Private ruling: GST and the construction and sale of property.
Date of advice: 9 May 2018
Published: July 2018
Ruling period: 1 April 201X – 30 June 201X
Date scheme commenced: 1 April 201X

Ruling: Q1: Are you making a taxable supply pursuant to section 9-5 of the GST Act when you sell property located at a specified location? | A1: Yes

Relevant facts and circumstances: Individual A is not currently registered for GST. Individual A is currently employed as a bus driver. Prior to that, Individual A was employed as a fitter and turner. Both roles were in the capacity of an employee. Individual A also operated as a self-employed contractor (courier) for a few years from XXXX. Individual B is registered for GST and carries on an enterprise of providing seamstress/clothing alteration services. Individual A and Individual B (You) acquired property located at a specified location in the 1990s as your principle place of residence. In 201X the existing dwelling (your principle residence) was demolished and construction began on two townhouses. Your intention at the time was to reside in one of the townhouses with the other townhouse being gifted to your two sons (Individual C and Individual D) as an ‘advanced inheritance’. Individual C and Individual D arranged all relevant Council permits and approvals for town planning including the preparation of plans and drawings etc. Construction was completed in September 201X. During the construction process, Individual D entered into a long-term relationship and the size of the townhouse was not suitable to accommodate his new family. You decided continue with the construction as you wanted to assist your other son, Individual C. You obtained a loan with the intention that Individual C service the loan in return for being able reside in one of the townhouses. During the construction process costs escalated and ended up much more than expected. As a result, Individual C was unable make the loan payments as agreed. As such, the decision was made in May 201X to sell the second townhouse (the Property) in an effort to recoup the escalated construction costs. Construction costs for the two townhouses totalled approximately $XXX being financed as follows: ● Individual D and Individual C contributed $XX ● Bank finance $XXX ● Individual A withdrew $XX from his Superannuation Fund ● Individual A and Individual B contributed $XX from private savings The sale of the Property will be reported as a capital gain in the individual tax returns of Individual A and Individual B with construction costs to be included in the cost base of the asset/townhouse sold. Neither Individual A nor Individual B have any prior involvement or experience in property development and have no intention of carrying out such activities in the future. Neither Individual D nor Individual C have previously developed or built a property. No construction expenses are reflected in the accounts of the business currently operated by Individual B. The Property was sold in December 201X. You currently reside in the other townhouse with Individual C. Consideration received for the sale of the Property was $XXX . The Property was not resided in prior to the sale.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Section 9-40 | Section 23-5 | Paragraph 40-35(1)(a) | Section 40-65 | Section 40-75 | Section 184-1 | Division 188 | Section 188-10 | Section 195-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides 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 for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Initially, we need to clarify the entity referred to as ‘you’ in sections 9-5 and 9-40. Section 184-1 provides that an entity includes a partnership. The term ‘partnership’ for GST purposes takes the meaning as given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997): 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. In this case we would consider that you (Individual A and Individual B) will be considered a partnership. In determining whether you (i.e. the partnership) are making a taxable supply of the Property, the question is whether your activities are in the course or furtherance of an enterprise that you carry on. If so, as you are not registered for GST, a further question will be whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done: ● in the form of a business; ● in the form of an adventure or concern in the nature of trade; ● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Section 195-1 states that the phrase ‘carrying on’ in the context of an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’. Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on. Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are ‘one-offs’ or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: ● There is a change of purpose for which the land is held; ● A profit making motive ● there is a coherent plan; ● borrowed funds financed the acquisition or subdivision; ● interest on money borrowed to defray subdivisional costs was claimed as a business expense; and ● buildings have been erected on the land. No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. The following discussion is centred on applying the facts of this case to the above indicators and factors in determining whether your activities are an adventure or concern in the nature of trade with reference to those indicators established in Statham and Casimaty in the context of real property transactions. In this case the activities involve a single property containing your principal place of residence. The property was only used for private purposes. The existing dwelling was demolished and two townhouses constructed. Initially, one townhouse was to be used as your principal place of residence and the other townhouse was intended to be gifted to your two sons (Individual C and Individual D) as an ‘advanced inheritance’. However due to a change of circumstances during the construction process, it became necessary to sell the one of the units. Therefore we consider that there was a change in the purpose for which the Property was to be used. You were able to sell the single unit for a profit. There was a plan implemented in regard to the construction process of the townhouses. The construction of the Property was financed primarily through a bank loan with costs also being met through personal savings and accessing funds from Individual A’s superannuation fund. Your sons also contributed to the town planning and pre-construction fees. Interest expense on money borrowed to meet construction costs was not claimed as a business expense. A townhouse was constructed/built on the Property. You have not previously been involved in, nor have any experience in property development however you were successfully able to construct and sell the premises at a profit. Given the above, we consider that your activities involving the construction and sale of the Property constitute ‘carrying on an enterprise’ for the purposes of GST. | Detailed Reasoning - GST registration: 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 (currently $75,000). As discussed above, you are considered to be carrying on an enterprise by conducting activities of the construction and sale of residential premises. The next step is to determine whether your turnover meets the GST registration threshold. | Detailed Reasoning - Turnover: The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or b) your projected GST turnover is at or above $75,000. Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months. However turnover from making input taxed supplies are not included when calculating your current GST turnover. Your ‘projected GST turnover’ is the sum of your turnover for the current month and the next 11 months. Likewise, turnover from making input taxed supplies are not included when calculating your projected GST turnover. A supply of real property is input taxed pursuant to section 40-65 unless it is new residential premises. The Property meets the definition of new residential premises as set out in 40-75 therefore the supply of the Property is not input taxed and is to be included in your projected turnover. As the sale of the Property exceeded $75,000, your turnover will meet the GST registration turnover threshold and you (the partnership) are required to register for GST at a point in time that you become aware your projected GST turnover will meet the $75,000 threshold. At the minimum this will be eleven months prior to the settlement of the property. | Detailed Reasoning - Conclusion: As discussed above, we consider that you are carrying on an enterprise. The sale of the Property is done in the course or furtherance of that enterprise. We have also established that you are required to register for GST. Furthermore, the supply of the Property was made for consideration and is connected with the indirect tax zone (Australia). The sale of the Property is neither GST-free nor input taxed. Therefore the sale of the Property is a taxable supply pursuant to section 9-5 and you are liable for GST in accordance with section 9-40. You were also entitled to input taxed credits on the construction costs from the time you were required to be registered for GST.