Private ruling: GST and supply of residential property
Published: August 2011

Ruling: Q1: Is the proposed sale of residential properties by the Trust taxable supplies? | A1: No, GST will not be payable on the proposed sale of the residential properties as supply of the properties will not be taxable supplies.

Relevant facts and circumstances: The Trust owns two properties for investment purposes. Initially the Trust purchased vacant land from a supplier and contracted separately with a builder to build the residential premises. This property was handed over to the Trust in 2007 and it derived rental income from this property. The Trustee advises this house has never been vacant. The Trust then purchased another block of vacant land from a supplier and again contracted separately with a builder to build the residential premises. This property was handed over to the Trust in 2008 and the Trust derived rental income from this property. The Trustee advises that this house has also never been vacant. These properties were built with the intention of holding them as long term assets for use in the residential leasing enterprise. The properties were purchased in the name of the Trust for asset protection purposes, as advised by a solicitor, with the intent of holding them on capital account. The Trustee was advised by a mortgage broker that the Trust would need to apply for an Australian business number (ABN) for further finance approval. The Trustee was also advised that the Trust would need to be registered for GST for a minimum of two years. The Trust did register based on this advice and has since recently cancelled their GST registration. The cancellation was backdated to be effective from 2007 when the Trust first registered. The Trust did not claim any GST credits and did not remit GST whilst they were registered; the Trust lodged all activity statements as nil. The Trust always intended to hold the properties long term and had the mortgage interest rate fixed for 5 years to protect against any further interest rate rises on one property. Unfortunately, the Trust is now in a difficult financial position and will be required to sell both properties to reduce debt. The Trust advises that there was never any intention to hold the properties on the income account of the Trust. The Trust further contends that it should never have been, nor was it legally required to be registered for GST. The current and projected turnover of the Trust is less than $75,000.

