Private ruling: Goods and services tax (GST) and property development
Published: May 2015

Ruling: Q1: Is GST payable on your sale of premises Y? | A1: No. | Q2: Will GST payable on your sale of premises X? | A2: GST will be payable on your sale of premises X only if the following requirements are met: • you remain registered for GST at the time of settlement of sale • you do not lease out the property for any continuous period of at least 5 years, and • your sale of the property is not a GST-free sale of a going concern You are entitled to cancel your GST registration. | Q3: Are you required to cancel your GST registration? | A3: No. However if you remain registered for GST you may have a GST liability upon sale of premises X

Relevant facts and circumstances: The partnership of individual A and individual B (you) is registered for GST and has been registered for GST since a number of years ago. A number of years ago, you purchased a property located in Australia with the intention of subdividing it into two lots, building a house on each of the new lots and leasing out each new house. You borrowed a very large amount of money to finance this development. The property you purchased included a derelict house. The partners did not live in this house. You demolished the original house on the property. You subdivided the original property into two lots. The two new lots are premises X and premises Y. You built a new house on each of the two new lots. Construction began on a certain date. Construction of the new houses was completed on a certain date. Individual B is a tradesman. They did no work in relation to the project. The partners did not hire a project manager to oversee the development work. The partners did not establish an office in connection with the development and sale. The partners did not use letterhead on correspondence they prepared in relation to the development. The partners did not bring the property to account as a business asset, for example, recording it as an asset in a balance sheet. Premises X has been leased out. You plan to lease out premises X for a continuous period of at least 5 years. The usual rental deductions will be claimed against the rental income for premises X. Deductions for premises Y will only be claimed depending on the result of the ruling application. After completion of construction, you tried to both rent and sell premises Y. It was decided only after completion of construction of the new houses due to you being unable to find an ongoing tenant for premises Y and interest being incurred on the loan taken out for the construction of the houses that you would sell premises Y. The partners used premises Y as their holiday home a very small number of times. Premises Y was on the books of an agent for holiday rental. You leased out premises Y only once, for a very brief period of time. You sold premises Y on a certain date for over $75,000. If you sold premises X, the sale price would be over $75,000. The development is a one-off development. You lease out residential premises at other locations. You deal with residential premises only. You do not carry on an enterprise at locations other than the site in question, apart from leasing out residential premises. You registered for GST only because of the development in question. This was due to advice from the Australian Taxation Office. The activity statements you have lodged have nil amounts only.

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 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 23-15 | A New Tax System (Goods and Services Tax) Act 1999 subsection 25-55(1) | A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 Division 188 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: Your sale of premises Y is not part of an enterprise. Therefore, your sale of premises Y is not a supply made in the course or furtherance of an enterprise that you carry on. Hence, GST is not payable on the sale of premises Y. | 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 the GST Act) You meet the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. This is because: • your sale of premises Y was a supply made for consideration, and • this supply was connected with Australia as the property is located in Australia, and • you were registered for GST at the time of sale of premises Y Therefore, what remains to be determined is whether your sale of premises Y is a supply made in the course or furtherance of an enterprise that you carry on and whether your sale of this property is GST-free or input taxed. | Detailed Reasoning - Enterprise: Enterprise includes: • 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) • leasing out property on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act) Paragraphs 262 and 263 of MT 2006/1 discuss whether a one-off property development can be an enterprise. 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.) Paragraphs 264 to 266 of MT 2006/1 provide guidance on determining whether a property subdivision activity is a business or adventure or concern in the nature of trade. They state: 264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • 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 to secure council approval for the subdivision; and • buildings have been erected on the land. 266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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 Paragraph 254 of MT 2006/1 discusses how the motive of a person may be relevant in determining whether a resale of an asset is an adventure or concern in the nature of trade. It states: 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 247 and 258 of MT 2006/1 distinguish between trade and investment/capital assets. They state: 247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. A work of art is an example of an asset that may provide personal enjoyment. The purchase of a single work of art to display in a person's home can be contrasted to the purchase of a large quantity of goods. In the case of Rutledge v. The Commissioners of Inland Revenue 14 TC 490 the purchase of one million rolls of toilet paper by a money-lender on business abroad and the subsequent sale of them on his return home were held to be an adventure in the nature of trade. 