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Authorisation Number: 1051267578475
Date of advice: 14 September 2017
Subject: GST and the sale of real property
Is the sale of your property located at a specified address in Australia (the Property) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
No, your sale of the Property is not a taxable supply under section 9-5 of the GST Act and therefore GST is not payable on the supply.
Relevant facts and circumstances
A and B (husband and wife) are individuals, both being employees and do not carry on any business.
You (the partnership of A and B) are not registered for an Australian business number (ABN) or GST.
In yyyy, A and B planned to buy real property for investment so as to have rental income for retirement. In mmyyyy, they purchased an established property which has since been leased.
In mmyyyy, under the label of a ‘Home & Land package’ offered by a builder C, you entered into two separate contracts. The two contracts were:
(i) the contract for the sale of land (the Sale Contract) which you entered into for your purchase of the land described as the proposed lot n at a specified address in Australia (the Land) from the vendor D and E, and
(ii) the residential building contract (Residential Building Contract for New Dwellings) which you entered into with builder C to provide you with building works to construct a new dwelling on the site described as the Land.
The building was completed and settled in mmyyyy and the property was leased to a tenant. The address of the Property is specified. The tenant paid x months’ rent in advance when signing the tenancy agreement and moved in on ddmmyyyy. The tenant moved out on ddmmyyyy. You refunded the rent and allowed a number of weeks rent free to cover the tenant’s cost of moving.
From ddmmyyyy to the current date, you marketed the house at a lower rent but without success. You are now considering selling the Property.
You were previously advised by the ATO that if you purchased a new property from the developer, you are not liable to pay GST on your sale of the property because the latter is not new residential premises as defined in the GST Act.
However, you consider that you have purchased the land and then engaged the builder to build the house. This being the case, you are uncertain whether the Property will be treated as new residential premises.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 38
A New Tax System (Goods and Services Tax) Act 1999 Division 40
A New Tax System (Goods and Services Tax) Act 1999 Division 188
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5
A New Tax System (Goods and Services Tax) Act 1999 Section 9-25(4)
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 40-35
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 Section 184-1
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
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
Section 9-40 states:
You must pay the GST payable on any *taxable supply that you make.
Section 195-1 clarifies that if a provision of the GST Act uses the expression you, it applies to entities generally, unless its application is expressly limited.
Accordingly, it is necessary to determine the correct ‘entity’ that is making the supply of the Property, prior to considering the GST status of the supply.
Which entity is making the supply of the Property located at the specified address?
An entity is defined in section 184-1 to include an individual and a partnership.
An ‘individual’ means a natural person.
A ‘partnership’ has the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997):
(a) an association of persons (other than a company or a * limited partnership) carrying on business as partners or in receipt of * ordinary income or * statutory income jointly; or
(b) a limited partnership.
Partnership is further explained in ATO reference materials, including:
● Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnership (GSTR 2003/13)
● Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6)
● 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 (MT 2006/1)
● 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?
GSTR 2004/6 discusses tax law partnerships and states in the following paragraphs:
9. The first limb of paragraph (a) of the definition refers to ‘an association of persons (other than a company or a limited partnership) carrying on business as partners’. This reflects the general law definition of a partnership, which is ‘the relation which subsists between persons carrying on a business in common with a view of profit’.8 We refer to this type of partnership as a general law partnership.
10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) ‘in receipt of ordinary income or statutory income jointly’. We refer to this type of partnership as a tax law partnership.
11. Tax law partnerships exist only for tax purposes. General Law does not recognize tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of such property result in a partnership. The receipt of income jointly from investments without carrying on business is outside the definition of a partnership under general law.9
Joint acquisition of property
40. Two or more entities may enter into a single agreement to purchase property for leasing purposes. The entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.
41. If the same co-owners purchase another income producing property, there is no new partnership. This is regardless of whether or not the co-owners hold identical interests in the new property. We take the view that there exists the same association of persons in receipt of income jointly.
A tax law partnership deals with the GST obligations and entitlements arising from the common situation of co-ownership of property, the exploitation of which for income producing purposes gives rise to receipt of income jointly.
In your case, A and B have acquired two properties for leasing purposes. Accordingly, we consider a tax law partnership exists by virtue of the second limb of paragraph (a) of the definition of a partnership under section 995-1 of ITAA 1997, as A and B are an association of persons in receipt of rental income jointly.
