Edited version of your written advice

Authorisation Number: 1012764749233

Ruling

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

Question

Is GST payable on the sale of lot B?

Answer

No.

Relevant facts and circumstances

The taxpayer Individual X and individual Y are a married couple with children (all dependants) at home. Individual X is a (number) year old, self-employed professional, whilst Individual Y's role is home duties.

Individual X has a client list they provide professional services for. Individual X also uses their professional skills to guide and support the couple's personal investments. An objective for Individual X and Individual Y is to build personal wealth to support their lifestyle and retirement needs.

The couple purchased a property (the pre-subdivision property) known as (name) on a certain date for a price of (amount) with settlement on a certain date. The property consisted of a residential dwelling (circa a particular decade) on a block of land of approximately (number) square metres.

At the time of purchase of the pre-subdivision property, the family primary residence was at address C. C is best described as a dated house in need of renovation, situated on a busy main road.

The reasons for purchase of the pre-subdivision property were:

1. C was dated and in need of renovation;

2. C has a main road frontage, whereas the pre-subdivision property is situated in a quiet street, a location more attractive to the family.

3. The pre-subdivision property's location was more appealing with its better proximity to the children's school and its location to shopping, beach and the facilities opposite. All highly desired in preference to staying at C.

4. The couple identified potential for sub dividing the land and selling a property to their benefit.

The Contract of Sale on acquisition of the pre-subdivision property identified the purchaser as Individual X and/or Nominee, with the contracted Purchaser amended on settlement as Individual X and Individual Y as Joint Proprietors. The purchase was funded using a Mortgage Loan provided by a bank and personal funds.

Plans were drawn for the pre-subdivision property involving the division of the land into 2 separate titles with a separate dwelling on each. One dwelling to become the primary residence for the family and the other to be retained as a property for sale. The couple, from the outset, set out (subject to approval from the council) to demolish the existing ageing residence and subdivide the land into two separate titles.

On a certain date, (approximately a few months after purchase) the council heard an application number (number) under the Planning and Environment Act and granted a Permit for construction of two residences on the site.

In design and construction, the couple identified the following unique features for the proposed primary residence:

• Landscaping specific to B with regard to plants.

With a start for construction approaching, the couple sought guidance from their tax agent with regard to their tax compliance requirements for A (the property to be sold). They outlined their reasons for the property purchase and the intended objective:

• To build a residence specific for the family's needs (known as B), closer to the children's school and in a more desired part of the locality.

• To build and sell a second residence (known as A). The proceeds of any sale would liquidate a significant amount of the land and construction finance, leaving a debt they could service from their existing income.

They provided estimates of the construction costs associated with A, along with market intelligence gathered around potential prices achievable. On the basis of the information provided, the couple applied for an ABN and registered for GST relating specifically to A.

The registration for GST as a "Family Partnership" was based on the fact that there were two individuals (Individual X and individual Y) with an equal interest in A.

The taxpayer required finance to construct the two dwellings. On a certain date, the bank approved the following:

1. Extension of the term of an existing loan in the individual names of Individual Y and individual X taken out to assist with the purchase of the pre-subdivision property.

2. A construction loan in the joint names of Individual Y and Individual X. The loan purpose was to fund the demolition and construction of the proposed two new residences.

With the funding approved, the construction of the two properties commenced. Approximately (number) months elapsed for the demolition and construction of the two dwellings.

The taxpayer experienced cost blowouts during construction which impacted adversely on the cost of the construction/project forecasted.

1. The construction used a new structural system the taxpayer was not experienced with and subsequently the basement costs were under estimated.

2. Due to the size and the detail in the design, the dwellings took an extra (number) months to complete and this added additional interest costs of approximately (amount) to the finance cost.

In all, the taxpayer spent approximately (amount) more than budgeted on the project.

During the construction phase, the taxpayer lodged Activity Statements claiming input tax credits for GST paid on creditable acquisitions made solely in relation to A.

As the taxpayer from inception deemed B as their future primary residence, expenses paid on acquisitions relating to B were separately accounted for from those relating to A.

The family moved from C, where they had resided for the previous (number) years, to B on a certain date. A Certificate of Occupancy was issued on a certain date and the subdivision of land was processed by the Land Titles Office (State or Territory) on a certain date, releasing the titles.

On moving in, the family made arrangements for all postal diversions from C along with necessary new address notifications to B.

Based on the taxpayer's forecast, A had an expected sale price between (amount) to (amount).

On a certain date, A was sold for a price of (amount). The settlement effected on a certain date. The price achieved was well below the (amount) and (amount) range expected. The impact of the lower than expected price was compounded by the unanticipated additional construction costs along with holding costs incurred.

