Edited version of your written advice

Authorisation Number: 1013114469127

Date of advice: 4 November 2016

Ruling

Subject: Whether GST is payable on the sale of X properties

Question 1

Is GST payable on the sale by you of X real properties located in a state of Australia?

Answer

Yes, GST is payable on the sale of Property B however GST is not payable on the sale of Property A.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for an Australian Business Number (ABN) with Australian and New Zealand Standard Industrial Classification (ANZSIC) code '6711 - Residential Property Operators'.

You are registered for GST.

On Date A you purchased real property which was a house located in a state of Australia (property or Property A).

The property was:

● Renovated from Date B to Date C.

● Total cost about $X.

● Main costs were replacing a kitchen and air-conditioner; painting; general maintenance; and electrical and plumbing costs.

● Rented out from Date D to Date E.

● A planning permit to subdivide the property was issued on Date F with part of the property becoming the subdivided property (Property B).

● Vacant from Date F to Date G.

● Renovated from Date H to Date I.

● Total cost about $Y.

● Major costs were a carport; fence; replacement of water heater, dishwasher, oven and cooktop; and additional storage. 

● Rented out from Date J to Date K.

● Sold on date L.

A building was built on the subdivided property (Property B) between Date M and Date N. The subdivided property was sold on date O.

The contracts of sale for both the property and the subdivided property state that:

● the sale was not the sale of a farming business or going concern; and

● at settlement the purchaser was entitled to vacant possession.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) 1999 Act (GST Act)

● Division 75

● Section 9-20

● Section 9-25

● Section 9-40

● Section 9-70

● Section 9-75

● Section 11-5

● Section 11-15

● Section 11-20

● Section 40-65

● Section 40-75

● Section 195-1

Further issues for you to consider

Section 11-20 of the GST Act provides that you are entitled to the input tax credits (also known as GST credits) for any creditable acquisition you make.

Under sections 11-5 and 11-15 of the GST Act, you do not make a creditable acquisition to the extent that the acquisition relates to making supplies that would be input taxed.

You are not entitled to any input tax credits for acquisitions related to the property because the property was used for making input taxed supplies of:

● residential rent under section 40-35 of the GST Act, and

● residential premises under section 40-65 of the GST Act

You may be entitled to input tax credits for acquisitions related to the subdivided property.

Under sections 9-70 and 9-75 of the GST Act you are required to pay GST of 1/11th of the price of a taxable supply.

You may need to consider whether you are eligible to calculate the GST payable on the sale of the subdivided property under the margin scheme in Division 75 of the GST Act.

Reasons for decision

Summary

Under section 9-40 of the GST Act, you must pay GST on any taxable supply that you make.

The sales of the property and the subdivided property were for consideration, connected with the indirect tax zone and you are registered for GST at the relevant times.

You were carrying on an enterprise of leasing property when you rented the property and the sale was in the course of that enterprise.

You were carrying on an enterprise of property development when you subdivided the property, built a town house on the subdivided property and sold the subdivided property.

The property and the subdivided property are both residential premises.

Under section 40-65 of the GST Act, a sale of residential premises is input taxed but an exception is new residential premises other than those used for residential accommodation before 2 December 1998.

You purchased the property, including the house currently on it. The house has been renovated but these were not substantial renovations and do not satisfy the requirements of paragraph 40-75(1)(b) of the GST Act and, as such, the property is not new residential premises.

The sale of the property is not a taxable supply under section 9-5 of the GST Act because it is an input taxed supply of residential premises under section 40-65 of the GST Act. GST is not payable.

The subdivided property is new residential premises under section 40-75 of the GST Act. Its sale is a taxable supply under section 9-5 of the GST Act. GST is payable.

Detailed reasoning

Section 9-40 of the GST Act provides that:

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

Section 9-5 of the GST Act 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, or required to be registered.

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

You sold the property and the subdivided property so both supplies were made for consideration.

Enterprise will be considered below.

The property and the subdivided property are in a state of Australia so they are connected with the indirect tax zone under subsection 9-25(4) of the GST Act.

You were registered for GST at the relevant times.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include 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 …

You rented out the property from Date D to Date E and again from Date J to Date K. Leasing property on a regular or continuous basis satisfies paragraph 9-20(1)(c) of the GST Act so you were carrying on an enterprise of leasing property. Selling the property was the disposal of an asset in the course of your enterprise of leasing property.

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 in paragraphs 262 to 302 considers isolated transactions and sales of real property. Paragraphs 262 to 263 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.)

After the subdivision of the property a building was erected on the subdivided property which was then sold. This is more than the mere realisation of an asset and satisfies paragraph 9-20(1)(b) of the GST Act and is considered to be a subdivision of land that is an enterprise of property development similar to Example 31 in paragraphs 284 to 287 of MT 2006/1. The sale of the subdivided property was in the course of your property development enterprise.

The requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act have been satisfied so the sales of the property and subdivided property will each be a taxable supply unless some provision makes the supply GST-free or input taxed.

One the basis of the information you have provided, the sales of the property and the subdivided property were not the GST-free supply of a going concern under section 38-325 of the GST Act.

The sales were not GST-free under another provision.

The property and the subdivided property satisfy the definition of 'residential premises' in section 195-1 of the GST Act.

Subsection 40-65(1) of the GST Act provides that:

A sale of residential property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential occupation (regardless of the term of occupation).

Subsection 40-65(2) of the GST Act makes an exception and states in part that “the sale is not input taxed to the extent the residential premises are ….. new residential premises….”.

Subsection 40-75(1) of the GST Act states in part

(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 …

You purchased the property with the existing house on it so the property does not satisfy the requirements of paragraph 40-75(1)(a) of the GST Act.

You renovated the property twice. 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? in paragraphs 53 to 83 and the various examples in paragraphs 99 to 140 provides guidance on when new residential premises are created through substantial renovations. On the basis of the information you have provided, the renovations were not 'substantial renovations' as defined in Section 195-1 of the GST Act and the property does not satisfy the requirements of paragraph 40-75(1)(b) of the GST Act.

The property is not new residential premises under section 40-75 of the GST Act.

The sale of the property was not a taxable supply under section 9-5 of the GST Act because the supply was input taxed as the sale of residential premises under section 40-65 of the GST Act. No GST is payable on the sale of the property.

You built a town house on the subdivided property and then sold it, so the subdivided property satisfies the requirements of paragraph 40-75(1)(a) of the GST Act and was new residential premises when you sold it. It had not ceased to be 'new residential premises' under subsection 40-75(2) of the GST Act as it had not been rented out for a period of at least five years.

The sale of the subdivided property was a taxable supply as it satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act and the supply was not GST-free or input taxed. GST is payable on the sale of the subdivided property.

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