Private ruling: Goods and services tax (GST) and the sale of a property
Date of advice: 2 December 2015
Published: February 2016

Ruling: Q1: Is GST payable on your sale of the property at (address)? | A1: No.

Relevant facts and circumstances: Company X (you) was formed on a certain date with individual X and individual Y (they are siblings) as the directors, and individual Z and individual X (husband and wife) together holding one share and individual Y holding the other. You were formed with the intention that you would act as the vehicle for a proposed business. On (date), you were registered for GST for the purpose of carrying on the business. The business never eventuated because of the downturn in the market. You continued to be registered for GST and lodged nil Business Activity Statements. Also on (date), you purchased vacant residential land at (address) (the property), with the intention of building residential premises on it for your shareholders to live in. Your shareholders did not take advice at the time of purchase and did not know what the implications of buying the land in the company name might be. You purchased the property for (price). Your shareholders financed the purchase of the property by way of a draw down facility in their private names but they were unable to get finance approved for building. Subsequently, you received an offer for the land which you accepted as you could not proceed with your originally intended use. You sold the property for (price).

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

Reasons for decision: Summary: GST is not payable on your sale of the property because the sale was the mere realisation of a private investment asset. | Detailed Reasoning - Detailed reasoning: GST is payable on any taxable supply. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 the indirect tax zone; 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 the GST Act). The indirect zone is Australia. 'Enterprise' includes (amongst other things): • an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act) • an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act) Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for GST purposes. Paragraphs 234 and 244 of MT 2006/1 discuss the concepts of 'business' and 'adventure or concern in the nature of trade'. They state: 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. 244. 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. Paragraphs 258 and 259 of MT 2006/1 discuss the concepts of trading assets and investment/capital 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. Paragraphs 249 and 250 of MT 2006/1 further discuss the concept of 'trading assets'. They state: 249. A trading asset is generally dealt with or traded within a short time after acquisition. 250. An example is the case of Edwards (Inspector of Taxes) v. Bairstow and Another ] where the taxpayers purchased a complete cotton spinning plant in 1946 with the object of selling it as quickly as possible at a profit. They had no intention of holding it by using it as an income producing asset and it was not purchased for their pleasure or enjoyment. It was eventually sold in five separate lots over a fifteen month period. Paragraphs 253 and 254 of MT 2006/1 discuss the concept of 'trade'. They state: The circumstances that were responsible for the realisation 253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties. Motive 254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. 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. Paragraphs 262 and 263 of MT 2006/1 discuss one-off and isolated real property transactions. They state: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) You purchased the property in question for the purpose of building residential premises on it for your shareholders to live in. The shareholders financed the purchase of the property by way of a draw down facility in their private names but they were unable to get finance approved for building. Subsequently, you received an offer for the land which you accepted as you could not proceed with your originally intended use. Based on these circumstances, we consider that your sale of the property was the mere realisation of a private investment asset. The use of a company (you) to purchase the property is not sufficient to give your sale of the property a commercial character and you did not hold the property as part of the structure of a business. Your sale of the property was not a supply made in the course or furtherance of an enterprise carried on by you. Hence, the requirement of paragraph 9-5(b) of the GST Act is not met. Therefore, as not all of the requirements of section 9-5 of the GST Act are met, GST is not payable on your sale of the property.