Private ruling: Goods and services tax and property
Date of advice: 24 August 2020
Published: October 2020

Ruling: Q1: Was x supply, in x, of part of her interest in x, to x a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. | Q2: Will x sale of x be a taxable supply as defined by section 9-5 of the GST Act? | A2: Yes. | Q3: Is x sale of x a taxable supply as defined by section 9-5 of the GST Act? | A3: No. | Q4: Is X's sale of x a taxable supply as defined by section 9-5 of the GST Act? | A4: Yes. The sale of x is treated as a taxable supply under section 142-10 of the GST Act. However, x is not entitled to input tax credits in relation to the property because subsection 142-15(4) of the GST Act prevents this.

Relevant facts and circumstances: x are married. They bought x in x. X was x square metres. They lived in the jointly owned property as their principal place of residence. They did not renovate x. X was built for residential accommodation with physical characteristics including bedroom(s), bathroom(s), toilet(s) and kitchen. X provides basic living facilities and shelter. They moved out of x in x due to problems with bad tenants nearby. They then rented out x. X is not registered for GST. X are not registered for GST as a partnership. X carried on a building design enterprise. She did not register for GST as her GST turnover did not meet the registration turnover threshold. However, she registered for GST as a result of the property development enterprise involving x. This enterprise is described below. The intention was to sell x. She was registered from x. X, in her name only, then bought x in x. It had a house on it. At that time x was located next to x. The loan to purchase x was in joint names. There is only one bank account. It is in the name of x. X was x square metres. X commenced extending and renovating the house on x in x. The work undertaken and not undertaken included the following: · wall linings were taken out; and · x internal walls were removed; and · walls were relocated; and · x% of the pre-renovated walls were plastered; and · x% of the pre-renovated walls were removed; and · x% of the pre-renovated interior or exterior non-supporting walls were replaced, removed or altered; and · the foundations were not altered or replaced; and · the floors were not replaced, removed or altered; and · There were approximately x interior or exterior supporting walls in the pre-renovated house. Only x such supporting wall was removed in the renovation. That required a structural beam to be inserted to basically hold up the roof. That was the only structural beam added in the renovation of x. Two external wall lintels above door openings were inserted elsewhere in the house; and · the roof was not lifted nor modified; and · Existing windows and doors were not replaced such that it was necessary to alter the brickwork. This was because the house is timber framed and timber cladded. However, x doors were altered into two different windows; and · some roof tiles were adjusted; and · French doors were installed on the existing dining wall; and · part of a bathroom became a hallway; and · an existing hallway became a toilet; and · part of a kitchen became a bedroom; and · part of another bedroom became a dining room; and · a deck was added with a roof; and · most of the house was rewired; and · The plumbing above ground was replaced. The plumbing below ground was left unchanged; and · new gas lines were installed; and · 1 bathroom, 1 family room and a master bedroom with an ensuite were added. This extension to the pre-renovated house is reflected in your post-renovation plans as BED 1, ENSUITE, PARENTS (sic) RETREAT and BATH; and · a free standing car port was added; and · new fencing was installed; and · a new driveway and crossover were added; and · a garden was added; and · new blinds were installed; and · the house was painted; and · all the kitchen cupboards in the pre-renovated house were removed and replaced; and · a new kitchen was built in a reduced area; and · The pre-renovated house had one bathroom only. It was a full bathroom and had a shower over a bathtub, vanity and toilet. This bathroom was removed in the renovation. The post-renovated house had a powder room which was a half bathroom. This half bathroom comprised a new vanity and new toilet; and · The outside of the existing residence was painted. All the existing stumps and bearers were maintained; and · A steel beam was added next to a timber bearer to provide support for the floor and roof above. This was needed due to insufficient support. The pre-renovated floor was sagging; and · The post-renovated BED 3 (per post-renovation floor plan) remained the same size as its pre-renovated state. A built in robe was added during the renovation; and · Built in robes and shelves were installed in the post-renovated BED 2 (per post-renovation floor plan). BED 2 was reduced in size due to the BATH (per post-renovation floor plan); and · There were two timber posts in the STORAGE/WORKSHOP AREA (per post-renovation floor plan). This area is under the house. The two posts were replaced by steel posts; and · On the x x supplied photographs and plans of x before and after renovations. There are two green bins in the third photograph down from the list of pre-renovation photographs supplied. The area around the bins is what she referred to as the 'small concrete deck landing and columns' area. This area was demolished; and · The pre-renovated house had only one air conditioner. It was in Bed 1 per the pre-renovation plans. This unit was removed in the renovation. A new air conditioning unit was installed in the post-renovated LOUNGE (per post-renovation floor plan). There were no other air conditioning units installed in the post-renovated house; and · The pre-renovated house did not have a security system. A camera only security system was installed in the