Edited version of your written advice

Authorisation Number: 1012802139586

Ruling

Subject: CGT - disposal and GST

Issue 1

Question 1

Will the proceeds from the sale of villa A be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the sale of villa A trigger capital gains tax (CGT) event A1, disposal of an asset under section 104-10 of the ITAA 1997?

Answer

Yes.

Question 3

Under section 118-20 of the ITAA 1997, are you entitled to reduce any capital gains made by the disposal of villa A by any amount which is included in your assessable income under 6-5 of the ITAA 1997

Answer

Yes.

Issue 2

Question 1

Is GST payable on your sale of the villa that has been sold?

Answer

Yes.

Question 2

Will GST be payable on your sale of the remaining villas?

Answer

GST will be payable on your sale of a remaining villa if:

• your final use of the villa is not your private or domestic use, and

• you are voluntarily registered for GST at that time, and

• you do not sell the villa with a lease intact as a GST-free supply of a going concern, and

• you do not lease out and/or grant a licence to occupy the villa for a continuous period of at least five years since completion of construction.

Otherwise, GST will not be payable on your sale of a remaining villa.

Question 3

Is GST payable on the rental income?

Answer

No.

Question 4

Are you entitled to input tax credits on your acquisition of development related goods and services?

Answer

No.

Question 5

Are you entitled to input tax credits for expenses in selling the villa that has been sold?

Answer

You are entitled to input tax credits for these expenses if:

• the associated supplies made to you were taxable supplies, and

• you were required to be registered for GST when you incurred these expenses or your GST registration is backdated to that time.

Otherwise, you will not be entitled to input tax credits.

Question 6

Are you entitled to input tax credits for expenses in selling the remaining villas?

Answer

If:

• the supplies made to you in respect of expenses in selling these villas are taxable supplies, and

• you are registered for GST when you incur these expenses, and

• your sales of these villas are not input taxed, and

• your final use of these villas is not your private or domestic use

you would be entitled to input tax credits in respect of the associated acquisitions.

Otherwise, you will not be entitled to input tax credits.

Question 7

Are you entitled to decreasing adjustments on your acquisition of development related goods and services?

Answer

You are entitled to such decreasing adjustments, provided that you backdate your GST registration to the time of the acquisitions.

Question 8

Do you need proof from a buyer of a villa that he/she is buying a property for private use or as an investment (to rent out) for GST purposes?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 January 2014

Relevant facts and circumstances

The partnership of X and Y (you) is not registered for GST.

In 20XX, X and Y purchased a house, which was rented from 20XX to 20XX.

In 20XX, X attained a licence as a registered builder and decided to demolish the existing house on the property, subdivide the land and build several villas, villa A, villa B and villa C.

When you were undertaking the demolition of the original house and construction of the three villas, you had not decided what you would do with the three villas, but you were intending to do one or more of the following things:

• sell a villa/villas

• rent out a villa/villas

• give away a villa/villas to one or more of your relatives to occupy as their home/allow your relatives to occupy one or more of the villas as their home.

Demolition commenced in 20XX and the subdivision and building of the villas was completed by 20XX.

At completion you placed all villas on the market for sale with the intention of selling one and keeping the remaining as rental purposes.

You sold villa A in 20XX. You will lease out villas B and C. After a period of leasing out villa B or C, you may give the villa to your relative to use as their home or allow them to occupy the villa as their home.

You do not know how long you will lease out villas B and C and whether you will lease out any of them for a continuous period of at least 5 years.

X and Y both have full time employment.

X and Y maintained their full time employment during the demolition of the original house and construction of the villas.

Although X has attained a registered builder's licence, X has continued to work for their employer for XX years.

This is the first property development activity X and Y have been involved in and after this activity; they do not have any plans for future developments.

Each villa would sell for over $75,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-20

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

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 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 Division 129

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Issue 1

Summary

While the activity is not considered to be a business of property development, it constitutes an adventure or concern in the nature of trade and is therefore considered an isolated commercial transaction conducted with a view to a profit.

As the activity was entered into, and any profits made, in the course of carrying out an isolated commercial transaction with a view to a profit, the proceeds will be assessable as ordinary income.

As the proceeds of the sale of villa A will be assessable as ordinary income, any capital gain or loss will be disregarded to the extent of any amount already included as ordinary assessable income.

