Edited version of your private ruling

Authorisation Number: 1012590424250

Ruling

Subject: goods and services tax (GST) and sale of property

Question 1

Will your projected GST turnover be below $75,000 when you sell the property?

Answer

Yes.

Question 2

Will you be required to be registered for GST when you sell the property?

Answer

No.

Question 3

Will your sale of the property be a taxable supply, for GST purposes?

Answer

No.

Relevant facts and circumstances

You are not registered for GST.

You are a discretionary trust settled by a deed dated a certain date with a company (Entity X) as your trustee.

The directors and shareholders of your trustee are Individual 1 and Individual 2

Individual 1 and individual 2 are named as your primary beneficiaries in the Trust Deed.

Individual 1 and individual 2 have a history of property development through other entities. Their experience involves the physical construction of premises on land for the purpose of sale. Both have skills and expertise in the project management of construction activities.

You will sell a property for a certain amount of money.

The property is comprised of two adjacent lots:

(a) 'Lot X', and

(b) 'Lot Y'.

The properties are located in Australia.

You purchased Lot X and Lot Y for a certain amount of money.

Lot X was purchased and registered on a certain date with one derelict vacant house situated on the lot. It was leased to a certain entity for a certain period from a certain date to a certain date for use as a certain thing. Since a certain date, the property has been let to a certain entity for use as a certain thing.

Lot Y was purchased and registered on a certain date with a tenanted house on the lot. The house has been continuously tenanted since the purchase of the property by you.

You acquired the property with the intention of developing and selling it as part of a joint venture with Entity Y.

At some point you estimated that a profit of a certain amount of money would be made if you developed the property.

An email, dated a certain date, summarises discussions between Entity Y, Individual 1 and Individual 2 regarding the joint venture.

During a certain financial year, the negotiations with Entity Y fell through. You were unable to secure funding and decided to abandon your intention to carry on a development business and develop the property.

You state that at this point you ceased to hold the property as trading stock and began to treat it as a capital asset.

You have not provided any details of whether you have acquired other land or buildings.

You engaged an associated development management company, Entity Z to obtain development approval (DA) for the property to improve its anticipated price on sale. Individual 2 is the sole shareholder and director of Entity Z.

The DA was obtained by Entity Z on a certain date for development of the property as a multi-storey residential development. You played no part in obtaining the DA.

You engaged real estate agents to sell the property on your behalf. You entered into a contract on a certain date to sell the property.

The date for the settlement of the contract is a certain date.

The DA is the sole improvement to the property and there has been no physical improvement to the property.

You will make a profit/gain on sale of the property of a certain amount of money (after deducting costs). You believe the gain on sale of the property is attributable to rezoning of the whole local area rather than the DA attaching to the property.

Your leasing income is below $75,000 a year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 995-1

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-25(a)

Reasons for decisions

Question 1

Summary

Your leasing income is below $75,000 a year and the sale of the property will be excluded from projected GST turnover. Therefore, your projected GST turnover will be below $75,000 when you sell the property.

Detailed reasoning

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise, and

(b) your GST turnover is $75,000 or more.

Subsection 188-10(1) of the GST Act states:

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

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

Subsection 188-15(1) of the GST Act sets out how to calculate current GST turnover. It provides that 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.

Subsection 188-20(1) of the GST Act sets out how to calculate projected GST turnover. It provides that 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; 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 sales of capital assets of yours should be disregarded when calculating projected GST turnover.

We shall now consider whether you are carrying on an enterprise.

Paragraph 9-20(1)(a) of the GST Act provides that enterprise includes an activity or series of activities done in the form of a business.

Paragraph 9-20(1)(b) of the GST Act provides that enterprise includes an adventure or concern in the nature of trade.

Paragraph 9-20(1)(c) of the GST Act provides that enterprise includes leasing out property on a regular or continuous basis.

Miscellaneous Taxation Ruling MT 2006/1 provides guidelines on the meaning of enterprise for ABN purposes.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for GST purposes.

Paragraphs 262 and 263 of MT 2006/1 discuss isolated real property transactions. They state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraphs 237 to 239 of MT 2006/1 explain that adventures or concerns in the nature of trade have a commercial nature. They state:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

238. A similar view was expressed by Foster J in AB v. FC of T 97 ATC 4945 at 4961; 37 ATR 225 at 242 where he said:

See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal' ( McClelland v. FCT (1970) 120 CLR 487 at 495; 2 ATR 21 at 26; 70 ATC 4115 at 4120).

239. The commercial nature of an adventure or concern in the nature of trade can also be shown from the following passage by Gibbs J in Federal Commissioner of Taxation v. NF Williams

Turning now to the Commissioner's argument that the case comes within s 25(1) of the Act, it seems to me that the co-owners did no more than realise their asset in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in Edwards (Inspector of Taxes) v. Bairstow , [1956] AC 14; [1955] 3 All ER 48. That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but it has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal (see at [1956] AC, pp. 36-37; [1955] 3 All ER, p. 58). The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from the sale were not income within the ordinary understanding of the term.

In accordance with paragraph 6 of Taxation Ruling TR 92/3, a profit from an isolated transaction is income according to ordinary concepts when both of the following elements are present:

(a) in entering into the transaction the taxpayer intended to expected to derive a profit which would have been assessable income, and

(b) the transaction was entered into in the course of carrying on a business or in carrying out a business operation or a commercial transaction.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031; 12 ATR 692). Whether a particular transaction has a business or commercial character depends on the circumstances of the transaction.

In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors that must be considered, as follows:

· the nature of the entity undertaking the operation or transaction. For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature

· the nature and scale of other activities undertaken by the taxpayer

· the amount of money involved in the operation or transaction and the magnitude of profit sought or obtained

· the manner in which the operation or transaction was entered into or carried out

· the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

· if the transaction involves the acquisition and disposal of property, the nature of that property, and

· the timing of the transaction or the various steps in the transaction. For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature.

