Private ruling: GST and supply of new residential premises
Published: August 2013

Ruling: Q1: Is the sale of the property (the new property) by you a taxable supply? | A1: Yes, your sale of the new property is a taxable supply.

Relevant facts and circumstances: X was registered for ABN and GST in relation to his/her business, however, his/her GST registration has been discontinued since he/she is not required to be registered for GST. X and Y (referred together as 'you') are not registered for goods and services tax (GST) as individuals or as a partnership. You jointly purchased a property with an existing house (the original property). The supply of the original property to you was not a taxable supply and no GST was payable. You rented out the original property while waiting for the council's approval on the planning permit. The Council approval was given and you moved into the original property and the original property was used as your principal place of residence. You decided to demolish the existing home, construct X residential buildings/townhouses on the original property then subdivide the original property into X smaller blocks. You borrowed to finance the construction of the X townhouses. Construction is planned to finish soon. Once construction completes, you will use a unit as your principal residence. You intend to sell the remaining (the new property). You have not claimed interest on the loan borrowed as a business expense. You have not claimed any deductions for the construction costs and any associated costs in your income tax returns. You will discuss with your accountant about the above items. However, you have claimed deductions for the rental income received from the original property. Previous construction activities: You have been involved in similar investment activities before. You purchased a property with an existing house with the intention of constructing new townhouses on the land. You rented the property for more than a year while waiting for the council's approval on the planning permit. You demolished the existing house on the property and started to build townhouses on the land, then subdivided the land into smaller blocks. You borrowed for the construction costs. Once construction was completed, you moved in and occupied it as your primary residence. You leased out Townhouse A for a number of months, and then you sold Townhouse A. You applied for a private binding ruling to the ATO about this sale. This ruling states your sale of Townhouse A is not a taxable supply. You sold Townhouse B then moved into the original property. You also own other residential properties for rental purposes. You state that you do not carry on any other enterprise apart from the leasing of residential premises.

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 Paragraph 9-5(b) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d) | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | 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 Paragraph 188-25(a) | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