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. Your sale of premises Y was not part of a business, because the development was a one-off development. We consider that your sale of premises Y was the sale of a capital/investment asset because of the combination of the following facts: • you purchased the development site with the intention of building two houses to lease out • you constructed the two new houses for the purposes of leasing out • it was only after construction was completed that you decided to sell premises Y and their decision to sell was due to you being unable to find an ongoing tenant and the interest you were incurring on the loan used to finance the development • premises Y was on the books of an agent for holiday rental • you held premises Y as an income producing asset (you leased it out once, for a very brief period of time) • premises Y provided your partners with personal enjoyment (they used it as their holiday home a very small number of times). Therefore, your sale of premises Y was not a sale of a trading asset, but was instead a sale of an investment/capital asset. Hence, the sale of premises Y was not an adventure or concern in the nature of trade. In accordance with paragraph 75 of Goods and Services Tax Ruling GSTR 2003/13, we consider that the supply, sale or disposal of enterprise assets will be in the course or furtherance of the enterprise in which those assets are used. If a capital asset is used in the carrying on of an enterprise, the sale of that asset can readily be in the course or furtherance of that enterprise. Your lease of premises Y for a very brief period of time does not amount to a leasing enterprise because you did not lease out premises Y on a regular or continuous basis. Premises Y was a capital asset of yours, but you did not use it in carrying on a leasing enterprise . Therefore, your sale of premises Y was not a supply made in the course or furtherance of a leasing enterprise . Your sale of premises Y is not a supply made in the course or furtherance of any enterprise you carried on. Hence, you do not meet the requirement of paragraph 9-5(b) of the GST Act. As you do not meet all of the requirements of section 9-5 of the GST Act, GST is not payable on your sale of premises Y. | Summary: Your activity of leasing out premises X on a regular or continuous basis is a leasing enterprise. If your GST registration remains in effect as at the time of settlement of sale of premises X, GST will be payable on your sale of this property, unless: • the sale is an input taxed sale of residential premises, or • the sale is a GST-free supply of a going concern because all of the requirements of section 9-5 of the GST Act would be met if the sale is not: • an input taxed sale of residential premises, or • a GST-free supply of a going concern, and your GST registration remains in effect as at the time of settlement of sale of premises X. | Detailed Reasoning - Detailed reasoning: You sale of premises X meets the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act, because: • the sale will be a supply made for consideration • the sale will be connected with Australia as the property is located in Australia, and • you are registered for GST Therefore, what remains to be determined is whether you would sell premises X in the course or furtherance of an enterprise that you carry on; and whether the sale would be GST-free or input taxed. We shall also consider whether you are required to be registered for GST, because if you are not, you can cancel your GST registration. | Detailed Reasoning - Enterprise: In accordance with section 195-1 of the GST Act, carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. You contend that the crucial time for determining whether an enterprise has been undertaken is at the commencement of the project. Therefore, as you undertook the development project with the intention to rent out the two new houses, you contend that you have not commenced an enterprise. Hence, you contend that you were not required to be registered for GST and should not have registered for GST. You contend that the sale of the houses would be disposals of investment assets. We disagree with your contention that as you undertook the development project with the intention to rent out the two new houses you are not carrying on an enterprise from premises X at any stage. We consider that the intention at the time of construction is relevant, but the actual use to which the property is put should also be taken into account. Also, leasing out property on a regular or continuous basis is an enterprise. You lease out premises X on a regular or continuous basis. Therefore, you carry on a leasing enterprise from premises X. Your activity of constructing the new house on property X is something that was done in the course of the commencement of the leasing enterprise that you are now operating from that property. Hence, your sale of premises X will be a supply you make in the course or furtherance of an enterprise you carry on. Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act. | Detailed Reasoning - GST registration: Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: (a) the entity is carrying on an enterprise, and (b) the entity's GST turnover meets the registration turnover threshold ($75,000). Section 23-10 of the GST Act provides that an entity is entitled to be registered for GST if it is carrying on an enterprise. You are carrying on a leasing enterprise from premises X. Therefore, the requirement of paragraph 23-5(a) of the GST Act is met. If you sold premises X, the sale price would be over $75,000. Subsection 188-10(1) of the GST Act 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. In accordance with subsection 188-15(1) of the GST Act, an entity's current GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is 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 made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or (c) supplies that are not made in connection with an enterprise that the entity carries on. In accordance with subsection 188-20(1) of the GST Act, an entity's projected GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is 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 made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or (c) supplies that are not made in connection with an enterprise that the entity carries on. In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital asset is excluded