The taxpayer was hoping to make a net surplus above cost of (amount) to (amount) on the sale of A. Due to construction delays, unanticipated higher costs, and the lower than expected sale price achieved, the financial result on settlement of the sale of A left the taxpayer in an unexpected financial position:

$

Sale proceeds for A amount

Funds appropriated to pay down debt (banks) (amount)

Debt outstanding after sale proceeds appropriated amount

At this time, the taxpayer discussed their financial position with their tax agent. It was agreed with the taxpayer they were at high risk of experiencing financial stress, given considerable doubts around their capacity to service their existing debt obligations to the bank.

This was evidenced by the taxpayer needing to borrow additional monies from friends and family to service their ongoing debt obligations.

Whilst the taxpayer had a positive net asset position, their capacity to service the debt levels was not clear. Options were discussed in the form of:

1. Sell C

C was leased to tenants after the taxpayers' family moved to B. It is best described as an ageing residence which needed considerable work to be done to prepare the property for a sale, funds that were not readily on hand. Any preparation of the property for sale would also take some time.

2. Sell B

B was considered more likely easier to sell due to the fact it was recently constructed, very marketable and could be made ready for immediate occupancy.

The taxpayer approached agents to look at both properties' propensity for sale with consideration given to potential price achievable and anticipated time on market. Consistently the agents advised B would sell more readily and would achieve a more substantial price.

With this advice, the taxpayer made arrangements for the listing and consequent sale by auction of B on a certain date. B was sold at auction for a price of (amount) with settlement effected on a certain date. The position after settlement:

$

Sale proceeds for B amount

Funds appropriated to pay down debt (amount)

Debt outstanding after sale proceeds appropriated 0

In all the family lived at B from a certain date to a certain date, a period of (number) months.

The overall outcome in summary:

On settlement of B on a certain date, the taxpayers moved to rented premises at D where they currently reside.

On a certain date, the taxpayers' agent received a letter from the ATO notifying a review of business transactions including sale of real properties for the period (a certain date) to (a certain date).

The taxpayers complied with the review requirements and on a certain date, the ATO issued a further letter via the tax agent identifying selection for audit.

The taxpayer responded to the request and submitted documentation required, excluding a request for a document described as, "Copy of the Partnership agreement between Individual X and Individual Y". The tax agent responded on behalf of the taxpayer to ATO Officer, by email on a certain date to the effect, "There is no formal Partnership Agreement due to it's a family Partnership."

On a certain date, the ATO issued a further letter via the tax agent's office advising of interim findings of audit. Within the accompanying Interim Report to the letter, a specific paragraph was identified referring to B to the effect:

"In relation to the property at B, it was found that your sale of your property at B was a taxable supply and will be subject to GST under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999. You are required to report the applicable GST payable amount in your (certain date) to (certain date) BAS."

On a certain date, the tax agent wrote on taxpayer's behalf to ATO, in response to the Interim Report, and specific to the paragraph in the Interim Report regarding B.

It was identified in the letter that ATO's expected treatment of the sale of B as a taxable supply in the forthcoming BAS is inconsistent with information provided by the taxpayer about the property.

In the letter advising of completion of the audit, it stated "We acknowledge that you will seek confirmation of the correct treatment of the property sale at B, and report the sale accordingly"

Relevant legislative provisions

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 section 9-20

Reasons for decision

Summary

GST will not be payable on the sale of B because it will be the mere realisation of a private investment asset.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

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

Section 9-20 of the GST Act defines enterprise to include:

• an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)); and

• an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

Miscellaneous Taxation Ruling MT 2006/1 provides guidance 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.

Paragraph 234 of MT 2006/1 discusses the terms 'business' and 'adventure or concern in the nature of trade'. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, 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.

Paragraph 244 of MT 2006/1 discusses adventures or concerns in the nature of trade and sales of private assets. It states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. 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.

Paragraphs 258 and 259 of MT 2006/1 discuss trading assets and investment assets. They state:

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

In accordance with paragraph 247 of MT 2006/1, if a property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

B was the couple's family home. They built it to live in and they lived in it for an extended period of time. They sold the property due to concerns over their capacity to service debt levels as a result of cost blowouts and a lower than expected sale price for A. Hence, the sale of B was the sale of a private investment asset and therefore, the sale is not a supply made in the course or furtherance of an enterprise that they carried on. Hence, they do not satisfy the requirement of paragraph 9-5(b) of the GST Act. As they do not meet all of the requirements of section 9-5 of the GST Act, the sale of B is not subject to GST.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).