Detailed reasoning

There are three ways profits from a land subdivision can be treated for taxation purposes:

1. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock.

2. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose.

3. As statutory income under the CGT legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Ordinary income

In your situation, the Commissioner is satisfied you are not carrying on a business of property development. The repetition, scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business.

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

TR 92/3 defines the term 'isolated transactions' as:

• transactions outside the ordinary course of business of a taxpayer carrying on a business; and

• transactions entered into by non-business taxpayers. 

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

• the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

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

d) the nature, scale and complexity of the operation or transaction

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

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

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

h) the timing of the transaction or the various steps in the transaction.

In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135 (Casimaty), the legal principles in relation to the subdivision of land were discussed at length. In concluding his judgment that the subdivision of the taxpayer was a mere realisation of a capital asset, Justice Ryan said, at 97 ATC 5152:

Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. [Emphasis added]

In addition to the above general factors, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

n there is a change of purpose for which the land is held;

n additional land is acquired to be added to the original parcel of land;

n the parcel of land is brought into account as a business asset;

n there is a coherent plan for the subdivision of the land;

n there is a business organisation - for example a manager, office and letterhead;

n borrowed funds financed the acquisition or subdivision;

n interest on money borrowed to defray subdivisional costs was claimed as a business expense;

n there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

n buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In your case, you acquired a property that you rented for approximately X years prior to the demolition, subdivision and construction of the villas.

In accordance with the direction provided in TR 92/3 and MT 2006/1 we consider that the activity amounts to more than the mere realisation of an asset to its best advantage. There is a coherent plan in place to carry out a sequence of actions that will result in a profit and there is a level of development of the land beyond that necessary to secure council approval for a subdivision and buildings have been erected on the subdivided land.

Having regards to your circumstances and the factors outlined above we find that the subdivision and construction of the dwellings will constitute an isolated profit-making scheme. Accordingly, your share of the profits from the disposal of villa A will be considered ordinary assessable income under section 6-5 of the ITAA 1997.

Capital gains tax

CGT is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1 (section 104-10 of the ITAA 1997), occurs when you dispose of your ownership interest in a CGT asset to another entity.

Under section 112-25 of the ITAA 1997, the subdivision of land does not result in a CGT event. As such, you are not making a capital gain or capital loss at the time of the subdivision. You make a capital gain or loss at the time you enter into the contract for the disposal of the subdivided land and villa A or when there is a change in ownership. Therefore you will not make a capital gain or loss on the two villas (villa B and villa C) you intend to keep and rent, until they are sold or the ownership interest changes. You will, however make a capital gain or loss on villa A at the time the contract for sale is entered into.

Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice.

Therefore, whilst CGT event A1 will occur due to the sale of the villa A, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997.

Issue 2

Question 1

Summary

Your development and sale of villa A is an adventure or concern in the nature of trade, which is an enterprise.

Your sale of villa A is a taxable supply because:

• you sold the villa for consideration

• you sold the villa in the course or furtherance of an enterprise that you carried on

• the sale of the villa is a supply connected with Australia as the villa is located in Australia

• you were required to be registered for GST at the time of sale, and

• the sale was not GST-free or input taxed.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply (for GST purposes) 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.

(*Denotes a term defined in the GST Act)

You meet the requirements of paragraph 9-5(a) and 9-5(c) of the GST Act. This is because:

• your sale of villa A was a supply made for consideration, and

• this supply was connected with Australia as the property is located in Australia.

You are not registered for GST.

There are no provisions of the GST Act under which your sale of villa A was GST-free.

Therefore, what remains to be determined is whether your sale of villa A was a supply you made in the course or furtherance of an enterprise that you carry on, whether you are required to be registered for GST and whether your sale of the villa was input taxed.

Enterprise

Enterprise includes:

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

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

• leasing out property on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act)

The Australian Taxation Office (ATO) considers that an adventure or concern in the nature of trade is a one-off or isolated commercial transaction.

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

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

Paragraphs 262 and 263 of MT 2006/1 reflect the view that a one-off or isolated real property transaction can be an enterprise. 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.)

In the example in paragraphs 273 to 275 to MT 2006/1, an individual purchased land; built a duplex on the land and sold one of the dwellings within the duplex and these activities were considered to be an enterprise because their intentions and activities had the appearance of a business deal.

