Private ruling: Property development and goods and services tax
Date of advice: 28 August 2019
Published: October 2019
Ruling period: 1 July 20YY
Date scheme commenced: 30 June 20ZZ

Ruling: Q1: Are you carrying on an enterprise and therefore are required to be registered for GST in relation to the sale of your new property? | A1: No, you are not carrying on an enterprise and therefore are not required to be registered for GST in relation to the sale of your new property.

Relevant facts and circumstances: You purchased an investment residential property in mid 20XX. You rented out your property from the time you purchased it to late 20YY. In late 20XY, your sibling (carer for your aged parent), their spouse and your parent (your family) decided to migrate to Australia to be with the rest of your family members. On arrival in Australia your family began the process of applying for permanent residency under visa class CA 143 Contributory parent and CA884 Contributory Aged Parent respectively. Your family were initially staying with your relative in a two bedroom property. The cramped accommodation housing X adults and a child created a fair amount of family tension, resentment and unhappiness for your elderly parent and their carers. In early 20YY, you decided to make available your investment residential property for your family to live in free of charge. However the state of the house required major renovations and on making enquiries of your architect, you were told it would be better to knock the house down and build a new house on the property. The property was chosen due to its close proximity to where your family were expected to commute daily to look after their one year old granddaughter. Unfortunately in mid 20YY, your parent passed away unexpectedly. You continued with the building plans of your property as your sibling and their spouse were intending to live in Australia and had applied for permanent residency under visa class CA 143 (Contributory parent) in mid 20YY. You made the decision to knock down the old house on your property and rebuild a new single dwelling for your sibling and their spouse as their principal place of residence. You engaged architects to undertake concept design in mid 20YY and design development in late 20YY. In late 20YY, you obtained an appraisal from the real estate agents of your property in its undeveloped state. The old house on your property was fully demolished in early 20ZY and in early 20YZ, you signed a contract with the builder for the construction of a new house on your property. As you did not consider that you were conducting an enterprise in relation to the rebuild of the new property, you did not register for GST. You did not make any input tax credit claims in relation to the original acquisition of your property, the construction of the new property and its eventual sale. Your sibling suffered from illness following your parent's death and returned overseas in early 20YZ to settle their affairs and while overseas, decided that they and their spouse would remain overseas for the foreseeable future. You went ahead with the build, despite knowing that given the existing market conditions, the market value of the new property would be less than the value of your property prior to its development plus the total construction and selling costs. In late 20YZ, your sibling decided to remain overseas and re-open their business. This together with your decision to retire in late 20YX, led to your decision to put the new property on the market in mid 20YX upon completion of its build. You spent $XX all up on the rebuild and the costs of selling the new property. You sold the new property at auction in mid 20YX for $XX. You consider this is $XX worse off than had you sold your property prior to its development. You submit that you are not carrying on an enterprise in relation to your development activities and therefore the sale of the new property is not a taxable supply for the following reasons: · you commenced on the rebuild of the house on your property for private and domestic reasons being to provide a house for your aged parent (initially) and sibling and spouse to live in Australia; · you did not draw up any financial plans for the project nor did you undertake the development for the purpose of making a profit; · you were aware prior to the commencement of the development of your property that the profit you would make from the sale of the new property would be lower than the profit you would make if you sold the undeveloped property; · It was not your intention to sell the new property when you commenced and during its construction; · you have not previously been engaged in property development of any nature and this is a one-off isolated transaction; · you did not register for GST nor did you claim any input tax credits believing that transaction was of a private nature; · you sold the new property due to a change in your personal circumstances.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

Reasons for decision: Summary: Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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. 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) provides the ATO view on the meaning of 'entity' and 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Paragraphs 170 to 179 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. Given the facts of this case, we consider that the activity of selling the new property is not in the nature of the indicators of a 'business'. Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Paragraph 245 of MT 2006/1 refers to the 'badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have characteristics of 'trade' and are held for income producing purposes, or either as an investment asset or for personal enjoyment. While an activity such as the selling of an asset may itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is being carried on. You knocked down and built a new residence on your property (new property) with the intention of using the new property for the personal enjoyment of your family. Your intention in developing the property was not to build and sell for profit. It was only after the death of your parent and the change in your and your family's personal circumstances that you decided to sell the new property. Given the above, we do not consider your activities to constitute an adventure or concern in the nature of trade and as such are not an 'enterprise' for the purposes of GST. Therefore the sale of the new property would be considered to be the mere realisation of a capital asset. As it is considered that the sale of the new property would not constitute an 'enterprise' for GST purposes, you are not required to be registered for GST. | Detailed Reasoning - Note: MT 2006/1 provides that assets can change their character from investment which is capital in nature to trade and therefore revenue in nature (paragraphs 258 to 260). If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant (paragraph 254). The characteristics of trade are explained in paragraphs 243 to 261 and include the length of period of ownership and the frequency or number of similar transactions. In particular attention is drawn to paragraph 251 of MT 2006/1 which states: 251. The greater the frequency of similar transactions the greater the likelihood of trade. Accordingly, if you continue to develop properties with the intention of using it for private purposes only to dispose of it on completion, those activities will need to be assessed to establish whether they now form part of a building enterprise. As such any other future sales of new residential properties that you will be making are not covered by this private ruling.