Property, were you required to be registered for GST pursuant to Division 23 of the GST Act? | A3: Yes. | Q4: Was the supply of the Property by you a taxable supply pursuant to section 9-5 of the GST Act? | A4: Yes. | Q5: If the supply of the Property by you was a taxable supply, did the margin scheme apply to the sale? | A5: No as there was no agreement in writing to apply the margin scheme at the time of the sale. | Q6: If the supply of the Property by you was not a taxable supply, are you required to make increasing adjustments under Division 129 and / or Division 138 of the GST Act? | A6: Unnecessary to answer.

Relevant facts and circumstances: You have both an Australian Company Number and an Australian Business Number, both effective from 20XX. You provided a copy of the company constitution as Appendix 1. You were registered for GST from 20XX until 20XX. You remain unregistered for GST as of the date this private ruling request. You sold the Property to an unrelated third party (Purchaser). The sale was effected by two, practically identical, contracts for sale. Copies of these two sale contracts were attached as Appendix 2. On the basis that you were not registered for GST on settlement date, being the day of supply for GST purposes, you treated the supply of the Property as not a taxable supply and did not remit any GST on the sale in your final business activity statement. You were established as a special purpose vehicle to acquire vacant real property, with the view to subdividing and selling residential lots and constructed dwellings to third parties You have both an Australian Company Number and an Australian Business Number, both effective from 20XX. You provided a copy of the company constitution as Appendix 1. You were registered for GST from 20XX until 2021. You remain unregistered for GST as of the date this private ruling request. You sold the Property to an unrelated third party (Purchaser). The sale was effected by two, practically identical, contracts for sale. Copies of these two sale contracts were attached as Appendix 2. On the basis that you were not registered for GST on settlement date, being the day of supply for GST purposes, you treated the supply of the Property as not a taxable supply and did not remit any GST on the sale in your final business activity statement. You were established as a special purpose vehicle to acquire vacant real property, with the view to subdividing and selling residential lots and constructed dwellings to third parties As the previous owner was a private individual not conducting any enterprise, the sale of the Property to you was not treated as a taxable supply. Including the associated acquisition costs and settlement adjustments (e.g., land tax, water and rates), the capitalised cost of acquiring the Property was $XXX. A copy of the Purchase Contract was provided as Appendix 4. The Property was zoned "urban growth", which allowed for residential uses. The Property was vacant land and had a total site area of XX hectares, of which approximately XX hectares was considered developable. In respect of the Property, you intended to prepare and register a plan of subdivision, followed by securing third party buyers of the subdivided lots. To this end, you engaged a local independent firm specialising in town planning and surveying, to assist with obtaining the various certifications and approvals necessary for the proposed subdivision. With their assistance, you lodged a plan of subdivision for stages 1 and 2 with the local council. The council issued you with a planning permit for the development and subdivision. With the assistance of third-party selling and conveyancing agents, you had XX committed off-the-plan buyers of the proposed dwellings for stages 1 and 2. You attached a summary of the off-the-plan sales for stages 1 and 2 as Appendix 6. During 20XX, it was becoming obvious to you that there were protracted and unexpected delays in relation to various approvals and infrastructure. As the delays above would likely have caused you to not be in a position to settle the committed sales by their relevant sunset dates, you instructed your conveyancing agent and legal advisors to write to all buyers offering each buyer the following options: • the buyer could withdraw from the contract and be refunded all monies paid; or • the buyer could withdraw from the contract and be granted a first right of refusal to repurchase their lot at a revised price. You advise that all buyers exercised their right to be refunded their monies in full. Given the difficulties in progressing the proposed development and subdivision, you resolved to sell the Property on an englobo basis. You also executed an exclusive agency agreement to undertake a public expression of interest campaign which was also in the vicinity of $XXX. You received interest in the Property, including at least two other offers. In 20XX, you executed the two sale contracts with the Purchaser for the sale. Under the sale contracts: • both prices were exclusive of GST and the Purchaser will be required to pay an additional amount to you should the Commissioner confirm that the supply of the Property is a taxable supply (to any extent); • were sold on a vacant possession basis; • both parties agreed to work together in good faith to determine the correct GST treatment of the sale of the Property. Following a period of negotiation with the Purchasers and discussions with accounting and legal advisors, you deregistered for GST in 20XX. This was on the understanding that the Property was, at the time of sale, being held on capital account for income tax purposes and, therefore, the proceeds from the sale of the Property were excluded from forming part of your projected GST turnover in section 188-20. As you would not have any assets after the sale of the Property and would be wound up shortly after settlement, your GST turnover was expected to be less than the registration turnover threshold. Settlement of the Property occurred and the supply of the Property was treated as a non-taxable supply given you were not registered for GST on the day of supply.

