Edited version of your private ruling

Authorisation Number: 1012552589727

Ruling

Subject: Carrying on an enterprise.

Question 1

Is demolishing a residential investment property in order to construct two townhouses and subsequently sell either one or both townhouses an enterprise within the meaning of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, demolishing a residential investment property in order to construct two townhouses and subsequently sell either one or both townhouses is an enterprise within the meaning of the GST Act.

Question 2

Do you need to be registered for GST purposes?

Answer

Yes, you need to be registered for GST purposes.

Relevant facts and circumstances

You purchased a residential investment property and commenced to rent it. Since purchasing the property you have rented out the property on an ongoing basis.

You are resolved to sell the property due to ongoing frustrations and financial losses arising from tenants defaulting on rents due and damage being caused to the property.

You are considering demolishing the existing residence and constructing two townhouses in order to realise the full value of the property.

You have engaged a builder to undertake the entire construction process.

You have no previous experience in property development.

Subsequent to the construction of the townhouses, you will either: (1) sell both; or (2) retain one as your home (principal residence), with your current principal residence being sold to maintain debt at manageable levels. It is unlikely that you can afford to maintain all three properties.

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 195-1

Reasons for decision

NB - See end of document for footnote references.

Question 1

Taxable supply

Pursuant to section 9-5 of the 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.

(Items marked with an *asterisk are defined in the Dictionary at section 195-1 of the GST Act)

Enterprise

'Enterprise' has the meaning given by section 9-20 of the GST Act. Subsection 9-20(1) of the GST Act states that an enterprise includes 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

…

'Business'

A business is defined in section 195-1 of the GST Act as including "any profession, trade, employment, vocation or calling, but does not include occupation as an employee".

There is no single test or determining factor of whether a business is being carried on, but all the relevant factors must be weighed¹. A summary of the main indicators of carrying on a business is provided at paragraph 18 of Income Tax Ruling 97/11:

A number of factors indicate that you are unlikely to be carrying on a business, including that:

· the activity is not a significant commercial activity,

· the small size and scale of the activity,

· there will be no repetition or regularity in conducting the activity,

· the activity is of a small size and scale,

· you lack knowledge and skill in property development.

'An adventure/concern in the nature of trade'

Miscellaneous Tax Ruling 2006/1 (MT 2006/1) states the distinction between a business and an adventure or concern in the nature of trade at paragraph 224: the term 'business' would encompass trade engaged in on a regular or continuous basis, whereas an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Therefore the transaction under consideration can still be considered an enterprise despite being a one-off transaction.

MT 2006/1 specifically considers the question of when isolated transactions and sales of real property constitute an enterprise. At paragraph 265 a list of factors is extracted from the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) that can assist in determining when activities to subdivide land might amount to a business or adventure or concern in the nature of trade². These factors are as follows:³

· 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 to secure council approval for the subdivision; and

· buildings have been erected on the land.

Other factors may be relevant, and no one factor is determinative. It is necessary to examine the facts and circumstances of each particular case and weigh up the relevant factors in order to reach a conclusion.⁴

The following factors together indicate that you are engaged in an adventure or concern in the nature of trade:

1. You purchased the property as a residential investment property but there has since been a change of purpose for which the land is held. You no longer intend to rent the property. You are now resolved instead to sell it.

2. There exists a coherent plan for the subdivision of the land. You have engaged a builder to develop plans, apply for regulatory permits and construct dwellings.

3. You are developing the land beyond a level necessary to secure council approval for the subdivision. You are constructing townhouses on the subdivisions. Your purpose in so doing is to optimise the proceeds of the sale, and not merely realise the capital asset that you own.

Accordingly, we are of the view that for the purposes of the GST Act, the property development activity amounts to an enterprise. You intend to either sell both townhouses, or retain one townhouse as your principal residence and sell the other. There will be an enterprise even if you retain one townhouse as your principal residence. This scenario is discussed at paragraphs 273-276 of MT 2006/1, where it is considered that a taxpayer who develops two units and retains one as his principal residence is still carrying out an enterprise.

Question 2

Section 23-5 of the GST Act states that you are required to be registered under the Act if:

(a)  you are * carrying on an *enterprise; and

  

(b)  your * GST turnover meets the * registration turnover threshold.

….

As explained above, we are of the view that you are carrying on an enterprise. Therefore, what remains to be determined is whether you meet the registration turnover threshold.

'GST turnover', in relation to meeting a turnover threshold, has the meaning given by subsection 188-10(1) of the GST Act. This provision provides that:

(1)  You have a GST turnover that 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.

Subsection 188-20(1) of the GST Act states:

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 40-65(2)(b) of the GST Act states that the sale of real property is not input taxed to the extent that the residential premises are new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. The premises that you propose to build that are the subject of this ruling request meet the definition of new residential premises per section 40-75(1) of the GST Act, which states:

*Residential premises are new residential premises if they:

(a)  have not previously been sold as residential premises (other than * commercial residential premises) and have not previously been the subject of a * long term lease or

…

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

'Registration turnover threshold' has the meaning given by sections 23-15 and 63-25 of the GST Act. Pursuant to subsection 23-15 (1), the current registration turnover threshold that applies to you is $75,000. As it is likely that the value of each of the properties that you propose to sell will exceed this threshold, you are required to be registered under the GST Act.

Section 9-40 of the GST Act states that you must pay the GST payable on any *taxable supply that you make.

As the sale by you of the townhouse(s) is a taxable supply, you will be required to pay GST upon making the sale(s).

Section 11-20 of the GST Act states that you are entitled to the input tax credit for any *creditable acquisition that you make.

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.

A creditable purpose is defined at section 11-15 of the GST Act. Pursuant to paragraph 11-15 (2)(b) of the GST Act input tax credits are not available to the extent that acquisitions are of a private or domestic nature. You are entitled to claim input tax credits on acquisitions to the extent those acquisitions relate to your property development enterprise where those acquisitions meet the requirements of a creditable acquisition and you hold valid tax invoices for those acquisitions. If you choose to retain one townhouse as a private residence you will not be able to claim input tax credits to the extent the acquisitions that you make to develop the property relate to any private or domestic purpose.

¹ Income Tax Ruling 97/11, paragraph 12.

² Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 at 4076-4077; 20 ATR 228 at 235-236 and Casimaty v. FC of T 97 ATC 5135 at 5151-5152; 151 ALR 242 at 261-262; 37 ATR 358 at 375-377.

³ Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 at 4076-4077; 20 ATR 228 at 235-236 and Casimaty v. FC of T 97 ATC 5135 at 5151-5152; 151 ALR 242 at 261-262; 37 ATR 358 at 375-377.

⁴ MT 2006/1 paragraph 266.

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