Edited version of your written advice

Authorisation Number: 1012832775969

Date of advice: 6 July 2015

Ruling

Subject: GST - new residential premises

Does goods and services tax (GST) apply to the supply of the residential premises to your shareholders?

Answer

Yes.

Relevant facts and circumstances

You (the company) will carry out a building project (the project) which consists of the purchase of land and the construction and sale of a number of units.

You are not registered for GST.

The scope of the project and company arrangements is detailed in correspondence relevant to the parties.

As part of the arrangement you will issue shares that contain certain rights. Shares will be redeemed at the end of the project and subject to all conditions being met; shareholders will take ownership over their respective units. The funds raised by the issue of shares will be used by you to secure the purchase of the land and the balance will be used to obtain all necessary approvals for the project.

There are no separate agreements other than the rights and obligations of the respective parties as set out in this correspondence.

Once the properties are transferred to the relevant shareholders, they will own the title and the company will be deregistered with the Australian Securities and Investments Commission.

All properties will be transferred to shareholders at completion and not to any third parties.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(d)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

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 section 188-10

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

Income Tax Assessment Act 1936 section 318

Reasons for decision

In this ruling, please note:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all terms marked by an *asterisk are defined terms in the GST Act

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

You must pay the GST payable on any taxable supply that you make.

Taxable supply

Section 9-5 provides that 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 the indirect tax zone, and

(d) you are *registered for GST, or *required to be registered.

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

Paragraph 9-10(2)(d) provides that a supply includes a grant, assignment or surrender of *real property.

Real property is defined in section 195-1 as including:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any contractual right exercisable over or in relation to land.

You will carry out a building project (the Project) which consists of the construction and sale of a multiple unit development. You will issue shares that contain certain rights which will be redeemed at the end of the project and subject to all conditions being met; shareholders will take ownership over their respective units.

It is considered that the transfer the title of the unit to the shareholders is a supply is made by you under paragraph 9-10(2)(d).

In your case, when you transfer the properties in question, you will make a supply which is connected with the indirect tax zone (Australia) for consideration which satisfies paragraphs 9-5(a) and (c). Further, the supply will not be GST free.

We will consider whether the requirements of paragraph 9-5(b) and (d) are met.

Enterprise

Paragraph 9-5(b) requires that the supply is made in the course of an enterprise that you carry on.

Subsection 9-20(1) provides that an enterprise includes 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 Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of carrying on an enterprise. Goods and Services Tax Determination 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'.

• a business encompasses trade engaged on a regular basis.

• an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income further discusses factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction including the:

• nature of the entity undertaking the operation or transaction

• nature and scale of other activities undertaken by the taxpayer

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

• nature, scale and complexity of the operation or transaction;

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

• 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 - for example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn; and

• 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.

In your case, you acquired land for the purposes of building multiple residential premises to supply to your shareholders, subject to certain conditions being met. Upon completion of the Project you will be wound up.

The manner in which the operations are entered into indicates that the transactions are commercial in nature. You were established to facilitate the building project and you entered into an agreement with shareholders. You used the funds raised by the issue of shares to secure the purchase of the land and will use the balance of funds raised to obtain all necessary approvals for the project.

On balance, and considering all relevant factors, we consider the factors support the view that your supplies of the units to the shareholders are of a commercial nature. It is considered that you are conducting an enterprise of land development for resale. Therefore, your activities constitute 'the carrying on of an enterprise' for the purposes of section 9-20. Accordingly, the supply is made in the course or furtherance of an enterprise that you carry on as required under paragraph 9-5(b).

Prior to considering whether you are required to be registered for GST we will consider whether the supplies of the units will be input taxed. Input taxed supplies are excluded from the GST turnover thresholds so this will impact on the decision to be made in relation to your requirement to be registered.

Input Taxed

Section 40-65 provides a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

However, subsection 40-65(2) provides the sale is not input taxed to the extent that the residential premises are new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term 'residential premises' is defined in section 195-1 as land or a building that is occupied as a residence or for residential accommodation (regardless of the term of the occupation).

On completion, the units will satisfy the definition of residential premises for the purposes of section 195-1.

Section 40-75 relevantly provides that residential premises are new residential premises if they have not been previously sold as residential premises, and have not previously been subject of a long term lease.

In your case, you issue shares that contain certain rights. Shares will be redeemed at completion of the Project upon payment of the designated lot price less their initial subscription.

Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? provides advice in relation to company title arrangements where residential premises are supplied.

Relevantly paragraphs 47 to 48 provide advice on the supply of the residential premises to shareholders.

47. Where the company is the first owner of the building, the supply of the residential units by the company to the individual shareholders is a supply of new residential premises under paragraph 40-75(1)(a) as they have not previously been sold. It is only shares in the company that have previously been sold. The supply of the units may be a taxable supply by the company.

48. However, where the residential units have been used for residential accommodation before 2 December 1998 (paragraph 40-65(2)(b)), the transfer of the newly strata titled units by the company to the shareholders is not a taxable supply, provided paragraphs 40-75(1)(b) or (c) do not apply.

It is considered that the supply of residential units by you to the individual shareholders is a supply of new residential premises under paragraph 40-75(1)(a) as they have not previously been sold.

Accordingly, the transfer of the units by you to the relevant shareholders is not an input taxed supply but a supply of new residential premises. Note: any subsequent sale by the new owner will not be sale of new residential premises under paragraph 40-75(1)(a).

Registration

Section 23-5 states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

In your case we consider your activities amounted to an enterprise and therefore we need to consider whether your GST turnover meets the registration turnover threshold.

The registration turnover threshold is $75,000.

Section 188-10 is relevant for working out whether your GST turnover 'meets, or does not exceed', a turnover threshold.

Whether you have a GST turnover that meets or does exceed a particular turnover threshold depends on an objective assessment of your projected GST turnover and your current GST turnover.

Your current and projected GST turnover is expected to be above the $75,000 threshold.

Upon completion of the project in 20XX you will redeem the shares by transferring ownership of the units provided certain conditions are met.

It is on this basis, you are required to be registered for GST.

Conclusion

As we have concluded that your activities amount to an enterprise and that you are required to be registered for GST, all the requirements of section 9-5 are satisfied. Therefore, you will make taxable supplies when you supply the units to your shareholders.

Accordingly, GST will apply to the supply of the residential premises from you to the shareholders.

Other matters for consideration

Where an entity makes a supply to an associate for no consideration, this does not, under section 72-5, stop the supply being a taxable supply if the:

• associate is not registered or required to be registered, or

• the associate acquires the thing supplied otherwise than solely for a creditable purpose.

The term associate is defined in section 318 of the Income Tax Assessment Act 1936 to include an entity that holds a majority voting interest in a company, as an associate of that company.

Further, section 72-70 may apply if the associate is not registered for GST and consideration for the supply is less than the GST inclusive market value. Where section 72-70 applies, the value for the taxable supply will be the GST exclusive market value.

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