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 Division 23 | A New Tax System (Goods and Services Tax) Act 1999 Division 129 | A New Tax System (Goods and Services Tax) Act 1999 Division 138 | A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision: Summary: The requirements in sections 188-15 and 188-20 largely mirror the requirements of paragraph 9-5(b) of the GST Act. The words 'in connection with an enterprise that you carry on', should therefore be read as having the same meaning as the words 'in the course or furtherance of an enterprise that you carry on' in paragraph 9-5(b) of the GST Act. 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 includes guidance onthe meaning capital assets. GSTR 2001/7 explains: 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 [...] 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. 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. [Footnotes excluded]. Considering the explanation in GSTR 2001/7, the Property is potentially a capital asset of relevance to determining your projected turnover. If the dealing in the Property is considered part of a business, or a one-off adventure in the nature of trade, the sale will not be considered capital but rather revenue in nature. In applying the above factors to this case, we acknowledge that: • You decided in 20XX that, due to delays, you would refund the deposits to the purchasers of the pre-sold lots. You also decided the best way to realise the sale of the land was via an englobo sale of the Property. • It was not until later that activities took place to market the sale of the Property. • Apart from engaging a sales agent and marketing entity, you have had a largely passive role; your only role being as the vendor of the Property. In Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation [2022] AATA 628 ( Collins ), the Tribunal held that, for the purpose of paragraph 188-25(a), the character of an asset must be determined at the time the supply is made or is likely to be made. Section 188-25 only arises for consideration where the supply is or would be made in the course of an enterprise the taxpayer carries on. The Tribunal accepted that the applicant's intention or object at the time the asset is acquired is not determinative and is of less significance than it is for the purposes of the capital versus revenue dichotomy in the income tax context. On balance, we consider that over the period that the Property was held by you, its character has not changed from revenue to capital. Unlike Collins and a number of cases [1] that preceded it, the land you are selling was purchased with the intention of using it as a revenue asset. All that has changed is the way the land is to be realised for profit; namely, as an englobo sale. Accordingly, paragraph 188-25(a) of the GST Act will not apply to the supply such that the sale must be included in your projected turnover. In Collins , the Tribunal considered that the purpose of paragraph 188-25(b) is to exclude from consideration the value of projected supplies that are outside the usual run of transactions which, if included, would distort an assessment of the scale of an entity's enterprise. The Tribunal found that the sale of land is the central objective of a land development enterprise and the sales were made in the course of and as a consequence of the applicant carrying on the enterprise, not as a consequence of ceasing, or a reduction in the size or scale of, that enterprise. In GSTR 2001/7 , the Commissioner provides the following commentary in relation to the meaning of the term "solely as a consequence": 41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1 of this Ruling), or the substantial and permanent reduction in size or scale of an enterprise. Given the facts of your case, the sale of the Property was always the intended result of your enterprise. Although there was a delay between actively marketing the subdivided lots and the englobo sale, the ultimate outcome was always to sell the land. Following the decision in Collins , this was the central objective of the enterprise and has not occurred as a result of ceasing, or a reduction in the size or scale of, that enterprise. Following on from the discussion in questions 1 and 2, your current GST turnover exceeded the GST registration turnover threshold at the date of settlement and the Commissioner is not satisfied that your projected turnover was below the threshold. As such, the Commissioner is satisfied that you were required to be registered for GST pursuant to Division 23 of the GST Act. At the date of settlement, all the requirements of s9-5 of the GST Act were met. Therefore, the sale of the Property was a taxable supply. Section 75-5 of the GST Act states that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land, selling a stratum unit or granting or selling a long-term lease, if you and the recipient of the supply have agreed in writing that the margin scheme is to apply. You acquired the Property by way of a sale that was not a taxable supply and therefore your supply is not ineligible for the margin scheme under subsection 75-5(3) of the GST Act. Although you were eligible to apply the margin scheme to your sale of the Property, you have not agreed in writing with the recipient that the margin scheme is to apply. Special condition X only indicates that the parties will work in good faith to determine the correct GST treatment of the sale of the Property including whether the margin scheme could be applied. This is not an agreement in writing which must be made on or before the making of the supply as required by section 75-5 of the GST Act. The Commissioner has a discretion under paragraph 75-5(1A)(b) of the GST Act to extend the time in which the agreement in writing must be made. Law Administration Practice Statement PSLA 2005/15: The Commissioner's discretion to extend the time in which the agreement in writing must be made to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 sets out the circumstances where the discretion will be exercised. Clause 5 provides some examples where it may be appropriate to exercise the discretion and this includes where the supplier mistakenly considered it was not required to be registered for GST. A request for the Commissioner to exercise the discretion under paragraph 75-5(1A)(b) of the GST Act needs to be in writing. | Detailed Reasoning - How to calculate the margin scheme: When selling a property using the margin scheme that you purchased after 1 July 2000 you must use the consideration method. The consideration method is the difference between the property's selling price and the original purchase price, which is the sale price minus purchase price equals the margin. The sale price must include any settlement adjustments in the sales contract. The following are not included in the calculation of the purchase price: Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides clarification on how the margin scheme Division 75 of the GST Act applies to a supply of a freehold interest of real property. | Detailed Reasoning - Question 6: This question does not arise given that the sale of the Property was a taxable supply. [1] Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (Casimaty)

Reasons for decision: Section 9-5 of the GST Act 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. | Under paragraph 9-5(d) of the GST Act, one of the requirements for making a taxable supply is that the supplier is: | (i) registered for GST, or | (ii) required to be registered for GST. | You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. | Whether your GST turnover meets, or does not exceed, a turnover threshold - s188-10 of the GST Act. | (1) You have a GST turnover that meets a particular turnover threshold 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. | Under section 188-15 of the GST Act: | (1) Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than: | (a) supplies that are input taxed; or | (b) supplies that are not for *consideration (and are not taxable supplies under section 72-5); or | (c) supplies that are not made in connection with an enterprise that you carry on. | In your case, the income you derived in the current month, being the month of settlement, and the preceding 11 months was income derived from the sale of vacant land which was over $75,000. | Under section 188-20 of the GST Act: | (1) Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than: | In working out your projected GST turnover, section 188-25 of the GST Act says to disregard: | (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and | (b) any supply made, or likely to be made, by you solely as a consequence of: | (i) ceasing to carry on an enterprise; or | (ii) substantially and permanently reducing the size or scale of an enterprise. | The Property you are selling is the vacant land originally purchased which you planned to subdivide and sell for profit. | You intended to use the property as an asset to derive income from the sale of the subdivided lots and, to this end you had pre-sold XX lots. | costs for developing the property | any options you purchased | any other related purchases.