This means, if the Property is sold, the entity making the supply will be the partnership entity of A and B (the Partnership/you) as opposed to the supply being made by A and B in their individual capacities.
Is the Partnership (you) making a taxable supply in selling the Property?
Section 9-5 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.
Subsection 9-25(4) and section 195-1 state that a supply of real property is connected with the indirect tax zone if the real property, or land to which the real property relates, is in the indirect tax zone. Generally, the term ‘indirect tax zone’ means Australia.
The definition of ‘carrying on’ an enterprise includes doing anything in the course of the commencement or termination of the enterprise.
You have been conducting a leasing enterprise since mmyyyy. Since the tenant moved out of the subject property at the specified address at the beginning of this year, you have been marketing the Property at a lower rent without success. You are therefore considering selling the Property.
In applying section 9-5 to the facts of your case:
(a) If or when you sell the Property, you will make the supply for consideration
(b) The supply of the Property will be made in the course or furtherance of an enterprise that you carry on
(c) The Property is connected with the indirect tax zone as the Property is located in Australia
(d) The Partnership is not registered for GST
Accordingly, when you sell the Property, the supply will satisfy the requirements specified in paragraphs 9-5(a) to (c). This means your supply of the Property will be a taxable supply only if:
(i) your supply of the Property is not GST-free
(ii) your supply of the Property is not input taxed, and
(iii) you are ‘required to be registered’ for GST.
(i) Are you making a GST-free supply when you sell the Property?
Division 38 provides for certain supplies to be GST-free. We consider Division 38 has no application to your supply of the Property.
(ii) Are you making an input taxed supply when you sell the Property?
Division 40 provides for certain supplies to be input taxed. If a supply is input taxed, then no GST is payable on the supply. In your case, it is appropriate to consider the provisions for sales of residential premises under section 40-65.
Section 40-65 states:
(1) A sale of * real property is input taxed, but only to the extent that the property is * residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).
(2) However, the sale is not input taxed to the extent that the * residential premises are:
(a) * commercial residential premises; or
(b) * new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.
‘Residential premises’ means land or a building that:
(a) is occupied as a residence or for residential accommodation; or
(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of the occupation or intended occupation) and includes a floating home.
The phrase ‘to be used predominantly for residential accommodation (regardless of the term of occupation)’ is not defined in the GST Act. The guidelines in Goods and Services Tax Ruling, Goods and services tax: residential premises (GSTR 2012/5) include the following explanations:
9. The requirement in sections 40-35, 40-65 and 40-70 that premises be ‘residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’ is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation.2
10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).
15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.
We consider the Property that you propose to sell is typically a residential house that is able to provide shelter and basic living facilities. That is, the premises have the characteristics that make them suitable for and capable of being occupied as residential accommodation. This means the premises satisfy the condition specified in subsection 40-65(1) as ‘residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).’
Accordingly, your sale of the Property will be input taxed, provided the exceptions in subsection 40-65(2) do not apply.
The Property is not commercial residential premises. That is, paragraph 40-65(2)(a) has no application. Therefore, we need to consider whether the ‘new residential premises’ exception in paragraph 40-65(2)(b) applies.
Subsection 40-75(1) provides the meaning of ‘new residential premises’ and, among other things, includes residential premises that have not previously been sold as residential premises.
However, under paragraph 40-75(2)(c), the premises are not new residential premises if, for a period of at least 5 years from becoming new residential premises, the premises have only been used for making supplies by way of lease, hire or licence that are input taxed under paragraph 40-35(1)(a).
More information on new residential premises is available in Goods and Services Tax Ruling GSTR 2003/3, Goods and services tax: when is a sale of real property a sale of new residential premises?
Paragraph 26 of GSTR 2003/3 states:
26. Subsection 40-75(1) states when residential premises are new residential premises. The definition of ‘residential premises’ in section 195-1 refers to land or a building that is occupied as a residence or is intended to be, and is capable of being, occupied as a residence. Because of the definition, for land to be residential premises, there must be a building on the land that has the physical characteristics of a residence. Vacant land, of itself, can never have sufficient physical attributes to characterise it as being able to be, or intended to be, occupied as a residence.16
In your case, you have entered into two separate and distinct contracts, being the Sale contract to purchase the Land and the Residential Building Contract for New Dwellings to engage the builder to construct your new residential building on the Land. In yyyy you signed the contracts. In mmyyyy the construction of the house commenced on the Land and in mmyyyy the house was completed.
