Edited version of private ruling

Authorisation Number: 1011858171346

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Ruling

Subject: GST turnover and enterprise

Question 1

Are you required to be registered for GST when you sell the new residential property?

Answer

Yes, you are required to be registered for GST when you sell the new residential property.

Relevant facts and circumstances

· You purchased a residential property as joint tenants in 200X.

· At the time of purchase you intended to subdivide the block, construct a new residential unit and perform minor renovations to the existing house.

· You intended to complete the project and rent both the existing house and new residential unit.

· In 200Y you entered into a contract with a registered builder to construct the new residential unit and renovate the existing house. Works were completed that year.

· Total construction costs including landscaping and additional works not included in the builder's contract

· You did not register for GST because the properties were to be rented out and you understood the acquisitions relating to the renovation of the existing house and the construction of the new residential unit would not be creditable because they relate to making supplies that would be input taxed.

· You did not claim any input tax credits on the construction costs.

· Once the construction was completed you decided to sell both properties as it was no longer financially viable for you to rent them out.

· In the recent year you entered into a contact to sell the new unit.

· In the recent year you entered into a contact to sell the existing house.

· The new unit was sold and the existing house was sold.

· The selling costs included real estate agent fees.

· Both properties were settled in the subsequent year.

· The margin scheme was not applied to the sale.

Reasons for decision

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the 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.

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

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

For the supply of your new residential property to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied.

New residential premises

Section 40-65 of the GST Act provides that the sale of real property (residential premises) is input taxed. However, the sale of residential premises is not input taxed to the extent that the residential premises are new residential premises.

Section 40-75 of the GST Act provides that residential premises are new residential premises if they have not previously been sold as residential premises and have not previously been the subject of a long term lease, or have been created through substantial renovations, or have been built or contain a building that has been built to replace demolished premises on the same land.

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

From the facts provided the sale of your new residential unit was for consideration and the supply is connected with Australia. Therefore, the requirements listed in paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied.

As such, what remains to be considered is whether the sale of your new residential property is made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Whether you are carrying on an enterprise

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or 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 considers the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

 Paragraph 244 of MT 2006/1 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.

You informed that at the time of purchase of the property your intention was to subdivide the block, construct a new residential unit and perform renovations to the existing house and on completion to rent both the existing house and the new residential unit.

We consider that you are not carrying on a property development business as you do not seem to be engaged in developing properties on a regular or continuous basis. However, it remains to be considered whether your property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade. MT 2006/1 considers some of the characteristics of trade as follows:

· where the property either provides an income or personal enjoyment to the owner it is more likely to be an investment asset rather than a trading asset;

· a trading asset is generally dealt with or traded within a short time after acquisition;

· the actual dealings are of a kind that take place in ordinary trade;

· the greater the frequency or number of similar transactions the greater the likelihood of trade;

· improving a property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade;

· the circumstances that are responsive for realisation need to be considered as an asset can be sold for reasons other than trade.

 

In relation to motive MT 2006/1 provides that motive is not relevant if an objective assessment of the activities of the entity indicates that the activities are in the nature of the trade. However, motive is relevant where the evidence is not conclusive or where there is a change in the character of the asset.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transaction and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

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.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

As stated earlier, a trading asset is generally dealt with or traded within a short time after acquisition. However, 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.

It is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

After taking into account the circumstances of your case and the events which actually occurred, we consider that the construction and sale of the new unit is more than a mere realisation of a capital asset.

You carried on the activities with a reasonable expectation of making a profit or gain. By subdividing the land and constructing the new unit on the property, you improved the property beyond preparing it for sale. You brought the land into a more marketable condition which enables you to gain a better price and enhance the revenue from the sale. You borrowed a substantial amount of money to construct the new unit and expended a substantial amount in real estate fees. 

Although your original intention was to build a residential unit for rental purposes, the steps that you took indicate that your intention changed when you decided to sell. Therefore, there was a change of purposes for which the property was held. Your activities changed the character of your property into a trading asset as your activities have the characteristics and appearance of a commercial deal and are of a kind undertaken by property developers.

Accordingly, your activities amount to an adventure or concern in the nature of trade. The sale of the new residential premises is a sale of a trading asset made in the course or furtherance of an isolated property development enterprise pursuant to paragraph 9-20(1)(b) of the GST Act.

Consequently, the sale of the new residential premises satisfies the condition in paragraph 9-5(b) of the GST Act, as it is a supply made in the course or furtherance of an enterprise that you carry on.

Whether you are required to be registered for GST

Section 23-5 of the GST Act provides that you are required to be registered for GST if you:

(a) are carrying on an enterprise; and

(b) you meet the registration turnover threshold.

As determined above, you are carrying on a property development enterprise. Hence, you satisfy the requirement in paragraph 23-5(a) of the GST Act.

The next step is to determine whether your GST turnover meets the registration turnover threshold, which in your case is $75,000.

In accordance with subsection 188-10(1) of the GST Act, your GST turnover meets the registration turnover threshold if your current GST turnover is $75,000 or more, and the Commissioner is not satisfied that your projected GST turnover is less than $75,000..

Your current 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 the 12 months ending at the end of that month.

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.

However, certain categories of supplies are excluded from the calculation of the current and projected GST turnovers. Relevant to your case, as mentioned in your ruling application, are supplies that are made or likely to be made by you solely as a consequence of ceasing to carry on an enterprise (subsection 188-25(b) of the GST Act).

Paragraphs 46 and 47 of GSTR 2001/7 Goods and services tax; meaning of GST turnover, including the effect of section 188-25 on projected GST turnover provides guidance on the effect of an isolated transaction, they state:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade.. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

As explained earlier, the construction and sale of the new unit is more than a mere realisation of a capital asset. Hence, the sale of the new unit is the sale of a trading asset of your property development enterprise. Consequently it does not fall under subsection 188-25(b) of the GST Act.

Furthermore, for the reasons explained in paragraph 46 of GSTR 2001/7, the sale of the new unit is not made as a consequence of ceasing to carry on an enterprise under subsection 188-25(b) of the GST Act.

Accordingly, the sale of the property is not disregarded when calculating your projected GST turnover under section 188-25 of the GST Act. As the sale price of the property is more than $75,000, you satisfy the requirement in paragraph 23-5(b) of the GST Act.

You are therefore required to be registered for GST as you meet all the requirements of section 23-5 of the GST Act.

Entitlement to input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if you acquire anything solely or partly for a creditable purpose, the supply of the thing to you is a taxable supply, you provide, or are liable to provide consideration for the supply and you are registered, or required to be registered.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, however, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature.

You informed that once the construction was completed you decided to sell the new unit as it was no longer financially viable for you to rent it out.

As the acquisition of the new unit is considered to be a creditable acquisition then you are entitled to input tax credits in relation to its acquisition.

Note: You are not entitled to input tax credits in relation to the renovated house if it is not considered to be new residential premises and it has been used for at least five years for making supplies that are input taxed (see above). Therefore, you may have to apportion your entitlement to input tax credits accordingly.

Margin Scheme

Note: where a sale of a real property is a taxable supply, the sale may be made under the margin scheme if certain conditions are met.

For further information on margin scheme, please refer to the following publication:

Margin scheme - made easy (NAT 73740)

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