Private ruling: GST and the sale of real property previously leased
Date of advice: 24 October 2017
Published: March 2018

Ruling: Q1: Are you liable for the GST on the sale of the subdivided blocks of land at the specified address? | A1: No.

Relevant facts and circumstances: You are a Family trust (the Trust) and are not registered for GST. The Trust initially held shares and cash, but subsequently decided to diversify its investments to safeguard the income stream. The Trust has never previously sold, or offered for sale, real property. The Trust purchased a house and block package for $xxxxx (the Property) on DDMMYYYY. From MMYY to MMYY, the Property had been rented and available for rent through a real estate agent. After an extended drought in the area, the soil on the Property had become reactionary causing cracks to the house, down opposite walls in the living room, toilet and kitchen. As a consequence of gaps in the walls, the cold could be felt across the house. In MMYY, a storm blew through the Property demolishing a substantial shed and fencing. The house had also been left in a terrible state by tenants. Giving due consideration to the above circumstances and realising that the house was badly damaged and it was not reasonable to expect tenants to be able to live there, you decided to demolish the house. The demolition was completed on DDMMYYYY. You approached a surveyor to subdivide the land into two blocks of approximately xxsqm. each. You took a very passive role in the subdivision process, fulfilling the minimum legal procedures required of you. The surveyor sent relevant documents to their broker, who then contacted you when these documents were ready. You were notified by e-mail of the subdivision. You made no enquiries direct to the council about the subdivision or change of zoning. The surveyor lodged all forms required by the Council and emailed you the bills (such as the open space levy), which you then paid for. The total subdivision costs are expected to be approximately $xxxx. You have contacted a real estate agent to sell the blocks and they have estimated the value of these blocks to be $xxxxx gross, with the costs of sale expected to be approximately $000 per block.

Relevant legislative provisions: 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 188-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 188-25 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision: Summary: Note: In these reasons for decision, 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 Under section 9-40, you must pay the GST payable on any taxable supply that you make. As defined in section 9-5, a supply is taxable if it is: ● made for consideration ● made in the course of furtherance of an enterprise carried on by the entity making the supply ● connected with the indirect tax zone (Australia), and ● made by an entity registered or required to be registered. However, the supply is not a taxable supply to the extent that the supply is GST-free or input taxed. As per the definition in section 195-1, carrying on an enterprise includes anything done in the course of the commencement or termination of an enterprise. You are selling vacant land, located in Australia, for consideration. However, the conditions for making a taxable supply include that you are carrying on an enterprise and are either registered or required to be registered for GST. As defined in subsection 9-20(1), an enterprise includes an activity, or a series of activities, done: ● in the form of a business, or ● in the form of an adventure or concern in the nature of trade, or ● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or… You bought the dwelling for the purpose of making supplies of residential rent. You rented the dwelling from MMYY to MMYY. This constitutes a leasing enterprise in accordance with the above definition. You are not registered for GST. Therefore it needs to be determined whether you are required to be registered. As provided in section 23-5, you are required to be registered if: ● you are carrying on an enterprise, and ● your GST turnover meets the registration turnover threshold (currently $75,000). Under section 188-10, your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover. As provided in subsection 188-10(2), your GST turnover does not exceed a particular threshold if: ● your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold, or ● your projected GST turnover is at or below the turnover threshold. Before the sale (settlement) of the property, your current GST turnover was nil, as residential rental income is input taxed in accordance with section 40-35 of the GST Act. However, at the time of settlement of your property, the sale proceeds will also be included in your current GST turnover, which will consequently exceed the registration turnover threshold. Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold. Paragraph 188-25(b) provides that in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you solely as a consequence of ceasing to carry on an enterprise. The Trust’s activities in relation to the Property consisted of making supplies of the house by way of lease. Up to the time when the house was damaged the Trust had used the Property solely in connection with their leasing activities. The Trust had not held the Property for the purpose of, or as part of, property development activities. Since the Property was damaged you have not done anything significant to improve the value of the land or occupied the land in a way to suggest that you commenced to hold the land for a purpose not connected with your input taxed supplies of residential leasing. The damaged house was demolished and removed merely to prepare the land for sale, as it was not reasonable to expect tenants to be able to live there. In your circumstances, because the damages made the house uninhabitable, the demolition and subdivision should not be regarded as a separate and distinct use of the land, but rather as a consequential step between the end of the Trust’s leasing activities and the sale of the land. After the Property had been damaged, the Trust has held and used the land merely for the purpose of bringing an end to their leasing of the Property. Accordingly, the proceeds of the sale will not be included in your projected GST turnover. It follows that the Trust’s GST turnover will not meet the registration turnover threshold and the Trust is not required to be registered for GST. As the Trust is neither registered, nor required to be registered for GST, the sale of the subdivided blocks will not be subject to GST.

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