Private ruling: GST and the sale of real property

Ruling: Q1: Will the sale of the town house be subject to goods and services tax (GST)? | A1: 

Relevant facts and circumstances: You are not registered as a partnership for GST. You are joint owners of real property, located in Australia (Property). You obtained this Property several years ago and it has been your principle place of residence since then. You have subdivided the Property, demolished the residential premises located on the Property and have commenced building 2 town houses. It is your intention to sell one of the town houses within 5 years to help with the associated costs and live in the remaining one. You have done this as the original house did not meet your living requirements. You would have preferred to only renovate your house however this could not be done given your financial circumstances. The consideration you would receive from the sale of the town house would exceed $75,000.


Reasons for decision: Summary: The building and sale of the town house is an enterprise for GST purposes. As a result you would be required to be registered for GST thus making the sale of the town house taxable. | Detailed Reasoning - Detailed reasoning: Tax law partnership A partnership is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by reference to the definition of a partnership given in section 995-1 of the Income Tax Assessment Act 1997 . The relevant part of that definition states that a partnership includes an association of persons in receipt of ordinary income or statutory income jointly. This type of partnership is referred to as a tax law partnership. Therefore for GST purposes, a tax law partnership is formed where the co-owners of real property come together and enter into an agreement for the development and sale of their real property. Taxable supply Section 7-1 of the GST Act provides that GST is payable on taxable supplies. Section 9-10 of the GST Act provides that a grant, assignment or surrender of real property is a supply for GST purposes. Furthermore, under section 9-5 of the GST Act, you make a taxable supply if: · you make the supply for consideration · the supply is made in the course or furtherance of an enterprise that you carry on · the supply is connected with Australia, and · 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. In your case, you are to supply (by way of sale) residential premises in the form of a town house (including land). The sale will also be connected with Australia as the property will be sold in Australia. There are no provisions in the GST Act or any other Act that allows your sale of the town house to be GST-free or input taxed given the town house is intended to be sold within 5 years of completion. Therefore, the sale of the town house will be a taxable supply if the sale is made in the course or furtherance of an enterprise that you carry on and you are required to be registered for GST. In the course or furtherance of an enterprise that you carry on The term enterprise is defined in subsection 9-20(1) the GST Act and includes an activity, or series of activities, done in the form of an adventure or concern in the nature of trade. As the activities you are undertaking; which include the subdivision of the Property, the demolition of the existing residential premises, the construction of two town houses and the eventual sale of one of the town houses upon completion; is a one-off set of activities, the activities are appropriately considered under this definition. Miscellaneous Taxation Ruling MT 2006/1 (available from the ATO website www.ato.gov.au ) provides the ATO view on whether or not an activity constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 . Goods and Services Tax Determination GSTD 2006/6 provides that the ATO view given in MT 2006/1 can be applied equally to the term enterprise as used in the GST Act. Paragraph 244 of MT 2006/1 provides guidance on the meaning of an adventure or concern in the nature of trade and states: 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature. Paragraph 263 of MT 2006/1 provides further guidance in determining whether an isolated transaction is an adventure or concern in the nature of trade and states: The issue to be decided is whether the activities 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. Therefore, following the guidance provided by paragraphs 244 and 263 of MT 2006/1, the subdivision of your Property, the demolition of existing residential premises and the building and sale of the town house is not an adventure or concern in the nature of trade unless it can be shown that this set of activities can be considered more as a commercial venture, that is, a profit making undertaking than the mere realisation of your private asset. Commercial venture Paragraph 265 of MT 2006/1 provides a list of factors that can be used to determine if a one-off property transaction is commercial in nature and provides that a one-off transaction displaying some of these factors may indicate that the transaction is a commercial venture. These factors include whether there is a change of purpose for which the land is held; whether there is a coherent plan for the subdivision of the land and whether buildings have been erected on the land. In your case, several of these factors are present. For example, there is a change of purpose for which the whole Property is held. Although part of the Property will still be used for your private