post-renovated house X alone did the following concerning x: · made decisions about the renovations; and · engaged the contractors; and · paid for the renovations. X intention was to purchase, renovate and sell x on her own as a sole trader. X was not involved in the decision to buy, renovate and sell x. X was built for residential accommodation with physical characteristics including bedroom(s), bathroom(s), toilet(s) and kitchen. X provides basic living facilities and shelter. The intention was to subdivide the land comprising of x and x into three blocks. Two of the three blocks were to be sold. The blocks to be sold were the newly created x and the smaller x. X was to be retained albeit smaller than its original size. X was to house the family home. There was a boundary realignment at stage 1 of the development. The boundary realignment occurred in x. The realignment related to the x and x boundary. X became bigger (i.e. x square metres). X became smaller (i.e. x square metres). In effect, x disposed of part of her interest in x to x. The interest disposed of by x comprised vacant land. X did not receive anything for the disposal of that part of her interest. X was never rented out. After leaving x x moved into various other places before living in x. They commenced living in x in x. At stage 2 of the development, the house on x was demolished in x. X became vacant land. The intention was to build the family home on this piece of vacant land. In x, x was subdivided to create a smaller x (i.e. x square metres) and x (i.e. x square metres). X is situated between x and x (i.e. x square metres). X and x were jointly owned by x. A new house was built on x by around x. X was built for residential accommodation with physical characteristics including bedroom(s), bathroom(s), toilet(s) and kitchen. X provides basic living facilities and shelter. X was unoccupied and listed for sale for x months after it was built. X intended to sell the house in a finished state. They were expecting to sell the house by x. However, the Royal Commission into banking resulted in lending restrictions. There was a downturn in the property market. This downturn occurred from x. They could not sell the property despite dropping the asking price. Therefore, there is no contract for sale. Subsequently x was and is rented out. X are still trying to sell it. They are not staying in x. X is expected to sell above $75,000. X will not be used only for rent for a period of 5 years prior to sale. X was sold. The sale settled in x. GST was included in the sale price. The margin scheme was applied in working out the amount of GST on the supply. The GST was reported in x Business Activity Statement (BAS). X has not reimbursed the buyer for the GST that she imposed on the sale. X will not be reimbursing the buyer for the GST that was charged. Due to fears for their personal safety they could not build their family home on x. X was sold. The sale settled in around x. GST was included in the sale price. The has not been reported in anyone's BAS as the same has not been lodged. X claimed input taxed credits (i.e. GST credits) in respect to x and x. She commenced making such claims in x. Since x x were not involved in any other enterprises.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Paragraphs 9-5(a), (b), (c) and (d) | Paragraphs 9-30(2)(a) | Subsection 11-15(2) | Paragraphs 11-15(2)(a) and (b) | Section 23-5 | Section 29-25 | Section 40-35 | Subsection 40-65(1) | Paragraph 40-65(2)(b) | Section 40-75 | Paragraph 40-75(1)(b) | Section 45-5 | Paragraphs 72-5(1)(a) and (b) | Subsection 142-5(1) | Section 142-10 | Subsection 142-15(4) | Subsection 188-10(1) | Subsection 188-20(1) | Paragraphs 188-20(1)(a), (b) and (c) | Section 195-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Was x, in x, of part of her interest in x, to x a taxable supply pursuant to section 9-5 of the GST Act?: In x, as a consequence of the boundary realignment at stage 1 of the development, x supplied xm 2 of vacant land at x to x. Under section 9-5, 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 However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. | Detailed Reasoning - Paragraph 9-5(a): We now consider whether paragraph 9-5(a) is satisfied. Paragraph 9-5(a) requires that x make the supply for consideration. X did not provide consideration for the acquisition of the vacant land. However, subsection 72-5(1) provides that: The fact that a supply to your *associate is without *consideration, does not stop the supply being a *taxable supply if: (a) your associate is not *registered or *required to be registered; or (b) your associate acquires the thing supplied otherwise than solely for a *creditable purpose. X are associates of x. Therefore, the supply without consideration can be a taxable supply if x made the acquisition otherwise than solely for a creditable purpose. Subsection 11-15(2) states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. X subsequently built a house at x that was rented out. The rental of the house at x is an input taxed supply under section 40-35. Consequently, x did not acquire the land for a creditable purpose according to subsection 11-15(2). It follows that, x acquired the vacant land otherwise than solely for a creditable purpose per paragraph 72-5(1)(b). In essence, paragraph 9-5(a) is deemed to be satisfied. This being the case, the supply of vacant land by x may be a taxable supply provided the other requirements of section 9-5 are satisfied (i.e. paragraphs (b), (c) and (d) of section 9-5). | Detailed Reasoning - Paragraphs (b), (c) and (d) of section 9-5: Next, we consider whether paragraphs (b), (c) and (d) of section 9-5 are satisfied. The supply is made in the course or furtherance of x property development enterprise. The supply is connected with the indirect tax zone as it is in Australia. X was registered at the time of the