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Ruling

Subject: GST registration and the input taxed supply of a property

Questions:

1. Is the sale of the property in Australia by Mr and Mrs X (referred together as 'you'), on the basis that the property is sold with vacant possession, not a taxable supply and not subject to goods and services tax (GST) because:-

(a) the sale is not made in the course or furtherance of an enterprise?

(b) you are neither registered nor required to be registered for GST?

(c) the sale is an input taxed supply of residential premises?

2. If the sale of the property in question (1) is subject to GST, is the sale of the property wholly or partly taxable?

3. If the sale of the property in question (1) is subject to GST, can the margin scheme apply to the sale of the property?

4. If the sale of the property in question (1) is subject to GST, will the GST status be different if:

(a) you obtained vacant possession of the property so that the commercial nursery operating on part of the property has ceased at the date of any contract for sale; or

(b) if you obtained vacant possession of the property such that the commercial nursery conducted on the property has ceased and the property was then re-let for residential only occupation and was then sold?

Answers:

Issue 1

Yes, your sale of the property in Australia is not a taxable supply and no GST is payable because:

(a) you are neither registered nor required to be registered for GST; and

(b) if you were registered for GST, the sale of the property is an input taxed supply of residential premises.

Issues 2 to 4

As the sale of the property is not subject to GST, issues (2) to (4) are not applicable.

Relevant facts and circumstances

Mr and Mrs X (referred together as 'you') are the owners of a property in Australia ('property').

You are not registered for goods and services tax (GST) as individuals or as a partnership.

The property was acquired by you in 19XX, and comprises an area of XX. You clarified that at the time of your purchase of the property, the improvements on the land consist of a residential dwelling, an associated carport/garage and a small storage shed (that is, the existing structures on the land which makes up the property at the time of acquisition).

From the date of your purchase of the property in 19XX, you have leased out this property under various residential leases for residential occupation.

In 20XX you leased the property to two tenants under a standard Residential Tenancy Agreement (lease) for a term of twelve months. The lease has been renewed from time to time and the last lease entered into has expired and these tenants are holding over under the lease as periodic tenants from week to week. The tenants occupy the residential dwelling and the associated structures on the property for residential purposes.

At some point in time, after taking the lease of the property, the tenants commenced using part of the property for a modest commercial nursery. You were not aware of this usage but, when you became aware, did not object to it because it had no impact on your property. The proportion of the property used by the tenants as their commercial nursery is estimated to be approximately XX% or less. You advised that the extent of the area used would have to be established by survey if there are GST issues.

The leases indicate that the rent for the property was $XXX per week (which is less than $75,000 per year).

You advise that the rent under the lease is commensurate with leasing out the residential premises for residential purposes only. The rent was not for the land associated with the operation of a commercial nursery conducted by the tenants on the land. You are leasing the property for residential tenancy purposes and not as a commercial nursery. This is consistent with the residential lease in place.

You also advise that the operation of the commercial nursery conducted by the tenants is merely incidental use by them in their occupation of the property for residential purposes.

The property has been re-zoned by the State Government. As a result of that re-zoning, the property is capable of subdivision into small residential lots for single dwellings and/or for residential townhouse development, with required road.

You are negotiating the sale of the property to a developer(s).

The property will be sold with vacant possession. At the date of completion of any sale of the property, the existing tenants will have vacated the property and their nursery business will have been removed from the site (property).

Currently the residential lease has expired, so you are able to serve a notice to quit to the tenants at any time and obtain vacant possession of the property. You are in a position to do so, if circumstances require it, prior to entering into any contract to sell the property.

At the date of completion of any sale of the property, the existing residential dwelling and associated structures (such as carport/garage and shed) used with this residence, will remain on the property. You confirmed that since your acquisition, the property has not undergone any major modifications or replacement of the residential property. The property has also not been substantially impacted by or modified as a result of the commercial nursery activities conducted by the current tenants. The current tenants used some of the land to grow plants for their activities, and their activities will be removed from the property (land) when they vacate the property.

You inform that you are currently living overseas. You own this property and also other residential properties in Australia. You do not own any commercial properties in Australia, and do not conduct any commercial business in Australia.