It is not necessary that a profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. It is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means.

In accordance with paragraph 254 of MT 2006/1, an intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Application to your circumstances

The following is an examination of the factors contained within TR 92/3 and MT 2006/1 with regard to your circumstances.

(a) Intention to resell at the time of acquisition

You had an intention to resell the property in your case at the time of your acquisition.

(b) Intention to make a profit

It was your intention when you entered the transactions to purchase the two property lots to commence a business of property development as part of a joint venture. The joint venture would develop the property which would then be sold for a profit.

(c) Nature of the entity undertaking the operation or transaction

You are a trust. Your purposes are that of your trustee, Entity X. Your primary beneficiaries are also the directors and shareholders of your trustee. Both have experience in property development construction and project management. It appears that the trust was formed for the purpose of undertaking this project.

(d) Nature and scale of other activities undertaken by the entity

This appears to be a one-off activity for you.

(e) Amount of money involved and the magnitude of profit sought or obtained

You purchased the two lots for a certain amount of money.

It was at some point estimated that a profit of a certain amount of money would be made if the previously planned development was undertaken.

You have made a net profit/gain on sale of the property of a certain amount of money (after deducting costs).

Therefore, there are very large amounts of money involved; you sought to make a very large profit and you made a very large profit/gain on the sale of the property.

(f) The nature, scale and complexity of the operation or transaction

The property was acquired for the purpose of development and subsequent sale. The nature, scale and complexity of the proposed arrangement were significant as it involved the negotiations of a joint venture, the actual property development and subsequent sale.

You entered into negotiations with a major property developer. When these failed you arranged for Entity Z (a company solely controlled by a primary beneficiary) to obtain development approval for a multi-storey residential building as this would enhance the sale value of the property.

You engaged real estate agents to sell the property on your behalf.

(g) The manner in which the operation or transaction was entered into or carried out

The lots comprising the property were purchased.

The beneficiaries entered into negotiations with Entity Y regarding a joint venture for the property development.

Entity Z prepared and lodged a development approval application.

A real estate agent sold the property.

(h) The nature of any connection between the relevant taxpayer and any other party to the operation or transaction

Whilst Entity Z is not a beneficiary of yours, its sole shareholder and director is one of your primary beneficiaries as well as the director of your corporate trustee. Entity Z is a development management company.

(i) If the transaction involves the acquisition and disposal of property, the nature of that property

The property purchased consists of two adjacent blocks of land. Lot X has been leased for use as a certain thing at various times. Lot Y contained a tenanted house which has been continuously tenanted.

(j) Timing of the transaction or the various steps in the transaction

Lot X was purchased on a certain date and Lot Y on a certain date.

Negotiations with Entity Y were entered into prior to a certain date. These failed around a certain date.

Development approval was obtained on a certain date.

During a certain financial year you decided to abandon the proposed property development.

You entered a contract to sell the property on a certain date and the settlement date is a certain date.

As full details of the timing of steps taken to develop the property have not been provided, we are unable to determine if they were carried out in a timely manner.

Although none of the factors are determinative on their own, it is considered that an isolated transaction was entered into, and the profit was made, in carrying out a commercial transaction for the following reasons:

· you had an intention to resell the property when you acquired it

· you acquired the property with the intent to develop and sell at a profit

· this is a one-off activity for you

· you purchased the two lots for a certain amount of money

· you will sell the two lots for a certain amount of money

· you sought to make a profit of a certain amount of money from the previously planned development

· you will make a profit/gain on sale of the property of a certain amount of money (after deducting costs), even though the profit/gain will not be obtained via the original means envisaged

· you employed a professional development management company to obtain DA to enhance the sale value of the property, and

· the DA permitted development of a multi-storey residential building with many levels.

The sale of the property does not represent the mere realisation of an asset to its best advantage, but rather has the characterisation of a commercial transaction.

Hence, your sale of the property will be an adventure or concern in the nature of trade. Therefore, you are carrying on an enterprise.

Additionally your sale of the property will be a supply you make in the course or furtherance of a leasing enterprise that you carry on.

Hence, you meet the requirement of paragraph 23-5(a) of the GST Act and the sale of the property is not excluded from GST turnover by paragraph 188-15(1)(c) or paragraph 188-20(1)(c) of the GST Act.

Sales of capital assets

In accordance with paragraph 258 of MT 2006/1, assets are either trading assets or investment/capital assets.

Section 70-10 of the ITAA 1997 defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. You are not carrying on a business. The property in your case is therefore not trading stock and it is therefore a capital asset.

As the sale of the property will be the disposal of a capital asset, it will be excluded from projected GST turnover. Hence, as your leasing income is under $75,000 a year, your projected GST turnover will be under $75,000 when you sell the property.

Question 2

As your projected GST turnover will be under $75,000 when you sell the property, you will not meet the compulsory GST registration threshold. Therefore, you will not meet the requirement of paragraph 23-5(b) of the GST Act. As you will not meet both requirements of section 23-5 of the GST Act, you will not be required to be registered for GST when you sell the property.

Question 3

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

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.

In your case, you will meet the requirements of paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act. This is because:

· you will supply the property for consideration when you sell it; and

· you will make the sale in the course or furtherance of an enterprise that you carry on; and

· the sale will be connected with Australia because the property is located in Australia.

You will not meet the requirement of paragraph 9-5(d) of the GST Act, as you are not registered or required to be registered for GST.

As you will not meet all of the requirements of section 9-5 of the GST Act, you will not make a taxable sale of the property. Hence, GST will not be payable on your sale of the property.

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