Private ruling: GST and sale of property
Date of advice: 6 July 2018
Published: September 2018
Ruling period: 1 July 2017 – 30 June 2018.
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 when you sell property situated at a specified location? | A1: No | Q2: Where the supply of the specified property is a taxable supply, are you able to apply the margin scheme to the sale to calculate the GST payable? | A2: Not applicable.

Relevant facts and circumstances: You are not and have never been registered for GST. You are a property investor owning multiple residential rental properties. You purchased residential property situated at a specified location (the Property) in xx/xxxx. The Property contained a single residential dwelling. The dwelling consisted of 2-3 bedrooms, bathroom, kitchen and living facilities. You rented the Property from the date of acquisition until xx/xxxx. At this time you demolished the existing residential dwelling with the intention of constructing three residential townhouses for rental purposes. Construction on the new townhouses commenced in xx/xxxx. Construction was completed in xx/xxxx however the certificate of completion is anticipated to be issued in xx/xxxx due to considerable delays in completion of the driveway and landscaping to Council satisfaction. Construction costs were funded by bank loan for an amount of $XXX,000. The loan was established in xx/xxxx as a construction loan which was to be converted to a standard principle and interest investment home loan. Under the financial institution’s terms, the loan was to be converted upon Practical Completion. In xx/xxxx during the conversion process, the financial institution advised that they were not prepared to refinance the full loan amount and would only be prepared to establish the new loan for an amount of $XXX,000. The financial institution advised that this was a result of changes to lending criteria requirements including your ability to service the original loan amount. The financial institution also advised that they now apply principle and interest rates rather than interest only and have increased the rate percentage margin across all borrowings. The financial institution also advised that they have also decreased the percentage of rental income that they include as income. As a result, in xx/xxxx you decided that you would sell one of the units (the Unit) in an effort to recover the funds and repay the borrowings needed to fund the shortfall between the loan amounts and expenses relating to the certification of completion and Council and Department of Lands approval to strata title the units. At this time you approached a real estate agent who listed the Unit in xx/xxxx. Consequently, the Unit is now under contract. It was never your intention to sell the Unit as originally you believed the financial institution would refinance the full construction loan amount. Your primary source of income is generated as a salary and wage earner and you do not work in the building or property development industry. You have a history of acquiring properties to hold as rentals and you have never previously been involved with the construction of new premises.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Section 9-40 | Section 23-5 | Division 188 | Section 188-10 | Paragraphs 188-15(1)(a) | Paragraphs 188-15(1)(c) | Paragraphs 188-20(1)(a) | Paragraphs 188-20(1)(c) | Section 195-1

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides 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 with the indirect tax zone; 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. The question in this case is whether you are making the supply of the Unit in the course or furtherance of an enterprise that you carry on. If so, as you are not registered for GST, a further question will be whether you are required to be registered for GST. 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; ● in the form of an adventure or concern in the nature of trade; ● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Section 195-1 states that the phrase ‘carrying on’ in the context of an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’. In this case, own a number of residential properties that you rent out. As such we consider that you carry on an enterprise of leasing, being activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? discusses when a 'supply of a going concern' is GST-free in respect to leasing enterprises. Paragraph 151 of GSTR 2002/5 states in part that where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. As such, we do not consider the sale of the Unit to be in the course or furtherance of your leasing enterprise given the Unit had never been leased or rented. Given the above, the next issue to consider is whether your activities undertaken in regard to the construction of the three townhouses and subsequent sale of the Unit is considered to be the course of another enterprise that you carry on. As discussed above, the term ‘enterprise’ includes 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. Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. | Detailed Reasoning - In the form of a business: Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1 lists, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? , indicators of carrying on 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. Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. | Detailed Reasoning - Application to your situation: You acquired the property in xx/xxxx and rented the existing residential dwelling until xx/xxxx. At this time you demolished the existing dwelling and constructed three new townhouses with the intention to also lease/rent the premises. The development of the three townhouses was not entered into with the intention of making a profit. It was your sole intention that you would generate an income stream as a result of renting the three new dwellings. Your primary source of income is generated as a salary and wage earner and you do not work in the building or property development industry. You have never previously been involved with the construction of new premises and do not intend to undertake similar activities in the future. We consider that the activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. This is a one off project that is not considered to being carried out in a manner similar to other property development businesses. Given the above, we do not consider your activities in regard to the construction of the three townhouses and subsequent sale of the Unit to have been done in the form of a business. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, 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. Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions: ● the subject matter of the realisation; ● length of period of ownership; ● frequency or number of similar transactions; ● supplementary work on or in connection with the property realised; ● circumstances that were responsible for the realisation; ● motive | Detailed Reasoning - Application to your situation: Paragraph 247 of MT 2006/1 discusses that where property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. In this case it was always your intention that the Unit was to provide a future income stream. The generation of a future income stream did not eventuate due solely to the financial institution’s decision not to approve the refinancing of the existing construction loan to the extent of the original loan amount. Typically a trading asset is dealt with or traded within a short time after its acquisition. In this case the property was acquired a number of years prior to the construction of the townhouses with the Unit being held for a short time following completion of construction. The newly constructed Unit was held for a minimal period following completion. However as previously discussed, the sale of the Unit was necessitated as a result of the financial institution’s decision regarding the refinancing of your original loan. Paragraph 253 of MT 2006/1 acknowledges that assets can be sold for reasons other than trade and that the circumstances behind the sale need to be considered. Paragraph 254 of MT 2006/1 discusses that in some cases, the motive behind the sale of an asset is a relevant consideration. In this case, your original intention was to generate a future income stream from leasing the premises and not to engage in trade by selling the newly constructed properties. The purpose of constructing the townhouses was to hold as investment assets. A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion the intention for holding the property was not for the purpose of trade. As such we do not consider your activities of constructing three residential townhouses and subsequently selling one of the properties as being done in the form of an adventure or concern in the nature of trade. | Detailed Reasoning - Conclusion: The activities you have undertaken in regard to the construction of the three townhouses and subsequent sale of the Unit is not considered to be the course of an enterprise that you carry on. | Detailed Reasoning - GST registration: As you are not currently registered for GST, the next issue to consider is whether you are required to be registered for GST. Section 23-5 provides that 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). As discussed above, it is considered that the rental of your residential properties constitutes an ‘enterprise’ for GST purposes. The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or b) your projected GST turnover is at or above $75,000. Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months. Your ‘projected GST turnover’ is the sum of your turnover for the current month and the next 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. As such, your input taxed supplies of leasing residential premises are disregarded when determining whether you meet the GST registration turnover threshold. Furthermore, paragraphs 188-15(1)(c) and 188-20(1)(c) provide that supplies that are not made in connection with an enterprise that you carry on are also disregarded. Therefore the proceeds from the sale of the Unit will also be disregarded in calculations for the purposes of determining whether you are required to register for GST. Given the above your GST turnover does not meet the registration turnover threshold and you are not required to register for GST. | Detailed Reasoning - Conclusion: The sale of the Unit is not a taxable supply as defined in section 9-5 as paragraphs 9-5(b) and 9-5(d) are not satisfied.