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Ruling

Subject: GST and supply of real property

Question 1

If the property sale comprises of the X lots and the existing building in one contract, are you required to be registered for goods and services tax (GST?)

Answer

No

Question 2

If the building is demolished and the property is sold as X separate lots of vacant land, are you required to be registered for GST and remit GST on the sale?

Answer

No

Relevant facts and circumstances

You are not currently registered for GST.

You are the owner of a commercial/residential building constructed on X separately titled allotments located in Australia.

The property is a commercial/residential mixed use building.

In anticipation of a sale, the property is currently untenanted with all tenants vacating recently. Total annual rent for the commercial part of the building was always below $50,000.

You do not have any enterprise other than leasing.

The purchase of the property

The property was purchased several years ago.

At the time of purchase the property included Y adjoining buildings (spanning over X lots on the property).

You borrowed from a lender to finance the acquisition. This borrowing has been renewed annually as part of an overall review of facilities.

Following the Global Financial Crisis, the lender changed the focus of their lending and sought to reduce lending for commercial property. As a result, there has been increased difficulty in obtaining continuing renewals on the loan facility for the property.

You intended to acquire the property for your leasing activities. However, several years earlier you were diagnosed with an illness and still required to undertake annual testing.

Town planning approval

At the time of purchase, each of the X lots was zoned industrial under your local council plan.

You have made an application to the local council to obtain approval to demolish the existing building and to gain development approval for a quality freehold residence on each of the X lots.

You had engaged the services of a town planner, architect, engineer, solicitor and other contractors to obtain the development approvals.

The approvals were granted but later lapsed due to your inaction.

Later you lodged a new development application with the local council for approval to construct X small lot houses. The new development application was substantially the same as that approved earlier with the exception of changes required by the authority under the current building and town planning requirements.

Recently the development approvals have been approved. The approvals will be valid for four years and in the light of the recent change to your council neighbourhood plan, including the requirement for parkland, it is likely that these approvals will not be granted once the current approvals expire.

Again the services of a town planner, architect, solicitor and other contractors were engaged to lodge the current development application

The land contamination and remediation consultancy services have been significant and this level of expenditure was not envisaged when the property was purchased.

The expenses spent over years are substantial including:

· Architect fees

· Council fees

· Legal fees

· Surveying fees

· Engineering fee

· Town planning fees

· Land contamination and remediation consultants

· Proposed sale

The property is currently being considered for sale. A real estate agency will provide marketing service.

The property can be sold under either option:

· The first option is to sell the property in its current state i.e. all X lots including the building sold in one transaction with the current development approval in place. To date there has been no interest in the sale of the property as a whole, or

· The second option: the existing building will be demolished. The intention would be then to sell the property as X lots of vacant land. You do not have the intention to undertake any further work on the property other than the demolition of the building and land contamination remediation work required in relation to the land. Any building works would be undertaken by the purchaser.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999

Section 7-1

Section 9-5

Section 9-20

Section 23-5

Sections 188-10, 188-15, 188-20, 188-25

Section 195-1

Reasons for decision

Question 1

Summary

The sale of the property is a sale of a capital asset and is not included in the calculation of the GST annual turnover registration threshold. Therefore, you are not required to be registered for GST.

Detailed reasoning

Under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is required to be registered for goods and services tax (GST) where all of the requirements under the section are met. This section 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.

*the asterisk denotes a defined term in the Act

Carrying on an enterprise includes anything in the course of the commencement or termination of an enterprise.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act to include 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 a property.

You have advised that since the acquisition of the property you have been leasing the building (commercial and residential).

Although, in anticipation of a sale, the property is currently untenanted with all tenants vacating recently, it is considered that you are carrying on a leasing enterprise (albeit currently in the course of termination of the leasing activities) for GST purposes.

Your GST turnover

As you are carrying an enterprise you are required to be registered for GST if your turnover meets the registration threshold. Under section 23-15 of the GST Act, the current registration turnover threshold is $75,000 (for entities other than non-profit body).

Meeting the registration turnover threshold

Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets the registration threshold if your current annual turnover threshold is at or above $75,000. If your annual current turnover is below $75,000 you still meet the threshold if your projected turnover is at or above $75,000.

If your current annual turnover is below $75,000 and you believe that your projected turnover is also below $75,000, you may still meet the threshold if the Commissioner is not satisfied that your projected turnover is below $75,000.

Not meeting the registration turnover threshold

Under subsection 188-10(2) of the GST Act, your annual turnover does not meet the registration threshold if your current annual turnover is below $75,000. If your current annual turnover is below $75,000 you may not meet the registration threshold if your projected annual turnover is below $75,000.

If your current annual turnover is below $75,000 and you believe that your projected annual turnover is above $75,000, you do not meet the threshold if the Commissioner is not satisfied that your projected annual turnover is above $75,000.

Calculation of annual turnover

Under sections 188-15 and 188-20 of the GST Act, your current and projected annual turnover both calculate an amount based on the value of supplies that you make. They are both the sum of the GST exclusive value of supplies you make in a twelve month period.

For current annual turnover, the twelve month period ends at the end of the current month.