Relevant legislative provisions: Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 | Subsection 9-20(1) of A New Tax System (Goods and Services Tax) Act 1999 | Section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 | Subsection 40-65(2) of A New Tax System (Goods and Services Tax) Act 1999 | Subsection 40-75(1) of A New Tax System (Goods and Services Tax) Act 1999 | Subsection 40-75(2) of A New Tax System (Goods and Services Tax) Act 1999 | Section 184-1 of A New Tax System (Goods and Services Tax) Act 1999 | Section 195-1 of A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: Why we have made this decision Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make. A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act, which states 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 with Australia; and d. you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply. In this case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the future sale of the properties will be for consideration and the sales will be connected with Australia as the properties are situated in Australia. Therefore, what needs to be determined is whether the sale of the properties will be in the course or furtherance of an enterprise that the Trust carries on, whether the Trust is required to be registered for GST and whether the sales are GST-free or input taxed. Enterprise An enterprise is defined in subsection 9-20 (1) of the GST Act as follows: An enterprise is 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; or · on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Is the Trust carrying on an enterprise of residential Leasing? The leasing of residential properties are activities that the Trust does on a regular and continuous basis which form part of its leasing enterprise. Purchasing a property with the intention of building a rental property for the purposes of leasing, comes within the meaning of an enterprise. Thus the building of properties with the intention of renting out the residential premises forms part of the enterprise of leasing. As the Trust is carrying on an enterprise of residential leasing the proposed sale of the properties will be made as part of this enterprise of leasing. Hence paragraph 9-5(b) of the GST Act is satisfied. Consideration needs to be given as to whether these supplies are GST-free or input taxed. There are no GST-free provisions that apply to the sale of residential properties; however the supplies may be input taxed. Input taxed supplies A sale of residential property is an input taxed supply under section 40-65 of the GST Act. However it is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises (other than those used for residential accommodation before 2 December 1998) under subsection 40-65(2) of the GST Act. Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. Paragraph 22 of GSTR 2003/3 provides the conditions to be satisfied for a supply of residential premises to be a taxable supply as follows: 22. A supply of residential premises by way of sale is a taxable supply where all the following conditions are met: · the residential premises are new residential premises as defined in section 40-75; · the new residential premises were not used for residential accommodation before 2 December 1998; · the supply is made for consideration; · the supply is made in the course or furtherance of an enterprise that the vendor carries on; · the residential premises are in Australia; and · the vendor is registered, or required to be registered. The term 'new residential premises' is defined under subsection 40-75(1) of the GST Act, and provides that residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease or (b) have been created through substantial renovations of a building or (c) have been built, or contain a building that has been built, to replace demolished premises on the same land. However, under subsection 40-75(2) of the GST Act, residential premises are not new residential premises if the premises have only been used for making input taxed supplies of residential rental under paragraph 40-35(1)(a) of the GST Act for the period of at least 5 years since: (a) the premises first became residential premises: where the premises have not been previously been sold as residential premises and have not previously been the subject of a long term lease (b) the premises were last substantially renovated: where the premises have been created through substantial renovations of a building, or (c) the premises were last built: where the premises have been built, or contain a building that has been built to replace demolished premises on that same land. In this case, the residential properties which are the subject of this ruling would be considered new residential premises under both paragraph 40-75(1)(a) as well as paragraph 40-75(1)(c) of the GST Act as the premises have not previously been sold as residential premises and both properties have been rented out for less than five years. The proposed sale of the new residential properties would meet the first five conditions listed in paragraph 22 of GSTR 2003/3. The properties the Trust proposes to sell are new. Being built in 2007 and 2008 respectively they were not used for residential accommodation before 2 December 1998 and the properties will be sold for consideration. The Trust is considered to be carrying on an enterprise of leasing and the proposed sale of the properties will be in the course or furtherance of its leasing enterprise. In addition, the residential premises are located in Australia. Consideration now needs to be given to the requirement relating to registration. The Trust is not currently registered for GST. Therefore we need to determine whether the Trust is required to be registered for GST purposes. GST Registration Under Division 23 of the GST Act an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. Entity is defined in section 184-1 of the GST Act to include an individual as well as a Trust. As the Trust is carrying on an enterprise of residential leasing we need to consider if it has a requirement to register for this enterprise based on its current and projected GST turnover. GST Turnover There are certain supplies that an entity can disregard from being included in the calculation of both the current and projected GST turnover. Goods and Services Tax Determination GSTD 2000/9 considers these circumstances at paragraphs 27 to 29 as follows:- 27. If your GST turnover meets the registration turnover threshold, you are required to register for GST. 18 | Detailed Reasoning - Residential Accommodation: 28. Where you let out residential premises for residential accommodation, the supply is input taxed and the rent is not included in your GST turnover for threshold purposes. If you do not make other supplies that are taxable or GST-free, you will not have to register for GST. 29. In Example 3 (home office), at paragraph 22, Belinda does not have to register for GST if she does not make any other supplies that are taxable or GST-free. The same situation would apply to Lesley in Example 4 (garage), at paragraph 23, and Rick and Christine in Example 5 (home unit), at paragraph 25, if they did not make any other taxable or GST-free supplies. Thus the rent received from leasing the residential premises is not included in the calculation of GST turnover as these supplies are input taxed and are disregarded. However, the properties are new residential premises. Therefore, by way of paragraph 40-65(2)(b) of the GST Act, the proposed sale of these properties will not be an input taxed supply of residential premises. The sales of these properties are the sale of capital assets and are also disregarded from the calculation of the projected turnover. Goods and services tax ruling GSTR 2001/7 states the following in relation to capital assets at paragraph 31: | Detailed Reasoning - 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 stock17) 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. We are of the view that the proposed sale of the properties is the sale of capital assets of the rental enterprise. As such the Trust is not required to include the sale proceeds from these properties in the calculation of its GST turnover. Accordingly, as the Trust does not meet the GST registration requirements as specified in section 23-5 of the GST Act it is not required to be registered for GST in respect of its residential leasing enterprise. In summary the Trust is not registered and is not required to be registered for GST purposes for the proposed sale of the properties or for its residential leasing enterprise and section 9-5(d) of the GST Act is not satisfied. Therefore all of the requirements of section 9-5 of the GST Act will not be satisfied. Accordingly, the proposed sale of the properties will not be taxable supplies. Other Information All public rulings and publications mentioned in this ruling are available on the ATO website at www.ato.gov.au

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