Private ruling: GST and residential property
Date of advice: 29 March 2019
Published: May 2019
Ruling period: 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is your sale of new residential property a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, your sale of new residential property is not a taxable supply in accordance with section 9-5 of the GST Act.

Relevant facts and circumstances: You are a partnership that operates a small construction business, primarily building residential houses and doing small repairs. The partnership is registered for Goods and Services Tax (GST). The partners had originally operated their building and construction business through their partnership before it was transferred into their trust. In XXXX the partners transferred their business operations back into a partnership as they scaled back their operations, working towards retirement. The partnership had purchased land and constructed two properties in the past and sold them as trading stock. Since then, no land has been purchased and no properties have been constructed and sold as trading stock. All business income have been from build contracts; that is building the home for their clients who owned the land, or smaller jobs such as repairs, decks carports and sheds. The partners entered into a contract with the vendor for the purchase of vacant land. The representative for the partnership has advised that the land was purchased by the partners as joint tenants. The contract of sale for the land, however, is silent on this matter. The representative further advised that the land purchase was not recorded as an asset in the partnership accounts and no GST credits have been claimed in relation to the land purchase. The partners proceeded with plans to build a new residence intended to be their principal residence. As they were tradespersons, they undertook the job themselves as owner builders. All licencing and accreditations were sought and obtained accordingly on that basis. The construction of the house (new property) was completed in XXXX, the landscaping and power to the shed was completed in XXXX. The representative has advised that the construction costs for the new property have not been recorded in the partnership accounts and no GST credits have been claimed in relation to these construction costs. The partner kept a spreadsheet which tracked all invoices and the jobs they related to. All invoices relating to the construction costs of the new property were recorded as drawings when the quarterly business activity statements were prepared. These amounts were coded to the equity account in the financial accounts of the partnership. The partners started moving their possessions from their original residence into the new property in XXXX, between this time and XXXX the partners were living between the two properties. During this time the partners started to have second thoughts about whether the new property was what they really needed as it had a smaller yard and less shed space. Subsequently they moved back into their original residence and placed the new property on the market for sale.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 9-40 | Section 40-65 | Section 40-75

Reasons for decision: Summary: Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make. Section 9-5 of the GST Act provides you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (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 supply of the new property will meet the requirements of paragraphs (a), (c) and (d) of section 9-5 of the GST Act. There are no provisions in the GST Act that will make the supply of the new property GST-free. What remains to be considered is if the supply of the new property meets the requirements of paragraph (b) of section 9-5 of the GST Act or is input taxed. A sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, section 40-65(2) provides that the sale is not input taxed to the extent that the residential premises are: (a) commercial residential premises, or (b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. 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) explains what a sale is for the purposes of section 40-65 and when real property is new residential premises pursuant to section 40-75 of the GST Act. Paragraph 10 and 11 of GSTR 2003/3 states: 10. The sale of new residential premises (whether it is a house or a unit) by a registered entity (for example, a builder or developer) in the course or furtherance of an enterprise it carries on, is a taxable supply. 11. The sale of a person's private residential premises will not be subject to GST, even if the premises are new residential premises, unless the sale is in the course or furtherance of that person's enterprise and the person is registered or required to be registered for GST. Generally, you are not considered to be carrying on a business if your property transactions are for private purposes such as when you are constructing or selling your family home. You have told us that you constructed the new property with the intention of using it as your private residence and not as part of your building enterprise. Consistent with this, you did not account for the acquisition of the land and the construction of the house on it as part of your building enterprise. That is, you did not claim any input tax credits in relation to the acquisition of the land and the construction of the house. The purchase of the land and the construction costs were privately funded from your superannuation and savings. We therefore accept that the new property is a private residence and as such the supply of it by sale is not made in the course of furtherance of your enterprise as a builder. As paragraph 9-5(b) of the GST act is not met, the supply of the new property will not be a taxable supply and therefore will not be subject to GST. It is noted that as the supply of the new property will not be a taxable supply, all acquisitions in relation to the purchase of the Land and the construction costs of the house are not acquired for a creditable purpose and therefore you are not entitled to the input tax credits in relation to these acquisitions. | Detailed Reasoning - Note: 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 Commissioner’ view on the meaning of carrying on an enterprise. 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 as your private residence only to dispose of it on completion, those activities will need to be assessed to establish whether they form part of your building enterprise. As such any other future sales of new residential properties that you may make are not covered by this private ruling.