Paragraphs 273 to 275 of MT 2006/1 state:

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

We consider that your property development activity was a one-off commercial deal to an extent as you erected villa A and sold it on completion, which is similar to a project that a commercial property developer would do. Therefore, you have carried on an adventure or concern in the nature of trade by developing villa A and selling it on completion. This project was on par with the circumstances in the example in paragraphs 273 to 275 of MT 2006/1 in terms of its commercial characteristics.

Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act as your sale of villa A was a supply made in the course or furtherance of an enterprise that you carried on.

GST registration

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold ($75,000).

In accordance with subsection 23-10(1) of the GST Act, an entity that is carrying on an enterprise is entitled to be registered for GST, regardless of their level of enterprise turnover.

You are carrying on an enterprise. Therefore, the requirement of paragraph 23-5(a) of the GST Act is met.

You sold villa A for over $75,000.

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.

In accordance with subsection 188-15(1) of the GST Act, an entity's current GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is 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 made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

(c) supplies that are not made in connection with an enterprise that the entity carries on.

In accordance with subsection 188-20(1) of the GST Act, an entity's projected GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is 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 made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

(c) supplies that are not made in connection with an enterprise that the entity carries on.

In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital asset is excluded from projected GST turnover.

Any supply made as a consequence of ceasing to carry on an enterprise is excluded from projected GST turnover by subparagraph 188-25(b)(i) of the GST Act.

Any supply made solely as a consequence of substantially and permanently reducing the size or scale of an enterprise is excluded from projected GST turnover by subparagraph 188-25(b)(ii) of the GST Act.

There are no exclusions from the GST turnover calculations that apply to you other than those mentioned above.

Input taxed supplies

Leasing out residential premises is input taxed under section 40-35 of the GST Act. Therefore, any rental income you earn from leasing out residential premises is excluded from your GST turnover calculations.

A sale of residential premises is input taxed under section 40-65 of the GST Act with the exception of:

• commercial residential premises (such as a hotel or motel), and

• new residential premises other than those used for residential accommodation before 2 December 1998.

Section 40-75 of the GST Act defines new residential premises. It states:

(1)*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

(b) have been created through *substantial renovations of a building, or

(c) have been built, or contain a building that has been built to replace

demolished premises the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

(2) However, the residential premises are not new residential premises if, for the

period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b) if paragraph (1)(b) applies - the premises were last substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a) of the GST Act.

A long-term lease means a supply by way of lease for at least 50 years if:

(a) at the time of the lease, it was reasonable to expect that it would continue for at least 50 years, and

(b) unless the supplier is an *Australian government agency - the terms of the lease, as they apply to the recipient are substantially the same as those under which the supplier held the premises.

Paragraph 90 of GSTR 2003/3 explains the 5 year rule in subsection 40-75(1) of the GST Act. It states:

90. Subsection 40-75(2) requires that for the period of at least 5 years the premises have been used only for making input taxed supplies under paragraph 40-35(1)(a). This requirement in subsection 40-75(2) is satisfied where the only supplies of the premises were by way of lease, hire or licence (i.e. residential rental) for any continuous period of at least 5 years between when the premises would otherwise have become new residential premises and when they are sold. See Example 8 at paragraphs 124 to 127.

Villa A is residential premises.

Villa A was new residential premises when you sold it because your sale of this villa was the first sale of the villa; it had not been subject to a long term lease and you did not lease it out for a continuous period of at least 5 years.

These new residential premises were not used for residential accommodation before 2 December 1998.

Therefore, your sale of villa A was not input taxed under section 40-65 of the GST Act

There are no other provisions of the GST Act under which your sale of villa A would be input taxed.

Sales of capital assets and supplies made solely as a consequence of ceasing to carry on an enterprise

Paragraph 258 of MT 2006/1 distinguishes between trading/revenue assets and capital/investment assets. This is relevant to determining whether an activity is an adventure or concern in the nature of trade. Paragraph 258 of MT 2006/1 states:

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.

Paragraphs 32 to 36 of GSTR 2001/7 also provide guidance on the meaning of trading assets and capital assets. They state:

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'.¹An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

You did not retain villa A to produce rental or other income or use it for private purposes. Therefore, your sale of that villa was not the sale of a capital asset.