For the projected annual turnover, the twelve month period starts at the beginning of the current month.

The calculation does not include input taxed supplies, supplies that are not connected with Australia, supplies to associates for no consideration (that are not taxable under section 72-5 of the GST Act) and supplies that are not made in connection with an enterprise that you are carrying on.

Calculation of your annual turnover

Your current turnover is below the registration threshold of $75,000 as only the rental of the commercial part of the building is included in the calculation. The lease of the residential premises is input taxed supply and is not included in the calculation.

As your current annual turnover is below $75,000, you are not required to be registered for GST if your projected turnover is also at or below $75,000.

As discussed above, we need to consider the value of the supplies you make during the twelve months periods that ends at the end of the current month. You have provided that you intend to sell the property and the issue becomes whether the consideration for the sale of the property should be included in the calculation of your projected annual turnover.

Goods and services tax ruling GSTR 2001/7 explains:

(a) the meaning of the terms 'likely to make', 'likely to be made', 'in connection with', 'transfer of ownership', 'capital asset', 'solely as a consequence of', and 'substantially and permanently' as used in Division 188.

(b) the relevance of projected GST turnover to your enterprise;

(c) how section 188-25 of the GST Act affects the calculation of projected GST turnover;

Paragraphs 27 and 28 of GSTR 2001/7 provide guidance for the meaning of 'in connection' with an enterprise:

27. The requirements in sections 188-15 and 188-20 largely mirror the requirements of paragraph 9-5(b) of the GST Act. The words 'in connection with an enterprise that you carry on', should therefore be read as having the same meaning as the words 'in the course or furtherance of an enterprise that you carry on' in paragraph 9-5(b) of the GST Act. ..

28. A supply which you make in the course of commencing or terminating an enterprise is a supply which is made in the course or furtherance of the enterprise which you carry on.

Therefore, the supply of property (consisting of the X lots and the existing building) is considered to be made in connection with your leasing enterprise that you are carrying on.

The consideration for the supply of the property will be over $75,000. Although the value of all other projected supplies are below $75,000 if the consideration for the supply of the property is included in the calculation of the projected annual turnover, your annual turnover will be above the registration threshold and you are required to be registered for GST.

However, under section 188-25 of the GST Act, in calculation of the projected annual turnover any supplies, made or likely to be made, by way of transfer of a capital asset are disregarded.

Section 188-25 of the GST Act states:

Transfer of capital assets, and termination etc. of enterprise, to be disregarded

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) 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.

Paragraphs 31 to 41 of GSTR 2001/7 explain the view of the Tax Office on the following terms 'capital asset', 'transfer of ownership', 'solely as a consequence'.

Meaning of 'capital assets'

The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill

Meaning of 'transfer of ownership'

The GST Act does not define the concept, 'transfer of ownership'. The words retain their ordinary meaning in context, and mean a transfer of the whole of your beneficial interest in the asset with or without legal title. A transfer of an interest in property that is less than your full interest will not be captured by these words. For example, if you merely grant a lease or licence over an asset that you own, the supply of that lease or licence will not be a 'transfer of ownership'. However, if you assign your full interest in that lease or licence it will be a 'transfer of ownership'.

Meaning of 'solely as a consequence'

40. In Perpetual Trustee Company Ltd v. Commissioner of State Revenue (2000) 44 ATR 273, Hansen J considered the phrase 'solely in consequence' within Exemption 23 of the Stamps Act 1958 (Vic). After discussing the purpose of the exemption, (that being to provide an exemption from stamp duty in specific cases), Hansen J said at pages 286-287:

'In its common understanding in its present context the word "solely" in conjunction with the words "in consequence of" means that the exemption will apply only if the instruments of transfer were executed in consequence of the change in trustee and in order to vest the real property of the trust in the name of the new trustee and not in consequence of any other factor.'

41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1), or the substantial and permanent reduction in size or scale of an enterprise

In your circumstances:

You have been carrying on a leasing enterprise on the property since acquisition. The intention at the time of acquisition was to lease the building to earn rental income not resale. It is considered that the property may be described as 'the business entity, structure or organisation set up or established for the earning of profits' and is considered a capital asset of the leasing enterprise.

You intend to sell the property (transfer of the whole of your interest in the property) in its current state in a single transaction with the current development approvals in place.

An enterprise terminates when activities relating to that enterprise cease. You have advised that due to your age, health and the on-going issue regarding the continuation of finance on the property by the current lender, you will not continue to carry on a leasing enterprise. In anticipation of a sale, the property is currently untenanted with all tenants vacating recently. It is considered that the sale of the property is the consequence of the cessation of the leasing enterprise.

Following the discussion above, you will dispose of a capital asset in addition to ceasing to carry on the leasing enterprise. The proceeds of the sale will be excluded when calculating your projected annual turnover. Your projected annual turnover will be below the registration threshold of $75,000.

As your current turnover and projected turnover are both below the registration threshold of $75,000, the requirement under subsection 23-5(1) is not met. You are not required to be registered for GST unless you would like to do so.