supply. Therefore, paragraphs 9-5(b), (c) and (d) are satisfied. The supply of vacant land is not GST-free nor input taxed. All paragraphs to section 9-5 are satisfied. X's supply of the land is a taxable supply. We note for your information that GST is 1/11 th of the GST inclusive market value of the land supplied to x. | Detailed Reasoning - Will x's sale of x be a taxable supply as defined by section 9-5 of the GST Act?: A partnership is defined in section 195-1 by reference to the definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). That definitionstates: partnership means: (a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or (b) a limited partnership. We consider there is a partnership comprising of x for GST purposes. The x partnership owns x. As such we need to determine whether the future sale of x is a taxable supply as defined in section 9-5 above. | Detailed Reasoning - Paragraphs (a), (b) and (c) of section 9-5: The supply will be made for consideration. The supply will be made in the course or furtherance of the partnership's property development enterprise. In addition, the supply is connected with the indirect tax zone as it is in Australia. Therefore, paragraphs 9-5(a), (b) and (c) are satisfied. As the partnership is not registered for GST, we will consider whether the partnership is required to be registered for GST per paragraph 9-5(d). | Detailed Reasoning - Requirement to be registered: 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 (which is currently $75,000 for entities other than non-profit entities). The partnership is carrying on a leasing and property development enterprise. However, if the partnership's GST turnover does not meet the registration turnover threshold then the partnership is not required to be registered. This being the case, the partnership will not satisfy section 23-5. Next, we will consider whether the partnership's GST turnover meets the registration turnover threshold. | Detailed Reasoning - GST registration turnover threshold: Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if: · your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or · your projected GST turnover is at or above the registration turnover threshold. The registration turnover threshold applicable to the partnership is $75,000. It is necessary to determine whether the partnership's projected GST turnover meets the threshold. The partnership is required to be registered for GST if the partnership's projected GST turnover is at or above $75,000. Subsection 188-20(1) states: 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: (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. The rental of the house at x is an input taxed supply under section 40-35. Therefore, the rental income is excluded from partnership's projected GST turnover by virtue of paragraph 188-20(1)(a). However, the partnership is likely to make a supply once a contract of sale is entered into by the relevant parties. The sale price will be included in the partnership's projected GST turnover. This is provided settlement occurs during the relevant 12 month period as prescribed in subsection 188-20(1). We expect that an executed sale contract will, at the right point in time, cause the partnership's projected GST turnover to be above the $75,000 registration turnover threshold. Accordingly, the partnership's GST turnover will meet the registration turnover threshold. It follows that, the partnership will either be registered or required to be registered at the time the sale of x settles. This means the partnership will satisfy paragraph 9-5(d) of the definition of 'taxable supply'. The sale of x is not GST-free under other provisions of the GST Act. Given that x will not be used only for rent for a period of 5 years prior to sale, it is considered 'new residential premises' per section 40-75. New residential premises are not input taxed per paragraph 40-65(2)(b). The sale of x is not input taxed under other provisions of the GST Act. Consequently, the sale of x is a taxable supply. We note for your information that the partnership is the entity that should have claimed any input tax credits (i.e. GST credits) on acquisitions related to x. The input tax credits should not have been claimed by x. In addition, the partnership may have to make increasing adjustments over a number of tax periods. This is due to a change in the way x was applied. X was applied for rental purposes instead of only for sale. We can provide you with verbal non binding advice in respect to this matter. | Detailed Reasoning - Question 3: Is X's sale of x a taxable supply as defined by section 9-5 of the GST Act ? We consider that the x partnership existed when the partnership rented out the house at x. However, the rental enterprise came to an end when the house was demolished. The intention at this time was to construct new residential premises to be used as the principal place of residence of x (i.e. x was to be applied solely for private purposes). The vacant land ceased to be an asset of the partnership. It became an asset of x as co-owners. As such, the issue is whether the sale of vacant land at x, by x as co-owners, is a taxable supply under s9-5 (mentioned above). A supply is not taxable if it fails paragraph (a), (b), (c) or (d) of section 9-5. Paragraph 9-5(b) requires that the supply be made in the course or furtherance of an enterprise that the entity carries on. Due to fears for their personal safety they decided not to build their family home on x. Therefore, the vacant land was sold in x. It follows that, the supply was not made in the course or furtherance of an enterprise that x carried on. Paragraph 9-5(b) is not satisfied. Therefore the sale is not a taxable supply. The sale of x is not subject to GST. GST should not have been included in the sale price. | Detailed Reasoning - Question 4: Is X's sale of x a taxable supply as