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Authorisation Number: 1051230434157
Date of advice: 19 June 2017
Subject: GST and property
Are you required to be registered for goods and services tax (GST) when you construct townhouses to be retained and rented?
No. You are only required to register for GST when your GST turnover meets the registration turnover threshold, currently $75,000. Your input taxed supplies of residential rental are not included in your calculation of GST turnover. You may choose to voluntarily register for GST.
Are you required to be registered for GST when you construct townhouses, pre-sell some of the townhouses and retain the others for rental?
Yes. You are required to register for GST when your GST turnover meets the registration turnover threshold, currently $75,000. The sale of new residential premises will be included in your calculation of GST turnover.
Relevant facts and circumstances
You are not registered for GST.
You purchased property located at a specified address (the Property) in yyyy. The Property settled on ddmmyy.
The Property was purchased as an investment property with the intention of making minor renovations prior to renting.
A subsequent inspection of the Property revealed that what initially appeared as minor structural issues revealed more serious issues which would require major rectifications.
As a consequence, you have decided to demolish the existing dwelling and construct X new townhouses.
You engaged the services of an architect who lodged a development application (DA) on a specified date. The DA was approved.
You had originally intended to retain all X townhouses and rent them out.
However, upon applying for finance to fund the construction, the financial institution requested a pre-sale of X townhouses prior to construction.
You are exploring other financial options which may enable you to retain all X townhouses.
Relevant legislative provisions
A New Tax System (Goods and Services Tax Act) 1999
Reasons for decision
In this reasoning:
● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all reference material, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au
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).
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.
Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides the ATO 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 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? 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.
Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to a business:
● a significant commercial activity
● a purpose and intention of the taxpayer to engage in commercial activity
● an intention to make a profit from the activity
● the activity is or will be profitable
● the recurrent or regular nature of the activity
● the activity is carried on in a similar manner to that of other businesses in the same or similar trade
● activity is systematic, organised and carried on in a businesslike manner and records are kept
● the activities are of a reasonable size and scale
● a business plan exists
● commercial sales of product, and
● the entity has relevant knowledge or skill.
Furthermore, paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business’ and those done in the form of 'an adventure or concern in the nature of trade’:
● A business would encompass trade engaged in, on a regular or continuous basis.
● An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.
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.
Paragraphs 264 to 266 of MT 2006/1 discuss judicial decisions that have 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
● 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.
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 of a business and factors in determining whether activities are a business or an adventure or concern in the nature of trade in the context of real property transactions.
In this case the activity involves a single property acquired in yyyy. Shortly after the Property was acquired a DA was lodged for the existing dwelling to be demolished and the construction of X townhouses. The DA was approved.
You have applied for finance in order to fund the construction of the new townhouses on the Property.
Given the above, we consider that your activities involving the acquisition of the Property, demolition of the existing dwelling and construction of new townhouses constitutes activities done in the form of an adventure or concern in the nature of trade and thus 'carrying on an enterprise’ for the purposes of GST.
Furthermore we also consider that you are carrying on an enterprise for GST purposes being activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property when you rent the townhouses out.
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.
Input taxed supplies
Section 40-35 provides that a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises). However, the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation.
The rental of the townhouses would be an input taxed supply pursuant to section 40-35 and as such, turnover from such supplies would not be included in the calculation of your GST turnover.
Therefore, as your GST turnover is below the registration turnover threshold you are not required to be registered for GST. You may choose to voluntarily register for GST.
Section 40-65 provides a sale of real property is input taxed to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, the supply will not be input taxed to the extent the residential premises are either commercial residential premises or new residential premises other than those premises used for residential accommodation before 2 December 1998.
New Residential Premises
Of relevance in your case is 'new residential premises’, defined in section 40-75 to include:
● premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease, or
● premises that have been built to replace demolished premises on the same land.
Premises will not be 'new residential premises’ if, for a period of at least 5 years the premises have been used only for making input taxed supplies pursuant to paragraph 40-35(1)(a) where:
● if the premises have not previously been sold as residential premises and have not previously been the subject of a long-term lease, the time the premises first became residential premises, or
● if the premises have been built to replace demolished premises, the premises were last built.
We have already established in question 1 that you are carrying on an enterprise, initially an enterprise of property development and subsequently an enterprise of leasing premises. As discussed above, turnover from your supplies of residential premises by way of lease are not taken into account when calculating whether your turnover meets the GST registration turnover threshold.
However, proceeds from your sales of 'new residential premises’ are included when calculating whether your turnover meets the GST registration turnover threshold and are considered connected to your enterprise of property development.
As the sale of a townhouse is likely to exceed $75,000 your turnover will meet the GST registration turnover threshold.
If you're not registered for GST, you are required to check each month to see whether you've reached the threshold, or are likely to exceed it. If your turnover exceeds the relevant threshold, you must register within 21 days of reaching it. Refer to question 1 for the previous discussion on GST turnover.