residence, the residual part is being used to build and sell an asset that can be marketed and sold to the public at large. There is also a plan for the development of your Property involving some financial analysis and the submitting of the relevant documentation to the local council to obtain development approval. Finally, given the nature of what is being built and sold, there would be a reasonable expectation of profit from the sale of the town house albeit that your desired intention was to renovate your original home. Considering as a whole the series of activities, you have done more than is required to realise a personal asset. The activities have a significant commercial purpose and viability and consequently, the activities are more of a commercial venture than the sale of a private asset. Hence, the activities are an adventure or concern in the nature of trade and as a result you are carrying on an enterprise for the purposes of GST as a tax law partnership. We now need to determine whether the final requirement for a taxable supply is satisfied, that is, whether you are required to be registered for GST. Required to be registered for GST Section 23-5 of the 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. The registration turnover threshold is currently set at $75,000. Furthermore, section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold of $75,000 if your projected GST turnover meets $75,000. Your projected GST turnover is calculated by adding the value of all the supplies you make or are likely to make in a particular month and in the next 11 months (excluding certain supplies such as input taxed supplies). Given that the proceeds from the sale of the town house will exceed $75,000 and that the town house is likely to be sold in the next several months, it is highly probable that your projected GST turnover exceeds $75,000 and that you are therefore required to be registered for GST. Please note that you can backdate your GST registration from the time you commenced carrying on your enterprise. For example, you may backdate your GST registration from the time you decided to subdivide your Property. Entitlement to input tax credits (GST credits) on construction and development costs You are entitled to claim, from the commencement of your GST registration, GST credits on the GST included in the development and construction costs of the town house that will be sold. You are not, however, entitled to claim any GST credits for the GST included in those costs associated with the development and construction of the town house that will be used for your private residence. If you make an acquisition that is necessary for the construction of both town houses (for example, subdivision costs) you must apportion the cost between each so as only to claim a GST credit on that part of the acquisition required for the town house that will be sold. Goods and Services Tax Ruling GSTR 2000/15 (available from the ATO website) will provide examples of how to make such apportionments. If you adopt the cash basis of accounting, you can claim GST credits in the tax period in which you provide consideration for an acquisition, but only to the extent that you provided the consideration in that tax period. If you adopt the non-cash method of accounting, you can claim GST credits in the tax period in which you provide any consideration for an acquisition or the supplier issues you with an invoice asking for payment for the acquisition. Either way, you are only entitled to claim GST credits on the associated costs provided you hold tax invoices for the acquisitions you make. No tax invoice is required for an acquisition less than $82.50 (GST inclusive). Attributing GST payable Goods and Services Tax Ruling GSTR 2000/28 (available from the ATO website) provides information on when you must attribute the GST payable on your sale of the town house. For example, paragraph 25 of GSTR 2000/28 indicates that if the sale is made under a completed standard land contract, the GST is attributable to the tax period in which settlement of the property occurs. This applies if you account for GST on either a cash or non-cash basis. Margin scheme A GST registered vendor of real property is entitled to use the margin scheme on the sale of their real property to reduce the GST payable, provided the real property was not acquired by them as a taxable supply. Note that you and the purchaser must choose to apply the margin scheme before or at the time of making the supply and this decision must be in writing. You cannot retrospectively choose to use the margin scheme. For example, where you supply real property under a standard land contract, the margin scheme must have been chosen to be used before or at the date of settlement. You must retain records of the decision to apply the margin scheme. More information on the margin scheme is available from the ATO website by searching under the heading building and construction - issues register and in the fact sheet GST and the margin scheme . Renting the town house You have stated that you may rent the town house if you do not receive your asking price. In these circumstances this would affect the GST credits you are entitled to claim. More information on this is available from the ATO website by searching under property and construction - issues register and from the public ruling GSTR 2009/4 (also available from the ATO website).

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