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Ruling

Subject: GST and supply of new residential premises

Question 1

Is your supply of the residential unit a taxable supply?

Answer

No

Relevant facts and circumstances

You are a partnership which is not registered for GST.

You have previously leased a residential property for a number of years.

In yyyy you purchased a second residential property located in Australia. You rented the property to tenants for a number of years.

Later, you decided to demolish the property and construct some townhouses on the land for rental purposes.

You entered into a joint venture agreement with entity A. You were to share the costs equally and at the end of the venture you were to each take two units

You also entered into a sale contract for $X with entity A for the sale of a half share of the land on which you were to construct the units.

Over the period of construction, you paid $X to the construction company for your half share of the construction costs. You did not claim GST credits on the cost of construction.

When the project was completed, you advised that you engaged an agent to manage the rental of the units. One of your units was rented out immediately. You were unable to find a tenant for the other unit.

Some months later, you received a large bill that was due immediately. As your borrowings were already at their limit, due to the construction of the units, you felt that your only choice was to sell one of the units you had constructed to rent.

You then sold the untenanted unit, at a loss.

You continued to lease the remaining unit through your agent.

Relevant legislative provisions

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

Section 7-1 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

Division 188 A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Is your supply of the residential unit a taxable supply?

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

As defined in section 9-5 of the GST Act, a supply is taxable if it is:

· made for consideration

· made in the course of furtherance of an enterprise carried on by the entity making the supply

· connected with Australia, and

· made by an entity registered or required to be registered.

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

You have made a supply for consideration of property located in Australia. Therefore the supply is connected with Australia. The premises were new residential premises as defined in section 40-75 of the GST Act. Therefore, the supply was not an input taxed supply. Nor, in your circumstances, was it a GST-free supply.

Therefore we need to consider whether the unit was supplied in the course of an enterprise that you carried on and whether you were required to be registered.

Enterprise

As defined in subsection 9-20(1) of the GST Act an enterprise includes an activity, or a 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;

You:

· leased one house for approximately XX years

· leased a second house until it was demolished.

· constructed two residential units in place of the demolished premises with the intention of leasing both of them out. When the construction of the units was complete you proceeded to lease one of the units, but were unable to obtain a tenant for the other unit.

These actions constitute an enterprise in accordance with section 9-20 of the GST Act. Your supply of the residential unit was made as part of this enterprise.

Registration

As provided in section 23-5 of the GST Act, you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

Section 188-10 of the GST Act provides that your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

Subsection 188-10(2) of the GST Act, provides that your GST turnover does not exceed a particular threshold if:

· your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold, or

· your projected GST turnover is at or below the turnover threshold.

Section 188-15 provides that 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, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration or

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

The leasing of your properties meets the definition of input taxed supplies as set out in section 40-35 of the GST Act.

The supplies you made during the 12 months ending at the end of the month following settlement of the residential unit included your rental receipts which are input taxed and the sale proceeds. The sale proceeds are not excluded from current turnover. Therefore your current GST turnover exceeds the turnover threshold of $75,000.

Section 188-20 provides that 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, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

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

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

The value of all the supplies that you have made, or are likely to make, during the month in which the residential unit settled and the following 11 months would include the input taxed rental receipts and the sale proceeds. Therefore, we need to consider whether the residential unit is a capital asset of yours which is excluded by paragraph 188-25(a) of the GST Act from the calculation of your projected GST turnover.

Your history shows that you purchase or construct residential properties for the purpose of renting rather than for sale. Your intention when constructing the two units was to rent both of them. This is evidenced by the following:

· you held and rented a residential property

· you acquired a second residential property, which you also rented

· you did not claim input tax credits on the construction of the units and

· you rented one of the newly constructed units and attempted to rent the other unit

We consider that the residential unit was a capital asset constructed to be a part of your leasing enterprise. Therefore proceeds of the sale will not be included in your projected GST turnover, which will be zero.

Therefore, your GST turnover does not exceed the registration turnover threshold because, although your current GST turnover is above the turnover threshold, the Commissioner is satisfied that your projected GST turnover is below the turnover threshold.

Therefore you are not required to be registered for GST.

As you did not meet all of the requirements of section 9-5 of the GST Act, your supply of the unit will not be a taxable supply.

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