You have held the property as residential premises for a long time and now wish to sell the property. The property will be sold without you undertaking any property development activities to the property.

Any sales contract for the property will have to make appropriate provisions for GST depending on the outcome of this private ruling.

Copies of various documents were provided.

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 23-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decisions

Issues 1 (a) and (b)

GST is payable on a taxable supply. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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.

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

You satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as you make the supply of the property for consideration; and the supply is connected with Australia as the property is located in Australia.

What remains to be determined is whether the supply is made in the course or furtherance of an enterprise, and whether you are registered or required to be registered for GST.

Enterprise

Subsection 9-20(1) of the GST Act provides that an enterprise includes (amongst other things) an activity or series of activities done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruing MT 2006/1 covers the meaning of an entity carrying on an enterprise.

Paragraph 303 of MT 2006/1 states:

In the form of a lease, licence or other grant of an interest in property as an enterprise

303. Paragraph 9-20(1)(c) of the GST Act includes in the definition of an 'enterprise', 'an activity, or a series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. The paragraph does not cover trading in the assets but rather the activity of a leaser or grantor of the interest in the property.

Further, carrying on an enterprise includes activities done in the commencement or termination of the enterprise.

Paragraphs 120 and 140 of MT 2006/1 state:

a) 120. In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. The definition ensures that activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise…

b) Termination of an enterprise

c) 140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

The facts indicate that the property (residential dwelling and associated structures on the land) was acquired by you in 19XX, and from the date of purchase, you leased out the property under residential leases in return for rental payments. Your activity of leasing the property is in the form of a lease, licence or other grant of an interest in property. Accordingly, you are carrying on a leasing enterprise in relation to that property. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. The disposal of your property which you have been using in your leasing enterprise is in the course of termination of that enterprise.

Consequently, the sale of the property is made in the course or furtherance of an enterprise that you carry on, and paragraph 9-5(b) of the GST Act is satisfied.

GST registration

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. The current registration turnover threshold is $75,000 for businesses (and $100,000 for non-profit entities).

GST turnover

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.

You are currently not registered for GST. You advise that you own the property and also other residential properties in Australia. The rent received from the property is less than $75,000, and the residential rent from the property will be excluded from your GST turnover. Any residential rent from other residential premises will also be excluded from the calculation of your GST turnover. You do not own any commercial properties in Australia, and do not conduct any commercial business in Australia.

Accordingly, your current GST turnover is less than $75,000. However, we need to consider if your projected GST turnover is $75,000 or more.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

(a) by way of transfer of ownership of a capital assets of yours, or

(b) solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Capital asset or revenue (trading) asset

The meaning of capital assets is discussed in Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 33 of GSTR 2001/7 provide that a capital asset is generally 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 are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. 'Capital assets' are to be distinguished from 'revenue assets', which is described in paragraph 34 of GSTR 2001/7 as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business'.

Further, paragraphs 258 to 260 of MT 2006/1 provide that assets are either categories as trading assets or investment assets. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. 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 pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

You advise that you purchased the property (residential dwelling and associated structures on the land) in 19XX, and from the date of purchase you leased the property under various residential leases. You have held this rental property for a long time and now wish to sell the property. The property will be sold without you undertaking any property development activities to the property. On the basis of these facts, it is considered that your sale of the property is the mere realisation and disposal of a capital asset. As such, the consideration for the sale of the property is excluded in the calculation of your projected GST turnover.

At the time you sell the property, your current GST turnover will be at or above $75,000. However, your projected GST turnover will be below $75,000, and in the absence of any other commercial business activities, you will not meet the registration turnover threshold and you are not required to be registered for GST under section 23-5 of the GST Act. Accordingly, paragraph 9-5(d) of the GST Act is not satisfied when you are neither registered for GST, nor required to be registered for GST.

In summary, your sale of the property does not satisfy all the requirements of a taxable supply under section 9-5 of the GST Act, and is not subject to GST.