Reasons for decision: Summary: A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act 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 defined term under section 195-1 of the GST Act) Based on the facts provided, the new property is owned as joint tenants by two individuals (X and Y), thus we first need to examine whether the property will be provided by each individual separately or by a partnership for GST purposes. The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership of X and Y. For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property . Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the new property. Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the properties are located in Australia respectively. Therefore, we need to consider: · whether your sale of the new property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and · whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act). | Detailed Reasoning - Are you carrying on an enterprise?: The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or 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. The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number , and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act . The principles outlined in the ruling and the determination has been applied in your circumstances. Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property. The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. You advised that you were involved in construction and sale of another property in the past. At the time, your activities represented a one-off transaction on the original property that you have purchased and used as your principal place of residence. The current construction and planned sale of the new property is the second time you are involved in a similar transaction. It is considered that your activities are carried out in the form of a business since these activities can now be considered as the beginning of an ongoing property development business. You claim that your activities of development and sale of the new property and of the property you sold the first time are only isolated transactions. You state that you do these for private reasons, not as business activities. Hence, it is necessary to determine whether the development and sale of the new property will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: Paragraph 13 of GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature. Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset. Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether: · there is a change of purpose for which the land is held, · additional land is acquired to be added to the original parcel of land, · the parcel of land is brought into account as a business asset, · there is a coherent plan for the subdivision of the land, · there is a business organisation (for example, a manager, office and letterhead), · borrowed funds financed the acquisition or subdivision, · interest on money borrowed to defray subdivisional costs was claimed as a business expense, · there is a level of development of the land beyond that necessary for council approval for the subdivision, and · buildings have been erected on the land. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. From the facts provided, you purchased the original property to be used as your principal residence, which was then rented out until the time when you moved in. However, you made plans and obtained Council approval to demolish the existing house, and you contracted to construct X new residential buildings: There is an intention at this time to sell the new property once construction of the properties are completed. You moved into the original property and used it as your principal residence until the time when demolition of the existing house and construction started. You stated that you carry on an enterprise of leasing residential property because you own other residential properties and lease them out. As provided in section 9-20 of the GST Act, activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property are activities in carrying on an enterprise. Further paragraph 122 of MT 2006/1 provides that activities done by the entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. We consider that your development and sale of the new property is in the course of an enterprise of property development and not the mere realisation of a capital asset in your enterprise of leasing residential property because: · there is a change in purpose for which the land (property) is held. Your original purpose of using the original property as a principal residence has changed to that of subdividing and constructing a new property for sale. · you had a coherent plan for subdivision and development of the original property and later the sale of the new property. You had plans to subdivide and construct the new residential properties, and had sought approval from council for the subdivision and finance for the construction. All planning and construction and finishing work are going to be completed by professionals and trade contractors. The new property for sale is new and unoccupied. You will put the new property on the market for sale and the selling price of the new property is more than $75,000. · you borrowed funds to finance the subdivision, construction and/or other costs. · the development of the land for the new property is beyond that necessary for council approval of the land, and the development cost of the new property is substantial. · you erected a new residential building on the new property. Based on the facts provided, these activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new property have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise of property development as defined in section 9-20 of the GST Act, and the sale of the new property will satisfy the requirement of paragraph 9-5(b) of the GST Act. | Detailed Reasoning - Are you required to be registered for GST?: As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the new property that you have constructed. Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if: a) your current GST turnover is at or above $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 the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months. In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation: c) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises). d) supplies that are not for consideration. e) supplies that are not made in connection with an enterprise that you carry on. f) supplies that are not connected with Australia. In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours. Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover , including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act. Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply. As discussed above, your activities of developing and selling the new property constitute the carrying on of an enterprise of property development. At the time of the intended sale upon the completion of the construction, the nature of your asset (the new property) is a revenue (trading) asset. The new property is never leased out. The sale of the new property does not constitute the transfer of a capital asset in your leasing enterprise and paragraph 188-25(a) of the GST Act does not apply. You are deriving income from the disposal of a revenue (trading) asset even if the disposal is part of a one-off transaction. Therefore, the sale of the new property is not excluded from the calculation of your projected GST turnover. Hence, the value of the sale must be included in the calculation of your current and projected GST turnovers. | Detailed Reasoning - Ceasing or reducing the size or scale of an enterprise: Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise. Paragraphs 46 and 47 of GSTR 2001/7 discuss isolated transactions. GSTR 2001/7 states at paragraphs 46 and 47: 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. 47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. Therefore, your sale of the new property will not satisfy paragraph 188-25(b) of the GST Act, and the consideration received from the sale of the new property is included in the calculation of your projected GST turnover. Accordingly, prior to the sale of the new property, you should be registered for GST because your projected GST turnover would be above the GST registration turnover threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied. We note that you may choose to backdate your GST registration to the date when you commenced your enterprise. Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, it is not taxable if it is GST-free or input-taxed. | Detailed Reasoning - GST-free and input taxed supply: The sale of the new residential property is not GST-free under any provisions of the GST Act or any other legislation. Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are: a) commercial residential premises, or b) new residential premises other than those used for residential accommodation before 2 December 1998. New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that: a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease, b) have been created through substantial renovation of a building, or c) have been built, or contain a building that has been built, to replace demolished premises on the same land. Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least five years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable. From the facts provided, the new property is residential premises to be used predominantly for residential accommodation. The new property will be put on the market for sale and would be new and unoccupied when sold. The new property is neither used before 2 December 1998, nor rented for five years. On the basis of these facts, the new property is new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of the new property will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act. In summary, the development and sale of the new property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11 th of the sale price to the Australian Taxation Office (ATO). | Detailed Reasoning - Additional Information - Margin scheme: Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, please refer to: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which are available on our website at www.ato.gov.au | Detailed Reasoning - Additional Information - Claiming input tax credits: Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices. Section 11-20 of the GST Act provides that you make a creditable acquisition if: § you acquire anything solely or partly for a creditable purpose; and § the supply of the thing to you is a taxable supply; and § you provide, or are liable to provide, consideration for the supply; and § you are registered, or required to be registered. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that: § the acquisition relates to making supplies that would be input taxed; or § the acquisition is of a private or domestic nature. Therefore, you are entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the new property where your GST registration is backdated to a date before you made the creditable acquisitions. All public rulings and publications are available on the ATO website at www.ato.gov.au