Paragraphs 46 and 47 of GSTR 2001/7 provide guidance on the 'transfer solely as a consequence of ceasing to carry on an enterprise' exclusion. They state:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Your adventure or concern in the nature of trade enterprise ceased as a consequence of the disposal of villa A, rather than this asset being disposed of in consequence of the ceasing to carry on the enterprise.

None of the exclusions from GST turnover apply to your sale of villa A.

Therefore, as villa A sold for over $75,000, you meet the registration turnover threshold at that time (settlement date). Hence, you meet the requirement of paragraph 23-5(b) of the GST Act. As you met both requirements of section 23-5 of the GST Act, you were required to be registered for GST. Therefore, you meet the requirement of paragraph 9-5(d) of the GST Act.

As you meet all of the requirements of section 9-5 of the GST Act, GST was payable by you on the sale of villa A.

Question 2

Summary

GST will be payable on your sale of a remaining villa if:

• your final use of the villa is not your private or domestic use, and

• you are voluntarily registered for GST at that time, and

• you do not sell the villa with a lease intact as a GST-free supply of a going concern, and

• you do not lease out and/or grant a licence to occupy the villa for a continuous period of at least five years since completion of construction.

Otherwise, GST will not be payable on your sale of a remaining villa.

Detailed reasoning

Your sale of villas B and C would meet the requirements of paragraphs 9-5(a) and

9-5(c) of the GST Act. This is because:

• your sale of these villas would be supplies made for consideration, and

• the sale of the villas would be connected with Australia, as the villas are located in Australia.

You will be carrying on a leasing enterprise through villas B and C. Therefore, your sale of these villas will be supplies you make in the course or furtherance of a leasing enterprise (presuming that you do not do anything else with them other than lease them out and then sell them). Hence, you meet the requirement of paragraph 9-5(b) of the GST Act.

However, if you cease leasing out a villa and then use it for your private or domestic purposes, and then sell it, the sale will be the mere realisation of a private investment asset, and therefore, the sale would not be made in the course or furtherance of an enterprise under such circumstances. Hence, the requirement of paragraph 9-5(b) of the GST Act would not be met under such circumstances.

Your sale of these villas will be sales of capital assets as they would have been retained to produce leasing income. Therefore, the sales of these villas would be excluded from projected GST turnover.

Rental income from these villas or any other residential premises is excluded from the GST turnover calculations because leasing out residential premises is an input taxed supply.

As your GST turnover would be zero (based on the facts provided) when you sell villas B and C, you would not be required to be registered for GST at that time. Therefore, unless you choose to remain registered for GST at that time, you will not meet the requirement of paragraph 9-5(d) of the GST Act.

These villas are residential premises.

These villas are not commercial residential premises.

Villas B and C will be sold for the first time when you sell them.

The leases on villas B and C will not be long term leases because the terms of these leases as they apply to the lessee would not be substantially the same as those under which you hold the premises given that you hold the freehold interest in the properties and the lessees would only hold the leasehold interest.

Therefore, your sale of villas B and C will be sales of new residential premises unless you supply them by way of lease and/or licence for any continuous period of at least 5 years since the time of construction.

These villas have not been used for residential accommodation before 2 December 1998.

Therefore, your sale of these villas will not be input taxed under section 40-65 of the GST Act unless you supply them by way of lease and/or licence for any continuous period of at least 5 years since the time of construction.

If you sell a property that you have leased out and you transfer your interest in the lease to the purchaser, you will make a GST-free supply of a going concern under section 38-385 of the GST Act provided that:

• the purchaser is registered or required to be registered for GST, and

• you and the purchaser agree in writing that the sale of the property is the

supply of a going concern.

If the sale of a villa would otherwise be input taxed and GST-free, the GST-free status will override the input taxed status.

In summary, GST will be payable on your sale of a remaining villa if:

• your final use of the villa is not your private or domestic use, and

• you are voluntarily registered for GST at that time, and

• you do not sell the villa with a lease intact as a GST-free supply of a going concern, and

• you do not lease out and/or grant a licence to occupy the villa for a continuous period of at least five years since completion of construction.

Otherwise, GST will not be payable on your sale of a remaining villa.

Question 3

GST is not payable on the rental income because leasing out villas is an input taxed supply of residential premises under section 40-35 of the GST Act.

