Edited version of your written advice

Authorisation Number: 1012694457237

Ruling

Subject: GST and supply of real property

Question 1

Is the sale of the property subject to goods and services tax (GST)?

Answer

No

Relevant facts and circumstances

• You are not registered for GST.

• Two years ago following the advice of your accountant, you acquired the land and building for the purposes of leasing. You intended to hold the property for your long-term investment including retirement planning. It was expected that the leasing enterprise would meet your negative gearing strategy

• You acquired vacant blocks of land located in Australia.

• You entered into a building contract with a builder to erect houses on the blocks.

• However, after you entered into a building contract, your marriage was on the brink of breaking down. You were in the separation/divorce process some months later.

• The houses were completed but were not offered for rent as you were not certain of the marriage and your long-term plan.

• You have provided a statement from your doctor that the marriage breakdown has had an immense impact on you and your plan for the future.

• When you became certain that your marriage was over you decided to sell the houses.

• The houses were sold at a loss.

• You have never bought and sold properties before.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-10

Section 9-20

Section 40-65

Section 40-75

Section 23-5

Reasons for decision

Summary

The supply of the properties was not made in carrying on an enterprise. It is a mere realisation of private assets.

Detailed reasoning

Under section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), GST is payable on taxable supplies. The sale of the house is subject to GST where the sale is taxable supply under the GST Act.

Section 9-5 of the GST Act sets out four criteria required which all must be met for a supply to be a taxable supply. However, we need to consider whether a supply is made when you sell your houses.

The term' supply' is defined in section 9-10 of the GST Act to include 'a grant, assignment or surrender of real property'. The term 'real property' is defined in Division 195 - the Dictionary part of the GST Act - to include any interest or right over land'. Therefore, the sale of your houses is a supply under paragraph 9-10(2)(d) of the GST Act.

Under section 9-5 of the GST Act, you make a taxable supply if:

• you make the supply for consideration

• the supply is made in the course or furtherance of an enterprise that you are carrying on

• the supply is connected with Australia, and

• you are registered or required to be registered.

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

In your circumstances:

• the supply (sale) of the house was made for monetary consideration

• the supply of the house is connected with Australia as the house is situated in Australia

• you are currently not registered for GST. However, you are required to be registered for GST if you are carrying on an enterprise and your turnover exceeds the registration threshold of $75,000. Therefore, it is necessary to establish whether you are carrying on an enterprise of land development in relation to the supply of the house.

Enterprise is defined in section 9-20 of the GST Act to include an activity or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

Miscellaneous Ruling MT 2006/1 provides the view of the Tax Office on whether or not an activity constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Goods and Services Tax Determination GSTD 2006/8 provides that the view of the Tax Office expressed in the MT 2006/1 can be equally applied to the meaning of enterprise under the GST Act.

Generally, a business includes a trade that is engaged on a regular or continuous basis.

Your activities in relation to the supply of the houses are not repetitive and regular. Therefore, it is considered that you are not carrying on a business in relation to the supply in question.

Although the supply of the houses is not considered to be a business, the definition of the term 'enterprise' includes 'activity or a series of activity done in the form of an adventure or concern in the nature of trade'

Paragraph 234 of MT 2006/1 provides that an isolated or one-off activity may fall into the category of 'an adventure or concern in the nature of trade'. This category includes a commercial activity of a trading nature that does not amount to a business but which has the characteristics of a business deal.

Paragraphs 235 and 237 of MT 2006/1 explain that:

235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

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'.

However, paragraph 244 of MT 2006/1 emphasises that:

…However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

The approach of the Tax Office on the question of 'whether an entity is carrying on an enterprise where there is one-off or isolated real property transaction' is expressed in paragraph 263 of MT 2006/1

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.

Paragraph 266 provides further that:

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In your circumstances

• the acquisition of the land and buildings was not made for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking.

Following the advice of your accountant, you acquired the land and building for the purpose of leasing. You intended to hold the properties for your long-term investment including retirement planning. It was expected that the leasing enterprise would meet your negative gearing strategy.

• You have advised in the affidavit to the Court that you and your former spouse decided to go separate ways. The houses were completed at the time when your marriage was over, awaiting the Court divorce order.

• Your doctor confirmed that you have been having anxiety, agitation and showing signs of depression for last few years and more so after change of work circumstances and other stress. Currently you are on medication and you have been highly recommended to have counselling.

• The houses were completed at which stage you were unsure what was to become of you marriage. When you knew that you were unable to save the marriage you have decided to sell the properties.

• There was no financial gain in selling the properties as they were sold at a loss.

It is considered that the supply of the properties was due to your personal circumstances and was a mere realisation of private assets. The sale is not made in the course of carrying a business or an adventure in the nature of trade.

As not all of the criteria in section 9-5 of the GST Act are met, the supply of the properties is not a taxable supply and does not attract any GST. You, the supplier of the properties, are not required to remit any GST from the supplies.

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