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Ruling

Subject: sale of new residential premises

Question

Do you make a taxable supply if you build a residential building on a land and sell off the plan or on completion?

Answer

Yes, you make a taxable supply if you build a residential building on the land and sell off the plan or on completion.

Relevant facts and circumstances

You are a permanent resident of Australia.

You bought a block of land (the land), and you intended to build a residential building to be used as your principal place of residence on this land..

You were unable to build your principal place of residence because your circumstances changed

You are required to build on the land as stipulated by the developer of the land. You have a mortgage on the land.

You intend to build a residential building on this land and then either sell the land and premises (the new property) off the plan or on completion. Alternatively, you might decide to rent the property out.

You have never been involved in development of any property. You borrowed funds to buy the land, and you will borrow funds to finance the construction of the new residential building. All planning, construction and finishing work will be completed by professionals and trade contractors. You plan to put the new unoccupied property on the market for sale, and the sales price should be more than $75,000. The new residential premises will provide the occupants with sleeping accommodation and basic facilities for day to day living; for example, kitchen, bedrooms, and bathrooms. The land is zoned residential.

You have never claimed the expenses of borrowing funds to buy/maintain the land as a business expense.

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 Paragraph 9-5(b)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(a)

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

Reasons for decision

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. 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 defined term under section 195-1 of the GST Act)

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration and the property is located in Australia respectively.

Therefore, we need to consider:

· whether your sale of the new residential property is 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).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (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, license or other grant of an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in the ruling and the determination have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in property development before and that your activities represent a one-off transaction on the land that you have purchased and intended to construct a building to be used as your principal place of residence. In the absence of other facts, it is considered that your activities are not carried out in the form of a business if these activities are part of a one off transaction on the land and not the beginning of an ongoing property development business.

As your activities of building and sale of the new property is an isolated transaction, it is necessary to determine whether the building and sale of the new property will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

In the form of an adventure or concern in the nature of trade

Paragraph 13 of GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 provides that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

· 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 for council approval for the subdivision, and

· buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

From the facts provided, you purchased the land and intended to construct a new building on the land to be used as your principal residence. Further, you have now changed your intention or plans for the new property due to changes in your personal circumstances. You have to continue with the construction of a new residential building on the land. However, you will now sell (instead of using it as your principal place of residence) the new property.

We consider that your development and sale of the new property is in the course of an enterprise and more than the mere realisation of a capital asset because:

· There is a change in purpose for which the land (property) is held. Your original purpose of using the property as a principal residence has changed to that of constructing a new property for sale.

· You intend to erect a new residential building on the land.

· You will borrow funds to finance the construction of the new building. All planning and construction and finishing work will be completed by professionals and trade contractors. The new property for sale is new and unoccupied. You will put the new property on the market for sale.

These activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new property have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sale of the new property will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the new property that you have constructed.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b) supplies that are not for consideration.

c) supplies that are not made in connection with an enterprise that you carry on.

d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of building and selling the new property constitute the carrying on of an enterprise. At the time of the intended sale, the nature of your asset (the new property) is changed from a capital to a revenue (trading) asset. The sale of the new property does not constitute the transfer of a capital asset and paragraph 188-25(a) of the GST Act does not apply. You are deriving income from the disposal of a revenue (trading) asset even if the disposal is part of a one-off transaction.

Therefore, the sale of the new property is not excluded from the calculation of your projected GST turnover. Hence, the value of the sale must be included in the calculation of your current and projected GST turnovers.

Ceasing or reducing the size or scale of an enterprise

Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

Paragraphs 46 and 47 of GSTR 2001/7 discuss isolated transactions. GSTR 2001/7 states at paragraphs 46 and 47:

46. An enterprise may consist of an isolated transaction or a 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.

Therefore, your sale of the new property will not satisfy paragraph 188-25(b) of the GST Act, and the consideration received from the sale of the new property is included in the calculation of your projected GST turnover.

Accordingly, prior to the sale of the new property, you should be registered for GST because your projected GST turnover would be above the GST registration turnover threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, it is not taxable if it is GST-free or input-taxed.

GST-free and input taxed supply

The sale of the new residential property is not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

Under the GST legislation the definition of residential premises means land or a building that: 

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; 

Goods and Services Tax Ruling GSTR 2000/20 which is about commercial residential premises, deals in Part one with Residential premises and provides discussion on the definition under section 195-1 of the GST Act and the characteristics of residential premises in paragraphs 18 to 36. Of particular relevance to this case are paragraphs 28 and 29 which are reproduced below: 

26. The physical characteristics common to residential premises that provide accommodation are:

(i)  The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

(ii)  The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

27. In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics given in paragraph 26. These often, but not always, include:

(i)  The purpose or context of the premises' use is for personal accommodation, rather than another purpose, such as for a business.

(ii)  The tasks of day to day living, such as, preparing food, cleaning and laundering, are performed by the occupant, or by others under private arrangements.

(iii) The status of the occupant is most commonly that of owner, tenant or lessee. Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.

(iv)  The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.  

Sleeping accommodation and facilities for human habitation

28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

29. Premises that lack these basic features may not be either residential premises or commercial residential premises. Supplies of buildings or other structures without these characteristics are subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupied as some form of residence.

You have confirmed that the new building's physical characteristics, basic fit out and zoning of the property meet the above requirements and that the premises is intended to be occupied and will be capable of being occupied as a residence for residential accommodation.

New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that:

a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

b) have been created through substantial renovation of a building, or

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

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the new property is residential premises to be used predominantly for residential accommodation. The new property will be put on the market for sale and would be new and unoccupied when sold. The new property is neither used before 2 December 1998, nor rented for five years. On the basis of these facts, the new property is new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of the new property will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

In summary, the construction and sale of the new property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. We consider that whether you sell the new property off the plan or on completion of construction, the decision remains the same. You are required to remit GST of 1/11^th of the sale price to the Australian Taxation Office (ATO).

Additional Information - Margin scheme

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which are available on our website at www.ato.gov.au

Additional Information - Claiming input tax credits

Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-20 of the GST Act provides that you make a creditable acquisition if:

§ you acquire anything solely or partly for a creditable purpose; and

§ the supply of the thing to you is a taxable supply; and

§ you provide, or are liable to provide, consideration for the supply; and

§ you are registered, or required to be registered.

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.

Therefore, you are entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the new property where your GST registration is backdated to a date before you made the creditable acquisitions.

All public rulings and publications are available on the ATO website at www.ato.gov.au

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