from projected GST turnover. | Detailed Reasoning - Input taxed supplies: Leasing out residential premises is input taxed under paragraph 40-35(1)(a) of the GST Act. Therefore, any rental income you earn from leasing out residential premises is excluded from your GST turnover calculations. A sale of residential premises is input taxed under section 40-65 of the GST Act with the exception of: • commercial residential premises (such as a hotel or motel), and • new residential premises other than those used for residential accommodation before 2 December 1998. Section 40-75 of the GST Act defines new residential premises . It states: (1)*Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a*long-term lease; or (b) have been created through *substantial renovations of a building, or (c) have been built, or contain a building that has been built to replace demolished premises the same land. Paragraphs (b) and (c) have effect subject to paragraph (a). (2) However, the residential premises are not new residential premises if, for the period of at least 5 years since: (a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or (b) if paragraph (1)(b) applies - the premises were last substantially renovated; or (c) if paragraph (1)(c) applies - the premises were last built; the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a) of the GST Act. A long-term lease means a supply by way of lease for at least 50 years if: (a) at the time of the lease, it was reasonable to expect that it would continue for at least 50 years, and (b) unless the supplier is an *Australian government agency - the terms of the lease, as they apply to the recipient are substantially the same as those under which the supplier held the premises. Paragraph 90 of Goods and Services Tax Ruling GSTR 2003/3 explains the 5 year rule in subsection 40-75(2) of the GST Act. It states: 90. Subsection 40-75(2) requires that for the period of at least 5 years the premises have been used only for making input taxed supplies under paragraph 40-35(1)(a). This requirement in subsection 40-75(2) is satisfied where the only supplies of the premises were by way of lease, hire or licence (i.e. residential rental) for any continuous period of at least 5 years between when the premises would otherwise have become new residential premises and when they are sold. See Example 8 at paragraphs 124 to 127. Premises X is residential premises other than commercial residential premises. Your sale of premises X will be the first sale of that house. Your lease of premises X is not a long term lease because the terms of the lease as they apply to the lessee would not be substantially the same as those under which you hold the premises given that you hold the freehold interest in the house and the lessee would only hold a leasehold interest. Therefore, premises X will be new residential premises for the purposes of the GST Act at the time of sale unless you have leased it out for at any continuous period of at least 5 years since the time you completed its construction. Premises X will not have been used for residential accommodation before 2 December 1998. Therefore, your sale of premises X will not be input taxed under section 40-65 of the GST Act unless you lease it out for any continuous period of at least 5 years after completion of construction of the new house on property X. There are no other provisions of the GST Act under which your sale of premises X would be input taxed. | Detailed Reasoning - Sales of capital assets: Your sale of premises X will be a sale of a capital asset because you will retain it to produce leasing income before selling it. Therefore, this sale will be excluded from your projected GST turnover. As your GST turnover will be zero when you sell premises X, you will not meet the requirement of paragraph 23-5(b) of the GST Act. As you will not meet both requirements of section 23-5 of the GST Act, you will not be required to be registered for GST when you sell 3A. Therefore, you will not meet the requirement of paragraph 9-5(d) of the GST Act unless you remain registered for GST at the time of sale. As your GST turnover will be zero when you sell premises X, you may cancel your GST registration, because you will not be required to be registered for GST at that time. | Detailed Reasoning - GST free going concerns: If you sell premises X with a lease intact, you will make a GST-free supply of a going concern under section 38-325 of the GST Act provided that: • the purchaser is registered or required to be registered for GST, and • you and the purchaser agree in writing that the sale of the property is the supply of a going concern. Goods and Services Tax Ruling GSTR 2002/5 provides guidance on the going concern exemption. Type in GSTR 2002/5 into an internet search engine. There are no other provisions of the GST Act under which your sale of premises X could be GST-free. Where a supply would otherwise be GST-free and input taxed, the GST-free status overrides the input taxed status. | Detailed Reasoning - Conclusion: You will not meet all of the requirements of section 9-5 of the GST Act in respect of your sale of premises X if you cancel your GST registration and this cancellation is in effect as at the time of settlement of sale of that property. Therefore, GST will not be payable on your sale of premises X under such circumstances. If your GST registration remains in effect as at the time of settlement of sale of premises X, GST will be payable on your sale of premises X, unless: • the sale is an input taxed sale of residential premises, or • the sale is a GST-free supply of a going concern because all of the requirements of section 9-5 of the GST Act would be met if the sale is not: • an input taxed sale of residential premises, or • a GST-free supply of a going concern, and your GST registration remains in effect as at the time of settlement of sale of premises X. | Detailed Reasoning - Question 3: You are not required to cancel your GST registration, because you are carrying on an enterprise (a leasing enterprise). An entity is entitled to be registered for GST if it is carrying on an enterprise. | Detailed Reasoning - Additional information: You were not entitled to input tax credits for construction expenses because you built the two new houses to lease out and leasing out residential premises is an input taxed supply.