Issue 1(c)

As all the requirements of a taxable supply under paragraphs 9-5(a) to (9-5(d) of the GST Act are not satisfied and the sale of the property is not subject to GST, there is no need to consider further the input taxed and GST-free provisions.

However, as you requested, we will address whether the sale of the property is an input taxed supply.

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.

Section 195-1 (the definition) of the GST Act defines 'residential premises' to mean 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;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

You advise that the property consists of a residential dwelling and the associated structures (carport/garage and shed) on the land. At the date of completion of any sale of the property, the existing residential dwelling and associated structures used with this residence will remain on the property. The existing tenants will vacated the property, and their commercial nursery will be removed from the site (property). There has been no substantial impact/modification to the property, and you will sell the property without undertaking any property development activities to the property.

Goods and Services Tax Ruling GSTR 2012/5 addresses residential premises. Paragraphs 6, 7, 9, 10 and 15 of GSTR 2012/5 state:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

In relation to land supplied with a building, paragraph 46 of GSTR 2012/5 states:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

Further, in relation to a purchaser's intention to not use premises for residential accommodation, paragraphs 12 and 13 of GSTR 2012/5 provide an example, and state that the purchaser's intention not to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. The purchaser's intention is not a relevant factor in determining the character of the premises.

As expressed in GSTR 2012/5, the Commissioner considers that premises that possess characteristics suitable for residential accommodation will be used for that purpose. However, the actual use of such premises for a purpose other than residential accommodation does not prevent the premises from being residential premises to be used predominantly for residential accommodation. In the context of the definition of residential premises and sections 40-35, 40-65 and 40-70 of the GST Act, suitability refers to the suitability of the premises by reference to their physical characteristics. Premises are suitable for, and capable of, occupation as a residence or for residential accommodation if they possess the necessary features to provide residential accommodation and are able to be occupied as residential premises. Premises that display these physical characteristics are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

In circumstances where premises are modified, that is the physical characteristics of premises may be altered after the premises are first designed and built, it is necessary to determine the suitability of the premises by reference to their physical characteristics at the time when the relevant supply is made. Paragraphs 40 to 45 of GSTR 2012/5 provide examples. Example 9 of GSTR 2012/5 provides that where changes are not sufficient to modify the physical characteristics of the property into premises other than residential premises to be used predominantly for residential accommodation (that is, no sufficient modifications to alter the physical characteristics of the premises so that they are no longer residential premises to be used predominantly for residential accommodation), the supply of the premises will be a wholly input taxed supply.

You advise that the property currently consists of a residential dwelling and associated structures (carport/garage and shed) used with the residence on the land. At the date of completion of any sale of the property, the existing residential dwelling and associated structures used with this residence will remain on the property. You confirmed that since acquisition the property has not undergone any major modifications or replacement of the residential property. You have not and will not undertake any property development activities to the property prior to sale. The property has also not been substantially impacted by or modified as a result of the commercial nursery activities conducted by the current tenants on some of the land. The current tenants used some of the land to grow plants for their activities, which will be removed from the site (land) when they vacate the property.

The property as described (being the residential dwelling and associated structures on the land) is residential premises in that the property (residential buildings on/with the land on the single title) is occupied as a residence or for residential accommodation, and is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation, at the time when the relevant supply of the property is/will be made. The residential property (dwelling/structures and land) has not undergone sufficient modifications to alter the physical characteristics of the premises so that it is no longer residential premises to be used predominantly for residential accommodation. The purchaser's intention is not a relevant factor in determining the character of the premises.

Furthermore, on the basis of the facts provided, the property is not 'commercial residential premises' as defined in section 195-1 (the definition) of the GST Act. The property is also not 'new residential premises' as defined in section 40-75 of the GST Act. For further information on commercial residential premises refer to Goods and Services Tax Ruling GSTR 2012/6, and for information on new residential premises refer to Goods and Services Tax Ruling GSTR 2003/3.

Accordingly, all the requirements in section 40-65 of the GST Act are satisfied, and if you were registered for GST, the sale of the property is an input taxed supply of residential premises and no GST is payable.

Issues 2 to 4

As the sale of the property is not subject to GST, issues (2) to (4) are not applicable.

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