Edited version of your private ruling

Authorisation Number: 1012436217388

Ruling

Subject: GST and sale of residential property

Questions

1. Will your sale of the new premises be subject to goods and services tax (GST)?

2. Are you entitled to claim input tax credits on the costs of constructing the premises?

3. Will adjustments arise when you decide to lease the premises for at least 5 years prior to selling them?

Answers

Yes, your sale of the new premises will be subject to GST.

1. Yes, you are entitled to claim input tax credits on the costs of constructing the premises provided all the requirements of section 11-5 of the GST Act are satisfied. Refer to the 'Reasons for decisions" section.

2. Yes, adjustments will arise when you decide to lease the premises for at least 5 years prior to selling them.

Relevant facts and circumstances

You are not registered for goods and services tax (GST).

You purchased a vacant land for the purpose of subdividing it and constructing a duplex (the premises).

You took out a loan from a financial institution when you purchased the property and will apply for further loan to cover construction costs.

You initially intended to lease the premises for at least five years upon completion. However, your circumstances have changed and you now intend to sell the premises as soon as completed.

You have previously bought a property which you are now leasing.

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 11-5,

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

A New Tax System (Goods and Services Tax) Act 1999 section 25-1,

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-15,

A New Tax System (Goods and Services Tax) Act 1999 section 188-20 and

A New Tax System (Goods and Services Tax) Act 1999 Division 129.

Reasons for decision

Question 1

GST is payable on a taxable supply.

A supply is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with Australia; and

(d) you are registered or required to be registered for GST.

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

Based on the information provided, you will satisfy paragraphs 9-5(a) to 9-5(c) of the GST Act. As you are not currently registered for GST, it must be determined whether you are required to be registered for GST when you sell the premises.

Required to be registered

According to 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, the registration turnover threshold is $75,000 ($150,000 for non-profit entities).

GST turnover

Subsection 188-10(1) of the GST Act provides that your GST turnover meets a particular turnover threshold if:

(a) your current GST-turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

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.

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.

Will the proceeds from the sale of the premises be included in your GST turnover?

According to paragraphs 188-15(1)(a) and 188-20(1)(a) of the GST Act, supplies that are input taxed are disregarded in calculating your current and projected GST turnover. Therefore, it must be determined whether your sale of the premises will be an input taxed supply.

Under subsection 40-65(1) of the GST Act the sale of residential premises is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. If a supply is input taxed you do not charge GST on the supply, but neither are you entitled to claim input tax credits for anything acquired or imported to make the supply.

However, under subsection 40-65(2) of the GST Act the sale of residential premises is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

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

New residential premises are defined in section 40-75 of the GST Act to include new residential premises that have not been solely used for making input taxed supplies for a period of at least 5 years since the premises were built.

As you will sell the new premises upon completion instead of using them to make an input taxed supply (that is, the premises will not be leased) the new premises will be new residential premises for GST purposes.

Therefore, the sale of the new premises will not be input taxed and will not be disregarded in calculating your GST turnover.

Based on the information provided, your GST turnover will meet the registration turnover threshold as a result of selling the premises. As such, you will be required to be registered for GST under section 23-5 of the GST Act.

Note that your GST turnover will meet the registration turnover threshold at a particular month if the sale of the premises will occur within 11 months after that month. Therefore, you will be required to be registered for GST from that month. You must apply for registration within 21 days after becoming required to be registered.

Conclusion

As you will be required to be registered for GST, paragraph 9-5(d) of the GST Act will be satisfied when you sell the new premises.

There is no provision in the GST Act under which your sale of the new premises will be GST-free; and, as discussed above, the sale will not be input taxed. Therefore, your sale of the new premises will be a taxable supply.

For more information on new residential premises and their sale please refer to Goods and Services Tax Rulings GSTR 2009/4 and GSTR 2003/3 (available at www.ato.gov.au)

Margin scheme

As the sale of the new premises will be a taxable supply, you may choose to use the margin scheme provided you and the purchaser have agreed in writing that the margin scheme is to apply.

You are not eligible to apply the margin scheme if the supply of the vacant land to you was a taxable supply and the GST was worked out without applying the margin scheme.

Question 2

An entitlement to input tax credits arises on creditable acquisitions and creditable importations.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(*denotes a defined term in section 195-1 of the GST Act)

All the requirements above must be satisfied for an acquisition to be a creditable acquisition.

Paragraph 11-5(a)

For the purpose of paragraph 11-5(a) of the GST Act, section 11-15 of the GST Act provides that 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:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

As discussed in the response to Question 1, the sale of the new premises will not be input taxed. Thus, your acquisitions in constructing the new premises are for a creditable purpose. Paragraph 11-5(a) of the GST Act is satisfied.

Paragraphs 11-5(b) and 11-5(c)

Some acquisitions in relation to the construction of the new premises may not be taxable supplies for some reasons, for instance, if the supplier is not registered for GST. Only taxable supplies give rise to the recipient's entitlement to input tax credits.

