Edited version of private ruling

Authorisation Number: 1011831507757

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Ruling

Subject: GST and the sale of house and land

Question 1

Is your sale of property (the property) a taxable supply?

Answer

Yes, your sale of the property is a taxable supply.

Relevant facts and circumstances

· You operate a business of undertaking building renovations as a partnership. The partnership is registered for GST.

· Partner 1 holds a builder's licence. However, you have no history of building and selling spec homes. You have never built a new home as a builder and have only ever done renovations.

· In yyyy you contracted to purchase a vacant block of land. You completed the purchase in later in yyyy when you paid the balance of the purchase price and took ownership of the land. You borrowed money to fund the acquisition. You later borrowed further to complete the construction of the house.

· When you signed the contract to purchase the land, you intended to build a house on it for resale. However, soon after, you changed your minds and decided to build a house as a residence for yourselves and move from your current residence at to the new property which was hundreds of kilometres apart.

· In yyyy, Partner 2's relative was placed into a nursing home that year. Partner 2's other relative was also living in a nursing home in the same area located close to your current residence.

· Around this time, Partner 1 submitted newly revised plans to the Council for the design of the house. The plans were revised as a consequence of your decision to build the house for yourselves to live in.

· You obtained building approval as owner builders and started construction in yyyy. This house was to be constructed by Partner 1, with the assistance of various contractors.

· The house was completed to a certain stage late in yyyy. At this time Partner 1 stayed in the property to help complete the construction of the house. Partner 2 stayed in the current residence to be near their elderly relative.

· Construction of the property was completed in the middle of yyyy.

· During construction you did not claim GST on materials or claim interest on the loan as you considered it to be a private dwelling and not part of their home renovation business.

· You did not reside at the property after the construction of the house was completed, nor did you rent it out. You put the property on the market in late in yyyy. It was subsequently sold.

· You listed your current residence for sale earlier in the year. You intend to move to another place, which is also close to another of Partner 2's relatives who has remained living alone.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

(d) you are registered or required to be registered for GST.

In your case, you have sold the property for consideration and the property is located in Australia. It needs to be determined if your sale of the property was made in the course or furtherance of an enterprise that you carried on.

The sale of the property in the course or furtherance of an enterprise that you carry on

The term 'enterprise' is defined in section 9-20 of the GST Act to include the following (amongst other things):

· 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)

However, subsection 9-20(2) of the GST Act contains some exclusions to the definition of enterprise.

Paragraph 9-20(2)(c) of the GST Act provides that an activity or activities done by an individual or a partnership whose members are individuals without a reasonable expectation of profit or gain are not enterprises.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of enterprise for the purposes of entitlement to an Australian Business Number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 234 of MT 2006/1 provides guidance on the meaning of business and adventure or concern in the nature of trade. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 provides further guidance on the meaning of adventure or concern in the nature of trade. It states:

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade. In accordance with paragraph 253 of MT 2006/1, trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale of an asset may have occurred as a result of sudden financial difficulties, rather than being for reasons of trade.

Paragraph 258 of MT 2006/1 distinguishes between trading assets and investment assets. It states:

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.

Paragraphs 259 and 261 of MT 2006/1 discuss disposal of investment assets.

In accordance with paragraph 259 of MT 2006/1, the mere disposal of investment assets does not amount to trade. Examples of investment assets are rental properties, business plant and machinery, the family home, and other private assets.

Further, paragraph 261 of MT 2006/1 provides that investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade.

In accordance with paragraphs 262 and 263 of MT 2006/1 even 'one-off' or isolated real property transactions may be enterprises. 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.)

The principle that profits made in the ordinary course of carrying on a business constitute income and is not of a capital nature was confirmed in FC of T v The Myer Emporium Ltd (1987) 87 ATC 4363; (1983) 163 CLR 199; 18 ATR 693 (Myer). The High Court also held that a profit arising from an isolated transaction which, although not made within the ordinary course of the taxpayer's business, was entered into with the purpose of making a profit and in the course of the taxpayer's business might well constitute income.

Myer is authority for the principle that profits arising from an isolated business or commercial transaction constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities.

Taxation Ruling TR 92/3 (TR 92/3) sets out the Commissioner's view of the principles that have been considered in determining whether an isolated transaction is of a revenue nature. It states that a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

The relevant intention or purpose of the taxpayer in making a profit or gain is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Paragraph 14 of TR 92/3 states:

14. It is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. It is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means.

In your case, you bought the property with the intention of building a house for resale. Although you changed your minds for a period of time and contemplated living in the new property yourselves, you did not proceed with this intention of using the property for private purposes. At no stage did you use the property as your home after it was completed.

Instead, you sold the property relatively soon after constructing the new house. The only purpose to which you applied the property was producing income from its disposal. The activities you conducted were carried on in a similar manner to property trading activities. The sale of the property was a commercial activity that had the characteristics of a business deal, rather than the mere disposal of an investment asset.

You undertook various actions that are consistent with an intention to use the property for you residence.

However, in actual fact, your current residence has always your main private residence and you did not move to the property. You sold the property for a profit, not in the exact way as you originally intended when you purchased the land in 200X, but nevertheless the sale was in accordance with your intention at the time of purchase, which was to build the house for resale at a profit.

Therefore, your sale of the property was in the course or furtherance of an enterprise that you carried on.

Sale of residential premises

In accordance with section 40-65 of the GST Act, a sale of residential premises is generally input taxed. However, paragraph 40-65(2)(b) provides that new residential premises other than those used for residential accommodation before 2 December 1998 are not input taxed.

In accordance with paragraph 40-75(1)(a) of the GST Act, new residential premises include residential premises that 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. However, in accordance with paragraphs 40-75(2)(a) and 40-75(2)(c) of the GST Act, residential premises are not new residential premises if, for the period of at least five years since the date construction was completed, the premises have only been used for leasing.

You sold residential premises that were less than 5 years old and had not previously been sold or leased. Consequently, the property was new residential premises at the time of supply and was not an input taxed supply.

Registered or required to be registered for GST

Section 23-5 of the GST Act sets out the criteria that has to be satisfied in order to be required to be registered for GST. It provides:

(a) you are carrying on an enterprise, and

(b) your GST turnover meets the registration turnover threshold

As explained above, you were carrying on an enterprise. Hence, you satisfied the condition at paragraph 23-5(a) of the GST Act.

In accordance with paragraph 23-15(1)(b) of the GST Act, the registration turnover threshold is currently $75,000.

As the sale price of the property exceeded $75,000, paragraph 23-15(b) is also met. therefore, you are required to be registered for GST.

As a partnership, you are already registered for an ABN and GST. Therefore, in considering the application of paragraph 9-5(d) to your circumstances, you made the supply in your capacity as a GST registered partnership and are required to report the sale onto your partnership's activity statement during the relevant period.

As your supply of the property meets all the requirements of section 9-5 of the GST Act, it is a taxable supply.

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