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Ruling

Subject: Sale of real property

Questions

1. Were you carrying on an enterprise when you sold the property?

2. If the answer to question one is yes, are you required to be registered for goods and services tax (GST)?

3. Was the sale of the property to the purchaser a taxable supply?

Answers

1. No. You were not carrying on an enterprise when you sold the property.

2. No. You are not required to be registered for GST.

3. No. The sale of the property to the purchaser was not a taxable supply.

Relevant facts and circumstances

You registered for GST as a partnership.

You owned a property as tenants in common. The property was acquired before 1 July 2000 by the previous owners as tenants in common. At the date of purchase, the property was disused farm land which was zoned as rural land and had no structures upon it.

The previous owners did not have specific immediate plans for the property. They expected they would probably conduct a market gardening business on the land. Components for glasshouses were assembled but none were completed to the point where they could be used. The partially assembled components have deteriorated substantially since then and are now derelict and beyond use or repair. No other structure or improvements were added to the site during the period of ownership.

A specific activity in respect of the property was never conclusively agreed nor commenced.

The owners of nearby properties invited the owners to join a rezoning application prior to 1 July 2000. The outcome was that the entire precinct of properties were rezoned which allowed farming or residential use but required scenic protection. The owners could not develop the property as a duplex, townhouses, apartments or commercial property.

Some members of the previous partnership passed away after 1 July 2000 and their interest in the property was transferred to one of the present partners.

None of you carry on a business in your own right and you are not registered for GST separately as individuals or as a company or a trust. You have never initiated steps to sell the property.

You entered into a contract with the purchaser to sell the property for a price plus GST. The contract was settled recently.

You were concerned that the correct GST treatment may not be clarified if the purchaser required settlement in the near future. You therefore applied for an ABN and GST registration as a partnership prior to the settlement of the sale contract. You issued a tax invoice with GST included in the price to the purchaser upon settlement of the property.

The only work on the property since purchase has been some minor management of overgrown vegetation. Until the contract for sale was exchanged, the frequency of lawn mowing was every six months or more. You did not claim any tax deductions for the lawn mowing cost, nor did you claim any input tax credits.

There were no other development activities or income generated from the property since it was acquired.

You advised that you have reached an amicable agreement with the purchaser that if the ATO decides that you are not required to register for GST, you will refund the GST to the purchaser and they will make the necessary adjustment on their activity statement if input tax credits have been claimed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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 195-1

Reasons for decisions

1. Were you carrying on an enterprise when you sold the property?

Enterprise

The scope of 'enterprise' for GST purposes is wider than the scope of 'business' for income tax purposes. An enterprise can include activities that may not constitute a business but have the character of a business transaction.

An enterprise is defined under subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and includes (amongst 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; or

· on a regular or continuous basis, in the form of lease, licence or other grant of an interest in property;

Based on the information provided, the property was acquired before 1 July 2000 and the only activity carried on at the property has been minimal vegetation management. You and the previous owners have simply retained ownership of the land and this does not constitute an activity or series of activities done in the form of a business.

What remains to be determined is whether your sale of the property would constitute an activity in the form of an adventure of concern in the nature of trade.

Miscellaneous Taxation Ruling 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.

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.)

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade.

Paragraphs 254 and 255 of MT 2006/1 discuss how motive may be a factor in determining whether an activity has the characteristics of trade. They state:

254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

255. Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment.

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.

While holding the property, you have not carried out any activity that has the appearance and characteristics of an adventure or concern in the nature of trade. No characteristics of a business deal are exhibited in your case, especially considering the long period of time you have held the property and the fact that you have not done anything to the property. There are no features exhibited that distinguish your property from an investment asset. Hence, your sale of the property would be the mere realisation of an investment asset.

Therefore, the sale of the property was not an activity in the form of an adventure or concern in the nature or trade done by you.

Accordingly, the sale of the property was not made in the course or furtherance of an enterprise that is carried on by you. 

2. Are you required to be registered for GST?

Section 23-5 of the GST Act states 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. The current registration turnover threshold is $75,000.

Section 23-10 of the GST Act states that you may choose to register for GST if you are carrying on an enterprise and your GST turnover is below the registration turnover threshold.

Therefore, the primary issue in determining whether you are entitled to register for GST is whether you are carrying on an enterprise.

As discussed in question 1, you were not carrying on an enterprise when you sold the property. You also advised that you are not carrying on any other form of activities that constitute an enterprise. Therefore, you are not entitled to register for GST.

Accordingly, you should cancel your GST registration retrospectively from the effective date you became registered.

3. Was the sale of the property to the purchaser a taxable supply?

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.

As discussed in the previous questions, the supply of the property to the purchaser is not made in the course or furtherance of an enterprise that you carry on and you are not entitled to register for GST. As such, you have not met the requirements in paragraphs 9-5(b) and 9-5(d) of the GST Act. Accordingly, the sale of the property to the purchaser by you was not a taxable supply.

Additional Information

You should inform the purchaser that you were not entitled to be registered for GST at the time of the supply. You are required to cancel any tax invoices that you have issued to the purchaser and to refund the GST you collected. In addition you will need to notify the purchaser to make any necessary adjustments on their activity statements if they claimed an input tax credit(s) as a result of the tax invoice(s) that you issued.

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