If the supply of the thing that you acquire is a taxable supply to you, it is made for consideration; and thus, you provide, or are liable to provide consideration. Accordingly, paragraphs 11-5(b) and 11-5(c) of the GST Act will be satisfied.

Paragraph 11-5(d)

Entitlement to input tax credits arise if you are registered or required to registered.

You advised that currently, you are not registered for GST. However, as discussed in the response to Question 1, you will be required to be registered in a particular month when your GST turnover meets the registration turnover threshold. Therefore, paragraph 11-5(d) will only be satisfied when you register either voluntarily or because you were required to be registered.

Accordingly, you are entitled to input tax credits on the costs of constructing the new premises to the extent that all the requirements of section 11-5 of the GST Act are met at the time of acquisition.

Question 3

An adjustment under Division 129 of the GST Act arises for an acquisition where there is a difference between actual application and the planned application of the thing for a creditable purpose.

Goods and Services Tax Ruling GSTR 2009/4 provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose. Paragraphs 24 to 29 of GSTR 2009/4 state:

24. If an entity constructs new residential premises and the entity plans, as evidenced by an objective assessment of the facts and circumstances, to only sell those premises by way of a taxable supply as part of its enterprise, the acquisitions made in constructing the premises will be for a creditable purpose. Assuming all of the other requirements in section 11-5 are satisfied, the acquisitions will be creditable acquisitions and the entity will be entitled to input tax credits.

25. Alternatively, if an entity constructs new residential premises for the purpose of sale but intends to lease the premises for a period of time prior to the sale, and an objective assessment of the facts and circumstances supports this dual planned use, the entity's acquisitions will be partly creditable. The entity will therefore be entitled to only a proportion of the full input tax credit.

Example 1 - partly input taxed and partly creditable planned use

26. Kim is a property developer. Kim recognises that the market for selling new residential premises has slowed significantly but is expected to pick-up in approximately two years. She decides to build new residential premises for sale as part of her property development enterprise but makes a decision to lease the premises for 2 years in order to allow the market to improve. An objective assessment of the facts and circumstances supports this dual planned use. In particular, Kim's business plan at the time of making the acquisition and the loan application documents reflect this intended use of the premises.

27. The acquisitions Kim makes in constructing the new residential premises are for two purposes - being the making of an input taxed supply of residential premises by way of lease and a taxable supply of new residential premises.

28. Kim's acquisitions are made in carrying on her enterprise and are for a creditable purpose except to the extent they relate to the making of the input taxed supplies. That is, the acquisitions are partly creditable. Kim will need to determine the extent of creditable purpose using a fair and reasonable method of apportionment.

29. If an entity constructs new residential premises to use solely by way of leasing the residential premises, and this planned use is supported by an objective assessment of the surrounding facts and circumstances, the entity's acquisitions will relate solely to making supplies that would be input taxed, and will not be made for a creditable purpose. The entity will not be entitled to input tax credits in relation to the acquisitions. Although the acquisitions in these circumstances are not creditable acquisitions, adjustments can still arise under Division 129 if the entity subsequently applies the residential premises for a creditable purpose.

In determining the extent of the creditable purpose, there must be satisfactory evidence that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose. A single piece of evidence may not be sufficient where there is other evidence which suggests a contrary purpose.

Currently, you intend to sell the new premises upon completion. If your circumstances change and you decide to lease the premises instead for at least five years when completed, you will have adjustments under Division 129 of the GST Act for your acquisitions as the actual application of the things that you acquired is for making input taxed supplies and are not for creditable purpose.

Note that you will still have adjustments under Division 129 of the GST Act even if you lease the premises for less than 5 years. The 'five-year' period is only used to determine whether residential premises are 'new residential premises' when sold.

Other information

The following publications which are available from the Australian Taxation Office (ATO) website (www.ato.gov.au) may be of assistance to you:

· Goods and Services Tax Ruling GSTR 2006/4 - determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

· Goods and Services Tax ruling GSTR 2009/1 - general law partnerships and the margin scheme.

· Goods and Services Tax Ruling GSTR 2009/4 - new residential premises and adjustments for changes in extent of creditable purpose.

· Goods and Services Tax Determination GSTD 2006/3 - are settlement adjustments taken into account to determine the consideration for the supply or acquisitions of real property.

· Goods and Services Tax Determination GSTD 2012/1 - what are the goods and services tax consequences following the sale of residential premises that are subject to a lease.

· GST guide 'eligibility to use the margin scheme when selling property'.

· Fact sheet 'property contract and tax invoice - GST checklist'.

· Fact sheet 'common GST errors and property'.

· Fact sheet 'GST and property adjustments'

· Fact sheet 'margin scheme made easy'.

· Guide 'GST and property'.

· Fact sheet 'time limits on GST refunds'.

If you decide to sell the property after leasing for at least five years you may apply for another private ruling to determine your GST liability and entitlement to input tax credits.

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