Private ruling: GST and the construction and supply of new residential premises
Date of advice: 2 December 2015
Published: February 2016

Ruling: Q1: Will you, be liable for goods and services tax (GST), pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you supply build and supply residential premises located in Australia, to your shareholders? | A1: Yes | Q2: If so, how is the GST payable, calculated? | A2: GST is payable at the rate of 10% of the GST exclusive market value of your supplies.

Relevant facts and circumstances: You are a company created to construct residential units. You are currently not registered for GST. Upon completion, the residential units will be supplied to the shareholders. The scope of the project and company arrangements is detailed in 3 documents: 1 Constitution 2 Shareholders Agreement and 3 Architectural Plans. Shareholders Agreement You have X shareholders, who are each issued with 1 ordinary Class Shares with the Subscription Amount of $XXXXXX. The shareholders are required to pay an initial payment of $YYYYYY prior to your purchase of the land. They are liable to pay calls on the shares up to the Subscription Amount. Upon completion of construction of the units, you will supply the units to the respective shareholders, who will surrender their interest in the respective share. The shareholders will pay the difference between the initial payment made by shareholders and the Subscription Amount for the designated share. The Subscription Amount is less than the GST inclusive market value of the residential unit.

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 72-70, | A New Tax System (Goods and Services Tax) Act 1999 Section 9-70 and | A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision: Summary: Pursuant to section 9-40, you are liable to pay the GST payable on taxable supplies that you make. Section 9-5 provides that your supplies will be taxable supplies where: (a) you make a 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 and (d) you are registered for GST, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. When you transfer the properties in question, you will make a supply of property located in the indirect tax zone, satisfying paragraph 9-5 (c) and the supply will not be GST free. Therefore it is necessary to determine whether: • the supply will be input taxed • you will be making the supply for consideration • the supply of the property will be made in the course or furtherance of an enterprise that you are carrying on and • you are required to be registered for GST. | Detailed Reasoning - Input Taxed: Under section 40-65, a sale of residential premises is input taxed, but not to the extent that the residential premises are new residential premises. As you will be supplying new residential premises to your shareholders, your supplies of those premises will not be input taxed supplies. | Detailed Reasoning - Consideration: Consideration is defined to include any payment, or any act or forbearance in connection with the supply of anything and any payment, or any act or forbearance in response to or for the inducement of a supply of anything. You supply the units to the shareholders in exchange for the shareholders surrendering their interest in their shares. The shareholder's surrender of their interest in the respective shares is the consideration for the supply. | Detailed Reasoning - 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 (MT 2006/1) considers the meaning of carrying on an enterprise. Furthermore, 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'. • a business encompasses trade engaged on a regular basis. • an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. 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. These activities can also apply to an activity done in the form of an adventure or concern in the nature of trade: • 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. You were established for the specific purpose of acquiring, developing and disposing of property for the benefit of shareholders. Accordingly, your activities of land acquisition, dwelling construction and disposal of real property constitute 'carrying on of an enterprise' of property development for the purpose of section 9-20. Therefore, the supply of the new residential units to the shareholders will be made in the course or furtherance of an enterprise that you carry on. | Detailed Reasoning - Registration: Under section 23-5 you are required to be registered for GST if: • you are carrying on an enterprise; and • your GST turnover meets the registration turnover threshold (currently $75,000). Section 188-10 of the GST Act is relevant for working out whether your GST turnover 'meets, or does not exceed', a turnover threshold. Whether you have a GST turnover that meets or exceeds a particular turnover threshold depends on an objective assessment of your projected GST turnover and your current GST turnover. You are carrying on an enterprise of property development. Your current and projected GST turnover will exceed the $75,000 threshold, as demonstrated by the Designated Lot Prices and Initial payments made by investors. Therefore, you are required to be registered for GST. Your supplies of the residential units meet all the requirements of section 9-5. Further they are neither GST-free nor input taxed. Therefore, you are making taxable supplies when you supply the units to your shareholders. Accordingly, GST will apply to your supplies of the residential units. | Detailed Reasoning - GST payable on the supplies: The sale price will equal the full subscription price, which is less than the GST inclusive market value of the premises. Subdivision 72- C provides that where you make a taxable supply to an associate (eg shareholders) for consideration that is less than the GST inclusive market value, the value of that supply is the GST exclusive market value of the supply. You will be supplying the residential units to your shareholders for consideration that is less than the GST inclusive market value of your supply. Further, the exemption in subsection 72-70 (2) does not apply, as the shareholders will not be acquiring the property for a creditable purpose. The amount of GST payable on a taxable supply is 10% of the value of the taxable supply. You will need to determine the GST exclusive market value of your supplies of each of the units and then calculate 10% of those amounts to work out the GST payable.