Edited version of your written advice

Authorisation Number: 1013041991869

Date of advice: 1 July 2016

Ruling

Subject: GST and property development

Question

Will you be carrying on an enterprise and required to be registered for goods and services tax (GST) in relation to the proposed property development at X (the Property)?

Answer

Yes. You will be carrying on an enterprise and required to be registered for GST in relation to the proposed Property development.

Relevant facts and circumstances

You are an individual and not registered for GST.

You entered a contract to purchase the Property. Your intention when you purchased the Property was to reside in the dwelling (the House) located on the Property as your primary principal residence.

The House was rented out. Then you moved into the House and you have continued to reside there until the present time. The House needs major repairs to restore it to a functional level. Rather than paying the amount required to undertake the repairs, you have decided to build a new house.

You have decided to demolish the existing House, subdivide the Property into two lots, sell one lot with an off the plan townhouse (Sale Townhouse) and use the proceeds from the sale of the Sale Townhouse to fund the building costs of a townhouse on the other subdivided lot which will be your main residence.

You contacted a builder for a quotation for the demolition of the House and the construction of two townhouses (the Project).

The builder provided a sales quotation for the Project. The estimated market value of the Property with the planning permit is $XXX.

It is estimated that the sale price of the Sale Townhouse will be $YYY

A planning permit application was lodged with the Council, who issued a planning permit approving the construction of two dwellings on the Property.

You have not lodged an application for the subdivision of the Property.

You will not personally undertake any activities in relation to the demolition, and construction of the two townhouses.

You have not undertaken any activities or a similar nature in the past and do not intend to undertake any similar activities in the future.

You will have to obtain finance for the project. You are contemplating borrowing approximately $ZZZ from a bank to supplement the cash amount you are able to pay.

The following will occur:

● An application for the subdivision of the Property will be lodged and the Property will be subdivided into two lots

● You will engage the services of the builder who will demolish the House and construct the two townhouses in accordance with the sales quotation

● You will engage the services of a real estate agent to sell one of the subdivided lots and an off the plan townhouse

● You keep the other subdivided lot on which the second townhouse will be constructed, which will be your main residence, and

● The two townhouses will be constructed in accordance with the planning permit issued by the Council.

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 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 188-15

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

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

Reasons for decision

GST is payable on ‘taxable supplies’, which are defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The elements of taxable supply are:

(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 an indirect tax zone, and

(d) you are registered or required to be registered.

In the context of the subdivision and sale of real property, (a) will be satisfied as the sale is for consideration, and (c) will be satisfied as the supply of real property located in an indirect tax zone. The relevant questions are therefore whether (b) and (d) are satisfied.

There will not be a taxable supply if the supply is input taxed or GST-free however these will not apply in your stated circumstances.

Enterprise

Section 195-1 relevantly states that:

(a) carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

(b) enterprise has the meaning given by section 9-20.

Section 9-20 of the GST Act relevantly states:

‘An enterprise is an activity, or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

d) …’

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 provides guidance on the meaning of 'an entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 provides that the principles in MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

You do not carrying on a business of developing residential properties. Although you have not previously been engaged in property development activities, it is necessary to consider whether your activities in demolishing the existing residential property, subdividing the land and building two new residential properties for your residence and sale respectively amounts to an enterprise.

Isolated transactions and sales of real property

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 -266 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' 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...

Paragraph 264-269 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation 105 (Statham) and Casimaty v. FC of T 106 (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade…. If several of these 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 follow:

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

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

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

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

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

● borrowed funds financed the acquisition or subdivision;

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

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

● buildings have been erected on the land.

266. 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...

The following example from MT 2006/1 explains further the ATO view in relation to isolated transactions and sales of real property. Example 29 states:

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.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

Example 29 is similar to your circumstances whereby your development is an isolated one and it involves the selling of a portion to finance the construction of residential premises to be lived in by the developer.

Applying the criteria in paragraph 265 above to your circumstances:

● there will be a change of purpose for which the land is held from residential premises to two residential premises to be used as your principal place of residence and to be sold respectively,

● there is a coherent plan for the subdivision of the land,

● finance will have to be obtained to pay for the construction of the two units

● there will be a level of development of the land beyond that necessary to secure council approval for the subdivision; and

● buildings will have been erected on the land.

Furthermore, as your intention is to use the profit from Sale Townhouse to fund the costs of building new residential premises for your principal residence, you have a profit making motive.

Paragraph 237 of MT 2006/1 explains that 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'.

We consider there is a reasonable expectation of profit as your plan will enable you to live in a newly constructing house instead of having to repair the existing building.

The activity of constructing and selling the Sale Townhouse is not the mere realisation of a private/capital asset but an adventure or concern in the nature of trade and the carrying on of an enterprise of property development for the purposes of section 9-20 of the GST Act.

Annual Turnover Threshold

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000.

If you are not registered for GST at the time you sell the Sale Townhouse, you will be liable for GST on the sale if you are required to be registered for GST. You will only be required to be registered for GST if your annual turnover exceeds $75,000.

To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 months period covers the period of the current month and the preceding 11 months, known as your current annual turnover, and the current month and the following 11 months, known as your projected annual turnover.

However, under sections 188-15 and 188-20 of the GST Act input taxed supplies are excluded from calculation of both your current GST turnover and your projected GST turnover respectively. Under section 188-25 of the GST Act supplies made by way of transfer of ownership of a capital asset and supplies made in relation to ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise are also disregarded in the calculation of your projected GST turnover.

Section 40-65 of the GST Act provides that supplies of residential premises are input taxed supplies. However, the supply of new residential premises is excluded from being an input taxed supply.

The proposed Sale Townhouse will be regarded as new residential premises according to section 40-75 of the GST Act because it will not have previously been sold as residential premises/been created through substantial renovations/been built to replace demolished premises on the same land and not been lived in for a period of five years since it first became residential premises. Thus you will supply new residential premises when you sell the Sale Townhouse in the course of carrying on your enterprise.

Although you were not engaged in property development activities in the past, the nature of your activities in developing the property and in selling the Sale Townhouse clearly indicate that it will be an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

As the sale of the Sale Townhouse will not be an input taxed supply or GST-free, any consideration received for it will be included in the calculation of both your current GST turnover and your projected GST turnover for your enterprise. You estimate that the consideration which you will receive for this new residential unit will be in excess of $75,000 therefore your GST turnover will meet the registration turnover threshold.

As a consequence you will be required to register for GST for this development.

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