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Edited version of your private ruling

Authorisation Number: 1012560680140

Ruling

Subject: GST and sale of property

Question

Is the sale of a residence which was built for the purpose of renting out subject to GST?

Answer

No, the sale of a property that was built for the purpose of renting out is not subject to GST.

Relevant facts and circumstances

Partners have purchased a block of land which was subdivided into three separate lots.

The partners built X identical residential premises on each of the lots.

Each partner kept one property as their own primary residence and are still living in them.

The partners engaged a builder to construct the residences.

The intention of the partners in building the third residence has always been to use it as a rental property. However, due to financial difficulties and other personal reasons, it was sold soon after construction works were completed. The profit from the sale was equally divided between the two couples.

The building construction activities were not carried on as part of other enterprises that the partners may have been carrying on.

The partners jointly obtained a home loan to fund the property development project. Each partner contributed half of the required payment.

No costs of the property development have been claimed as a business deduction or as an input tax credit by any of the partners.

Relevant legislative provisions

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

Section 7 of the A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

According to section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), GST is payable on taxable supplies.

What is a taxable supply?

Section 9-5 of the GST Act defines a taxable supply as follows:

(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.

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

Here, the 'you' (the entity) referred to in section 9-5 of the GST Act) is a tax law partnership of the partners. They have contributed jointly and carried out the venture together as one entity.

As the sale of the third residence has been made for consideration (that is, the sale price) and is connected with Australia the sale meets paragraphs 9-5(a) and 9-5(c) of the GST Act.

Therefore what remains to be determined is whether the supply was made in the course or furtherance of an enterprise that was carried on by the entity and also if the entity is required to be registered for GST.

Enterprise

'Enterprise' has the meaning given by section 9-20 of the GST Act. Subsection 9-20(1) of the GST Act states the following:

(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; or

The intention of the entity in building the third residence was to use it as a rental property. As defined in subsection 9-20(1) of the GST Act, an enterprise is an activity done in the form of a lease. Therefore renting out a residential property comes within the definition of carrying on of an enterprise. It is acknowledged that the entity never rented out the property as it was sold soon after it was constructed. However, for GST purposes, things done in setting up an enterprise are still considered to be done in the course of an enterprise. Therefore, constructing a residence for the purposes of renting it out is considered to be done in the course of a rental enterprise. Furthermore, the sale of a capital asset is considered to be made in the course of an enterprise. Thus, the sale of the third residence (which is a capital asset of the rental enterprise that the entity intended to carry on is considered to be sold the course of an enterprise.

GST registration

An entity is required to be registered for GST if their GST turnover meets the registration turnover threshold which is currently $75,000 ($150,000 for non-profit entities).

Pursuant to section 188-25 of the GST Act, the transfer of ownership of a capital asset of an entity is disregarded in calculating the projected turnover of that entity. Accordingly, when the third residence which happens to be a capital asset of the rental enterprise of the entity is sold, the sale proceeds do not go towards the calculation of the projected turnover. As a result, the entity in this case will not meet the registration turnover threshold. Accordingly, the entity is not required to be registered for GST.

As the sale of the third residence does not meet all the requirements of section 9-5 of the GST Act when, it is not a taxable supply and GST is not payable upon the sale of that residence.

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