Under subsection 7-1 of the GST Act, GST is payable on taxable supplies. To be a taxable supply, one of the requirements is that the supplier is registered or required to be registered for GST. As you are not registered or required to be registered, the supply of the property is not a taxable supply and no GST is payable on the supply.

The development approvals

You have advised that the development approvals are included in the sale of the property in its current state.

In some cases development consents issued by local authorities in effect run with the land. The consents usually remain current for a set period of time. If the land changes ownership during the currency of the consent then the new owner may well be able to proceed with the relevant development provided that all of the development conditions imposed by the local authority are satisfied. This may happen without any formal assignment of rights in respect of the development consent from the vendor to the purchaser as it is provided for in the relevant state legislation.

In such a case any assignment or similar provision in a contract purporting to transfer these rights may be achieving nothing more than the situation which results from the transfer of the land itself. In such a case there will only be a single supply of the land, as the rights which run with the land are not a separately identifiable part of the supply. If however the assignment referred to in the contract effects a transfer of something more than that resulting from the transfer of the land itself, the additional assignment may be a separately identifiable part of the supply.

If the additional assignment is a separately identifiable part of the supply, it may be taxable and the consideration for the whole supply must be apportioned on a reasonable basis to determine the value of the taxable part.

It should be noted that a development enterprise has not been commenced. The activities to obtain the developments approvals in itself without further activities are not considered an enterprise in its own right.

A development consent that is attached to the land and which runs with the land is not considered a separate supply of the development consent in its own right when a property is sold. The sale of the property with the attached development consent would, in the circumstances of this case, be a single supply.

Question 2

Summary

The supply of the property is a mere realisation of an investment asset and is not subject to GST.

Detailed reasoning

You have provided that to date there has been no interest in the sale of the property as a whole. Option two is the other option that you are considering. Under option two you will demolish the building and sell the property as X separate lots of land with no development approvals.

You have provided further that you need to incur expenses to demolish the building (as the building was built on Y lots), environmental remediation and revetment wall.

As discussed above, under option one the sale of the property in its current status is considered as a supply made, by way of transfer of ownership of a capital asset solely as a consequence of ceasing to carry on a leasing enterprise.

We need to consider whether the sale made under option two will be subject to GST. That is, whether the sale of separate vacant lots of land after some activities done in preparation for the sale will constitute a taxable supply for GST purposes.

Section 9-5 of the GST Act sets out four criteria required for a supply to be a taxable supply. Under this section, you make a taxable supply if:

1. you make the supply for consideration

2. the supply is made in the course or furtherance of an enterprise that you are carrying on

3. the supply is connected with Australia, and

4. you are registered or required to be registered.

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

A supply is not a taxable supply unless all of the criteria above are met. In your circumstances, the supplies (sale) of the vacant land will be made for monetary consideration. The supply of the land will be connected with Australia as the lots are situated in Australia. You are currently not registered for GST. However you are required to be registered for GST if you are carrying on an enterprise and your turnover exceeds the registration threshold of $75,000.

Therefore, it is necessary to establish whether your activities are business like activities or a mere realisation of a capital asset in relation to the sale of the property.

Enterprise is defined in section 9-20 of the GST Act to include 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.

Miscellaneous Ruling MT 2006 /1 provides the view of the Tax Office on whether or not an activity constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Goods and Services Tax Determination GSTD 2006/8 provides that the view of the Tax Office expressed in the MT 2006/1 can be equally applied to the meaning of enterprise under the GST Act.

Generally, a business includes a trade that is engaged on a regular or continuous basis. However, your activities are not repetitive and regular. Therefore, it is considered that you are not carrying on a business.

Although the sale of the land is not considered to be a business, paragraph 234 of MT 2006/1 provides that an isolated or one-off activity may fall into the category of 'an adventure or concern in the nature of trade'. This category includes a commercial activity of a trading nature that does not amount to a business but which has the characteristics of a business deal.

Paragraphs 235 and 237 of MT 2006/1 explain that:

235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

The approach of the Tax Office on the question of 'whether an entity is carrying on an enterprise where there is one-off or isolated real property transaction' is expressed in paragraph 263 of MT 2006/1

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 your circumstances

· The property was initially acquired for leasing enterprise. You did not acquire the property with the intention of resale for profit. The reasons that you put the property on the market are age, health and the on-going issue regarding the continuation of finance on the property by the current lender.

· The property was continued to be used for leasing activities since the date of acquisition up to recently. In anticipation of a sale, the property is currently untenanted with all tenants vacating recently.

· You have not acquired any additional land to add to the property for the purposes of resale.

· Your intention merely incurs expenses to prepare the property for sale. To date the expenditures have been planned to demolish the building, the environmental remediation and the revetment wall. Although the expenditures are substantial, it is considered that the expenses are necessary to facilitate the sale rather than to improve the land beyond preparing an asset for sale.

· You will engage a real estate agent to handle the marketing of the property.

It is considered that the supply of the vacant land is a mere realisation of a capital asset and is not an enterprise in its own right as defined in section 9-20 of the GST Act.

As all of the criteria in section 9-5 of the GST Act are not met, your supply of the vacant lots is not subject to GST.

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