Edited version of private ruling

Authorisation Number: 1011554042715

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Ruling

Subject: GST and sale of property

Will your supply of your property in Australia be a taxable supply?

Yes, your supply of property will be a taxable supply.

Relevant facts

You are not registered for GST.

You purchased residential premises. Your intention at this time was to keep the property as a long term investment.

You leased the premises until you were not able to find tenants due to the condition of the house.

You borrowed additional funds to demolish the existing house and build units on the property.

The properties are near completion. The estimated total cost of the units is $X.

You were advised by a real estate agent that the rental market has diminished and that it is harder to let premises than at the time you commenced construction. The neighbouring property was vacant for some time before it was successfully rented.

Your original intention was to rent the units. You now intend to sell some of the units, with an estimate sale price of $Y per unit.

You have not commenced any marketing of the units.

You hold one other property, which is a residential rental property. You may build your principal residence on this property in the future.

You have not previously undertaken any property development activities.

Reasons for decision

GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*denotes a term defined under section 195-1 of the GST Act).

In your case, the sale of the units will be for consideration. The sale of the units will be connected with Australia as they are located in Australia. Hence, the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act will be satisfied.

It must now be determined whether the sale of the units will be in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST at the time of the sale.

Enterprise

Section 9-20 of the GST Act defines an enterprise to include, amongst other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. In your case, you let the house on the property. Therefore, under the above definition of an enterprise, this is considered as an enterprise of leasing residential rental premises.

Although the property was not let for a period, the demolition of the old house and construction of the new units for rental is a continuation of the leasing enterprise. Therefore, the sale of the units under construction will be in connection with your leasing enterprise.

Required to be registered

An entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for non-profit entity).

An entity has a GST turnover that meets a particular turnover threshold if:

· its current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that its projected GST turnover is below the turnover threshold, or

· its projected GST turnover is at or above the turnover threshold.

An entity's current GST turnover at a time during a particular month is the sum of the values of all the supplies made, or likely to be made during the 12 months ending at the end of that month.

An entity's projected GST turnover at a time during a particular month is the sum of the values of all the supplies made, or likely to be made during that month and the next 11 months.

Supplies that are input taxed, or are not for consideration, or are not made in connection with an enterprise carried on, are excluded in calculating the GST turnover.

Input taxed supply of residential premises

According to section 40-65 of the GST Act, 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).

However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

In accordance with section 40-75 of the GST Act, residential premises are new residential premises if they:

· have not been previously sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease, or

· have been created through substantial renovations of a building, or

· have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, they are not new residential premises if, for the period of at least five years since their construction, they have only been used for making supplies that re input taxed.

You advised that the units have an estimated value of $Y. Therefore, your GST turnover will meet the registration turnover threshold and you will be required to be registered for GST at the time of sale of the units.

As all of the requirements in section 9-5 of the GST Act will be satisfied, the sale of the units will be a taxable supply and will be subject to GST.

The sale of the units will not be an input taxed supply and will not be GST-free under any other provisions of the GST Act.

Input tax credits

You may be entitled to claim the input tax credits for the acquisitions relating to the proportion applied to the units to be sold such as cost on subdivision and construction of the new residential premises. You are not entitled to claim the input tax credits for acquisitions relating to the proportion applied to the units that will be leased.

To be able to claim the input tax credits on your creditable acquisitions, you must be registered for GST at the time of making the acquisition. You must also hold valid tax invoices for the acquisitions before you can claim the input tax credits.

In order to claim the input tax credits on expenses already incurred, you may backdate the date of effect of your registration to a date prior to the acquisitions being made or the date when you first commenced the subdivision of the property.

Hence, you will be entitled to claim input tax credits on the cost of subdivision and building works in relation to the sale of the units to be sold.

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