Private ruling: Goods and services tax (GST) and residential property development
Published: May 2013

Ruling: Q1: Are you required to be registered for GST? | A1: No. | Q2: Will GST be payable by you on your distribution of a number of the units to beneficiaries (relatives of individual 1 and individual 2)? | A2: No.

Relevant facts and circumstances: You are not registered for GST. You were established a number of years ago for the purpose of acquiring land (located in Australia) with an existing residence for the purpose of demolishing the existing residence and constructing a number of residential units (not for resale). Individual 1 and individual 2 are guarantors for the building costs. They also sold their house to contribute to the building costs. They also provided additional funds required to purchase the original property of a certain amount of money. They will be permanently living in one of the units. The residential units are nearing completion. Once completed, individual 1 and individual 2 will move into one of the units as their residence. You will lease out a number of the other units on a regular, continuous basis. You will distribute the remaining units to beneficiaries (relatives of individual 1 and individual 2). Relatives of individual 1 and individual 2 will live in or lease out the units that are distributed to them.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 subsection 72-5(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-25(a)

Reasons for decision: Summary: You will not be required to be registered for GST because your GST turnover will be zero. | Detailed Reasoning - Detailed reasoning: Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is required to be registered for GST if: (a) it is carrying on an enterprise, and (b) its GST turnover meets the registration turnover threshold of $75,000. | Detailed Reasoning - Enterprise: Section 9-20 of the GST Act defines enterprise to include: · an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)). · an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). · an activity or series of activities done in the form of a lease (paragraph 9-20(1)(c)). Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for the purposes of determining whether an entity is carrying on an enterprise for GST purposes. Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It states: 234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the meaning of trading assets and investment assets. They state: 258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. 259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. Paragraph 249 of MT 2006/1 states: 249. A trading asset is generally dealt with or traded within a short time after acquisition. In accordance with paragraph 254 of MT 2006/1, an intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. You have not built any of the units to sell. You will retain a number of the units to produce rental income. Therefore, you will hold these units as investment assets. Hence, when you sell these units (if you sell them at some stage after leasing them out), these sales will be the realisation of investment assets. One of the units will be retained by you for individual 1 and individual 2 to live in permanently. Therefore, you will hold this unit as an investment asset. Hence, when you sell this unit (if you sell it at some stage after leasing it out) the sale will be a realisation of an investment asset. You will transfer the other units to beneficiaries for no consideration. Therefore, you will not sell these units. Hence, you are not carrying on a trading activity or an activity that has the characteristics of a business deal. Therefore, you are not carrying on an activity or series of activities in the form of a business or an adventure or concern in the nature of trade. However, you will be carrying on a property leasing enterprise in relation to a number of the units because you will be leasing out these units on a regular or continuous basis (although you will not receive payment from individual 1 and individual 2 for the lease of one of the units to them). The other units will not be connected with this enterprise as you will not lease out these units. As you are carrying on an enterprise, you satisfy the requirement of paragraph 23-5(a) of the GST Act. | Detailed Reasoning - GST turnover: Subsection 188-10(1) of the GST Act explains when an entity's GST turnover meets a particular turnover threshold. It states: You have a GST turnover that meets a particular *turnover threshold if: (a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or (b) your projected GST turnover is at or above the turnover threshold. Subsection 188-15(1) of the GST Act sets out how to calculate current GST turnover. It provides that your current 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 the 12 months ending at the end of that month, 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 of the GST Act dealing with supplies to associates); or (c) supplies that are not made in connection with an enterprise that you carry on. Subsection 188-20(1) of the GST Act sets out how to calculate projected GST turnover. It provides that 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 of the GST Act dealing with supplies to associates); or (c) supplies that are not made in connection with an enterprise that you carry on. In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital/investment asset is excluded from the calculation of projected GST turnover. Leasing income from leasing out residential premises is consideration for an input taxed supply under section 40-35 of the GST Act. Therefore, the leasing income you earn from leasing out a number of the units will be excluded from the calculation of your current GST turnover and projected GST turnover. As your lease of one of the units to individual 1 and individual 2 will be an input taxed supply of residential premises by way of lease, this supply will be excluded from the calculation of your current GST turnover and projected GST turnover. Your transfer of ownership of a number of the units to beneficiaries will be excluded from the calculation of your current GST turnover and projected GST turnover because these supplies will not be connected with your leasing enterprise (as you will not lease out these units) or any other enterprise that you carry on. Goods and services Tax Ruling GSTR 2001/7 provides guidance on the meaning of GST turnover, including the effect of section 188-25 of the GST Act on projected GST turnover Paragraph 31 of GSTR 2001/7 discusses capital assets. It states: 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'. Capital asset is another term for investment asset. The proceeds from selling the units that you are building to lease out (if you sell them at some stage after leasing them out) will be excluded from the calculation of your projected GST turnover as your sales of these units will be sales of capital/investment assets. Hence, your GST turnover will be zero even at the time that you sell any of the units (if applicable). Therefore, you will not satisfy the requirement of paragraph 23-5(b) of the GST Act. As you will not satisfy all of the requirements of section 23-5 of the GST Act, you will not be required to be registered for GST. | Summary: GST will not be payable on your distribution of a number of the units to beneficiaries (relatives of individual 1 and individual 2) because: · you will not supply these units in the course or furtherance of an enterprise that you carry on; and · you are not registered or required to be registered for GST. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: 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. (*Denotes a term defined in section 195-1 of the GST Act) The distributions of a number of the units to beneficiaries will not be supplies connected with your leasing enterprise or any other enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act will not be satisfied in relation to these supplies as you will not supply these units in the course or furtherance of an enterprise that you carry on. You are not registered for GST. You will not be required to be registered for GST when you distribute a number of the units to beneficiaries. Hence, the requirement of paragraph 9-5(d) of the GST Act will not be satisfied when you distribute these units. Therefore, as not all of the requirements of section 9-5 of the GST Act will be satisfied, you will not make taxable supplies of the units to the beneficiaries. Hence, GST will not be payable on the transfer of these units to the beneficiaries. If you sell any of the units that you will lease out, these sales will not be taxable supplies because you will not be registered or required to be registered for GST when you sell these units. Therefore, GST would not be payable on your sales of these units.