Edited version of your written advice

Authorisation Number: 1013084054169

Date of advice: 2 September 2016

Ruling

Subject: Goods and services tax and sale of assets in leasing enterprise

Questions

1. Will the profit from the sale of the units located at the property by you to third parties assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the sale a taxable supply?

Answers

1. No, the profit from the sale is not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Capital gains tax events (CGT) CGT A1 occur in accordance with section 104-10 of the ITAA 1997 when the properties were sold.

2. No, the sale is not a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The supply is the sale of capital assets in your leasing enterprise and the sale proceeds are excluded from the projected turnover calculations under section 188-25 of the GST Act. Since your GST turnover is less than $75,000, you are not required to be registered for GST.

You are not liable to remit GST on the sale of the properties.

Relevant facts and circumstances

You bought vacant land and built the units with the intention for lease.

You submitted written evidence of your intention to lease the units. These are written communications dated before and at the time of the purchase of the land between you and relevant independent third parties/stakeholders (including financial institutions in support of your loan applications).

You also submitted written evidence of the change of financial circumstances which forced you to sell the properties as soon as the building project finished.

Assumption

You submitted that you were not undertaking a profit making scheme (or an adventure in the nature of trade) of developing land for resale. Your purpose, upon acquisition of the land, was for the construction and letting of the units with a view to holding as an investment. You have never had an intention of building the units for sale upon acquisition of the vacant land.

Please note that it is necessary to make assumptions based on the available facts. The private ruling system does not provide for the ATO to answer questions of fact, only matters involved in the application of provisions of the law. The facts above and objective evidence we have been provided do not conclusively identify your intention. As your intention is a relevant, material fact that is not substantiated, we have included the above intention as an assumption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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

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

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

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

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

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 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

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

Reasons for decision

Income tax issue:

Legislative references referred to herein are from the ITAA 1997.

The proceeds from the sale of the units are not ordinary income and not assessable under section 6-5. The proceeds represent a mere realisation of capital assets which will fall for consideration under the capital gains tax provisions in Part 3-1.

Capital gains tax

The capital gains tax (CGT) provisions are contained in Part 3-1. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose of your ownership interest a CGT asset. The time of the event is either when you enter into a contract for the disposal, or when the change of ownership occurs if there is no contract.

You will make a capital gain if the capital proceeds from the disposal of a CGT asset are more than the cost base of the CGT asset. You will make a capital loss of those capital proceeds are less than the reduced cost base of the CGT asset. 

Application to your situation

In this case, CGT event A1 occurred on the dates when you entered into each of the contracts to dispose of each of the units. Any capital gain or capital loss made on the disposal of the units will be calculated under the general CGT provisions.

Indirect Tax issues:

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act 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 defined term under section 195-1 of the GST Act)

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration, and the units are located in Australia.

Therefore, we need to consider whether your sale of the units is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Whether the sale of the property is in the course of an enterprise that you carry on

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) 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, license or other grant of an interest in property.

Based on the information provided, we do not consider that you are carrying on a business of property development - paragraph 9-20(a) of the GST Act does not apply.

Based on available facts and the assumptions, the profit making intention has not been proven in your case and the sale of the units was not made in an enterprise of property development. Paragraph 9-20 (b) of the GST Act does not apply.

Although you are not undertaking an adventure or concern in the nature of trade and the activities are not a profit making undertaking or scheme, your activities would still amount to an enterprise for GST under paragraph 9-20 (c) of the GST Act, because the units were constructed for a leasing enterprise.

Although the units were never leased before the sale, you submit evidence of the intention to build the units for lease. These are written communications dated before and at the time of the purchase of the land between you and relevant independent third parties/stakeholders (including financial institutions in support of your loan applications).

You also submitted written evidence of the change of financial circumstances which forced you to sell the properties as soon as the building project finished.

We consider that an enterprise of leasing is capable of commencing prior to the date at which leasing could actually begin. While your intention changed prior to any leasing activity occurring (and thus termination of the enterprise began when you sold the units) we consider that the change in intention is a peculiarity within the facts and circumstances of this ruling.

Based on available facts and the assumptions, you are considered to be carrying on an enterprise of leasing residential premises as defined in section 9-20 of the GST Act, and the sale of the units is made in the course of carrying on or termination of that enterprise for GST purposes. The requirement in paragraph 9-5(b) of the GST Act is satisfied.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (of $75,000 for a business or $150,000 for non-profit). In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Based on the information provided, you are not registered for GST and the sale of the units would be excluded from the calculation of your GST turnover because it will be a transfer of capital assets. Therefore, as you are neither registered nor required to be registered for GST and the requirement in paragraph 9-5(d) of the GST Act is not satisfied.

Your sale of the units does not satisfy all the requirements of a taxable supply under section 9-5 of the GST Act and is not subject to GST. There is no need to consider further whether the supply is GST-free or input taxed. Consequently, GST will not be payable on the sale of the units.

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