We consider that the land you purchased cannot, of itself, be classified as a residence as explained in paragraph 26 of GSTR 2003/3
In the other contract, builder C only provided you with building services/building works to construct a residential dwelling on the Land as opposed to them selling new residential premises to you.
Accordingly, both the Land and the building services respectively, do not fall within the meaning of ‘new residential premises’ for the purpose of section 40-75.
This means when you sell the Property, the Property cannot be considered as having been previously sold to you as residential premises. Consequently, when you sell the Property you will be selling new residential premises pursuant to section 40-75. As such, your supply of the Property would not be an input taxed supply and GST is payable. This is provided you are required to be registered for GST.
(iii) Are you required to be registered for GST?
Section 23-5 states:
You are required to be registered under this Act if:
(a) you are * carrying on an * enterprise; and
(b) your * GST turnover meets the * registration turnover threshold.
As determined earlier in this ruling, you are carrying on an enterprise of leasing investment properties. Hence, the requirement in paragraph 23-5(a) is satisfied. You will be required to register for GST if paragraph 23-5(b) is also satisfied.
Does your GST turnover meet the registration turnover threshold?
Generally, an entity’s GST turnover meets the registration turnover threshold if the GST turnover is $75,000 or more.
The provisions of Division 188 include that, in general:
● your GST turnover meets the registration turnover threshold if 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 - paragraph 188-10(1)(a) refers.
● your current GST turnover at a time during during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month - subsection 188-15(1) refers.
● your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months - subsection 188-20(1) refers.
Certain supplies are excluded from the calculation of the current and projected GST turnovers, including supplies that are input taxed.
Further, section 188-25 specifically requires that in working out your projected GST turnover, you disregard:
(iii) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and
(iv) any supply made, or likely to be made, by you solely as a consequence of:
(i) ceasing to carry on an enterprise; or
(ii) substantially and permanently reducing the size or scale of an enterprise.
However, in relation to section 188-25 it is the Commissioner’s view that:
● Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above.
● Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b).
● When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once.
The above view is expressed in paragraph 30 of Goods and Services Tax Ruling GSTR 2001/7, Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.
Therefore, in your case, it is relevant to determine:
● if you are making any input taxed supplies, and
● if section 188-25 applies to your sale of the Property.
Are you making any input taxed supplies?
Current GST turnover
Section 40-35, among other things, generally provides that a supply of residential rent is input taxed if the supply is of residential premises to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation).
Based on the facts of your case, you do not carry on any business. You carry on the leasing enterprise of leasing properties you own. The supply of the residential rent is input taxed under section 40-35. Accordingly, the value of these leasing supplies is excluded from working out your GST turnover. As you do not carry on any other enterprise, your current GST turnover does not meet the registration turnover threshold.
Projected GST turnover
In relation to the sale of the Property, we have already determined earlier in this ruling that you will not be making an input taxed supply as you will be supplying ‘new residential premises’. Whether the proceeds likely to be made from the sale of the Property are required to be included in the calculation of projected GST turnover will be further considered under section 188-25.
Does section 188-25 apply to the sale of the Property?
In your case, you leased the subject property at the specified address for n number of weeks in mm/mmyyyy. Since then you marketed the Property for a new tenant without success, and you therefore propose to sell the Property.
The potential sale of the Property will satisfy paragraph 188-25(a) as it has been used as a capital asset to generate rental income. Therefore, the sale proceeds from the potential sale of the Property are disregarded in working out your projected GST turnover.
In summary, in working out your GST turnover, you disregard:
● the rent from leasing the property/properties and
● the sale proceeds from the potential sale of the Property.
Accordingly, your current GST turnover does not meet the registration turnover threshold and the Commissioner is satisfied your projected GST turnover is below the turnover threshold. As such, you are not required to be registered for GST under section 23-5.
Therefore, in selling the Property you will not be making a taxable supply under section 9-5 and GST is not payable. This is because the condition in paragraph 9-5(d) is not satisfied.
The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.