Question 4

Summary

You are not entitled to input tax credits for development related goods and services because you did not, at those times, have a definite intention to carry on an enterprise.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition if you meet the requirements of section 11-5 of the GST Act, which 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 for GST.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, subsection 11-15(2) of the GST Act provides that you do not acquire a thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

Paragraph 49 of Goods and Services Tax Ruling GSTR 2008/1 states:

49. An entity is often required to determine the extent to which an acquisition is for a creditable purpose, based on the entity's intended use of the acquisition.

Paragraphs 228 to 290 of MT 2006/1 provide an example of a property deal that is considered to be a private or domestic arrangement rather than a commercial deal. They state:

288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live.

289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house.

290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter.

You did not acquire the development related items for a creditable purpose because before you had completed construction you had not formed an intention to sell them or lease them out on completion and were considering possibly giving away the villas to your relatives on completion as one of three options. If you have given away the villas to your relatives on completion, the development of, and transfer of titles to, the villas, would have been a private arrangement, rather than an enterprise, because the arrangement would have lacked a commercial flavour and you would not have earned rental income. You did not make the acquisitions in carrying on an enterprise.

As you did not make the acquisitions for a creditable purpose, you do not meet the requirement of paragraph of paragraph 11-5(a) of the GST Act.

Where the supplies made to you were taxable supplies, you meet the requirement of paragraph 11-5(b) of the GST Act.

You provided consideration for the supply of the development related items that you purchased. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act

If your GST registration is backdated to the time you made a development related acquisition, you would meet the requirement of paragraph 11-5(d) of the GST Act in respect of the relevant acquisition.

As you did not acquire the development related items for a creditable purpose, you are not entitled to input tax credits in respect of these acquisitions. However, you are entitled to decreasing adjustments if you backdate your GST registration to the time of the acquisitions. See further information on decreasing adjustments below.

Question 5

If:

• the supplies made to you in respect of expenses in selling villa A are subject to GST, and

• you were required to be registered for GST when you incurred these expenses or your GST registration is backdated to that time,

you will meet the requirements of section 11-5 of the GST Act. Therefore, under such circumstances, you would be entitled to input tax credits in respect of the associated acquisitions.

Question 6

If:

• the supplies made to you in respect of expenses in selling these villas are taxable supplies, and

• you are registered for GST when you incur these expenses, and

• your sales of these villas are not input taxed, and

• your final use of these villas is not your private or domestic use,

you will meet the requirements of section 11-5 of the GST Act.

Therefore, under such circumstances, you would be entitled to input tax credits in respect of the associated acquisitions.

Otherwise, you will not be entitled to input tax credits.

(An acquisition of selling services etc. in connection with an input taxed sale of residential premises is an acquisition that relates to making a supply that is input taxed. Therefore, such an acquisition is not made for a creditable purpose.)

Question 7

In accordance with Division 129 of the GST Act, because you did not acquire the development related goods and services for a creditable purpose, but you have applied these items partly for a creditable purpose (to the extent that they relate to the villa that has been sold) you are entitled to decreasing adjustments, provided that you voluntarily backdate your GST registration to the time of these acquisitions.

However, you do not have decreasing adjustments for expenses that had a GST exclusive value of $1,000 or less.

Decreasing adjustments are reported as a positive amount at label 1B of a BAS (which is also the input tax credit label).

The initial decreasing adjustments can be calculated as follows:

GST component of expense multiplied by 1/3rd (providing that each villa was of equivalent value)

These initial adjustments should be reported in your April to June 2015 quarter BAS.

You may have further decreasing adjustments if and when you sell the remaining two villas. This will depend on when you sell these villas and whether you lease them out for any continuous period of at least 5 years. Such further decreasing adjustments, if any, would be claimed after you sell these remaining villas. You could seek further advice from the ATO on whether you have such further decreasing adjustments once you have sold these remaining villas.

Leasing out the villas does not generate an entitlement to a decreasing adjustment because leasing out residential premises is a non-creditable application of the development related items acquired.

For detailed guidance on Division 129 adjustments, see Goods and Services Tax Ruling GSTR 2000/24. Type in GSTR 2000/24 into an internet search engine.

Question 8

The intended use of villas by the entities you sell them to is not relevant for any GST purposes. You don't need proof of the buyer's intended use of a villa for any purposes under the GST Act.

Note that the buyer's intended use does not affect whether your sale of a villa is subject to GST.

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