defined by section 9-5 of the GST Act ? | Detailed Reasoning - Classification of supply under Chapter 2: Firstly, we need to consider whether X's supply is input taxed under Chapter 2 which sets out the basic rules for GST. Paragraph 9-30(2)(a) in Chapter 2 states that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act. Division 40 includes subsection 40-65(1). Subsection 40-65(1) states: A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). X is residential premises to be used predominantly for residential accommodation. At first view, the sale of x is input taxed. However paragraph 40-65(2)(b) states, among other things, that the sale is not input taxed to the extent that the residential premises are new residential premises Under paragraph 40-75(1)(b) residential premises are new residential premises if they have been created through substantial renovations of a building. The issue is whether or not 'new residential premises' have been created through substantial renovations of x. Section 195-1 states, among other things, that substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) deals with the circumstances in which residential premises are new residential premises. We emailed you a copy of GSTR 2003/3 on 19 May 2020. GSTR 2003/3 paragraph 61 states: We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial: (i) the renovations need to affect the building as a whole; and (ii) the renovations need to result in the removal or replacement of all or substantially all of the building. We note that, for substantial renovations to occur both the above criteria have to be satisfied. GSTR 2003/3 paragraph 64 provides information on what it means for substantial renovations to affect the building as a whole. Paragraph 64 states: Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. We consider that your renovations directly affect most rooms in x. Therefore, the renovations affect the building as a whole. However, the renovations need to also result in the removal or replacement of all or substantially all of the building. GSTR 2003/3 paragraph 69 provides that this criterion is satisfied where there is a removal or replacement of a substantial part of the: · structural components of the building; or · non-structural components of the building. GSTR 2003/3 paragraph 70 elaborates that structural work may give rise to substantial renovations in its own right. Structural work includes such work as: · altering, or replacing of, foundations; · replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior); · lifting or modifying of roofs; · replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door). GSTR 2003/3 paragraph 74 states that non-structural building work includes: · replacing electrical wiring; · replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior); · plastering or rendering an entire wall or walls; · plumbing (eg replacing old metal pipes with copper pipes or plastic pipes); · removing or replacing kitchen cupboards, bathroom fixtures, etc; · removing or replacing air-conditioning or security systems. We are of the view that X's renovations do not result in the removal or replacement of all or substantially all of the building. The renovations do not satisfy the definition of substantial renovations for GST purposes. X is not new residential premises under paragraph 40-75(1)(b). The sale of x is input taxed under subsection 40-65(1). Therefore, the supply is input taxed under paragraph 9-30(2)(a). Paragraph 9-30(2)(a) is in Chapter 2 containing the basic rules for GST. The sale of x is input taxed under Chapter 2. Accordingly, X should not have claimed input tax credits in respect to x. | Detailed Reasoning - Classification of supply under Chapter 4: However, subsection 142-5(1) states: This Subdivision applies if, after disregarding any amounts covered by subsection (2), your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable. X did include an amount of GST on the sale of x in her business activity statement. Therefore, X's assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable. In addition, section 142-10 states: For the purposes of each *taxation law, so much of the excess from subsection 142-5(1) (the excess GST) as you have *passed on to another entity is taken to have always been: (a) payable; and (b) on a *taxable supply; until you reimburse the other entity for the passed-on GST. Since X has not reimbursed the buyer for the passed-on excess GST, this excess GST on the supply of x is taken to have always been payable and on a taxable supply. Section 142-10 is in Chapter 4 which contains the special rules for GST that apply in particular circumstances. Therefore, the supply of x is treated as a taxable supply under Chapter 4. | Detailed Reasoning - Tie breaker provision: Section 45-5 (in Chapter 4) states: The provisions of this Chapter override the provisions of Chapter 2 (except section 29-25), but only to the extent of any inconsistency. Accordingly, the provisions of Chapter 4 override the provisions of Chapter 2, but only to the extent of any inconsistency. This means that section 142-10 (found in Chapter 4) overrides paragraph 9-30(2)(a) (found in Chapter 2). The sale of x is treated as a taxable supply due to the operation of section 142-10 until X reimburses the passed-on GST to the recipient. We note for your information that X still cannot claim input tax credits in respect to x despite the sale being treated as a taxable supply under Chapter 4. Subsection 142-15(4) prevents such a claim for GST credits on purchases in respect to x. The input tax credits claimed in Business Activity Statements lodged within the last four years should be paid back to the Australian Taxation Office.

· unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | · all terms marked by an *asterisk are defined terms in the GST Act | · all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au