Edited version of your written advice

Authorisation Number: 1051197072482

Date of advice: 10 March 2017

Ruling

Subject: Proposed acquisition, development and sale of property

Question 1

If the Taxpayer acquires the Property, engages a builder to erect a dwelling and then sells the developed Property will the Taxpayer be carrying on an enterprise within the meaning of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

If the Taxpayer acquires the Property, engages a builder to erect a dwelling and then sells the developed Property, will the Taxpayer be required to register for GST?

Answer

Yes.

Question 3

If the Taxpayer acquires the Property, engages a builder to erect a dwelling and then sells the developed Property, will the Taxpayer be required to account for GST in respect of the sale of the developed Property?

Answer

Yes.

Relevant facts and circumstances

The Taxpayer is not registered for GST. The Taxpayer’s adviser confirmed that the Taxpayer is not currently making any supplies.

The Taxpayer intends to purchase the Property (a parcel of land) for approximately $[ ]. The Taxpayer has obtained an estimate from a builder of between $[ ] and $[ ] to erect a dwelling on the Property. Construction of the dwelling will take approximately three months and it is likely that the Taxpayer will offer the developed Property for sale.

Relevant legislative provisions

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 Division 188

Reasons for decision

Question 1

Summary

The Taxpayer will be carrying on an enterprise as defined in paragraph 9-20(1)(b) of the GST Act, i.e. a series of activities done in the form of an adventure or concern in the nature of trade.

Detailed reasoning

Enterprise:

Section 9-20 of the GST Act provides that 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…

Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of ‘entity carrying on an enterprise’ for the purposes of entitlement to an Australian Business Number (ABN), however paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 states that the principles set out in MT 2006/1 apply equally to the term ‘enterprise’ as it appears in the GST Act.

Adventure or concern in the nature of trade:

‘An adventure or concern in the nature of trade’ is not defined in either the GST Act or the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Paragraph 234 of MT2006/1 states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraphs 246 to 261 of MT 2006/1 discuss the badges of trade. Paragraph 247 refers to the subject-matter of realisation (i.e. the form and quantity of property acquired) and provides that if the property acquired provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. Another badge of trade is the length of period of ownership and paragraph 249 of MT 2006/1 states that a trading asset is generally traded within a short time after acquisition. A further badge of trade is motive and paragraph 254 of MT 2006/1 provides that an intention to sell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Activity, or series of activities:

The ‘enterprise’ definition refers to ‘an activity, or series of activities, done…’. Paragraph 153 of MT 2006/1 provides that an activity is essentially an act or series of acts that an entity (defined in subsection 184-1(1) of the GST Act to include an individual) does. Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity, or a series of activities, that amount to an enterprise. Example 15 in MT 2006/1 sets out the activities usually associated with the sale of real property:

Example 15 - activities associated with the sale of real property

161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise?

162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included:

n assessing the economic viability of the project ;

n purchasing the land ;

n engaging an architect ;

n constructing a block of units on the land ;

n engaging a real estate agent and auctioneer ; and

n arranging for the sale of the units at auction.

163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise.

Example 15 indicates that where, as in the present case, the Taxpayer will engage third parties (e.g. a builder and a real estate agent) to undertake activities, the Taxpayer is nevertheless doing those activities. We therefore consider that, for the purpose of determining whether the Taxpayer is carrying on an enterprise, the Taxpayer is taken to carry out the erection of the dwelling on the Property and the sale of the developed Property.

Isolated property transactions:

Paragraphs 262 to 302 of MT 2006/1 discuss whether an entity is either carrying on an enterprise (i.e. either in the form of a business or in the form of an adventure in the nature of trade) or merely realising a capital asset where there is a ‘one off’ property transaction.

Paragraph 264 of MT 2006/1 provides that two Federal Court decisions, Statham & Another v FCT 89 ATC 4070 (Statham) and Casimaty v FCT 97 ATC 5135 (Casimaty) provide guidance on when the subdivision and sale of land amounts to either a business or a profit-making undertaking or scheme. Paragraph 265 provides that if several of the following factors are present in relation to an isolated property transaction it may be an indication that a business or adventure in the nature of trade is being carried on:

● 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.

However it is not necessary to address those factors in detail as isolated transactions are also discussed in Goods and Services Tax Ruling GSTR 2001/7 and paragraph 46 of GSTR 2001/7 confirms that an isolated transaction comprising the acquisition and development of a property for resale is a series of activities done in the form of an adventure or concern in the nature of trade and therefore falls within paragraph 9-20(1)(b) of the ‘enterprise’ definition in the GST Act:

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.

We therefore consider that the Taxpayer will be carrying on an enterprise in relation to the acquisition, development and sale of the Property

Question 2

Summary

As the Taxpayer’s projected GST turnover will be at or above the registration turnover threshold and the exclusion from calculation of projected GST turnover for any supply by way of transfer of ownership of a capital asset will not apply, the Taxpayer will be required to register for GST.

Detailed reasoning

Registration for GST:

Section 23-5 of the GST Act provides that an entity (you) are required to be registered for GST if:

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

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

For the reasons set out in Question 1 we consider that the Taxpayer is carrying on another enterprise in relation to the acquisition, development and sale of the Property.

Regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 provides that the registration turnover threshold (other than for non-profit bodies) in $75,000.

Section 195-1 of the GST Act provides that, in relation to meeting a turnover threshold, ‘GST turnover’ has the meaning given by subsection 188-10(1) of the GST Act. Subsection 188-10(1) 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.

Subsection 188-10(3) defines ‘turnover threshold’ to include the registration turnover threshold.

Current GST turnover at or above the registration turnover threshold:

The test in paragraph 188-10(1)(a) is in two parts. The first part is whether the Taxpayer has a current GST turnover which is at or above the registration turnover threshold.

Section 188-15 deals with the calculation of current GST turnover. Subsection 188-15(1) states:

(1) Your current GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are 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 for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

In the present case the Taxpayer’s adviser confirmed that the Taxpayer currently does not make any supplies. We therefore consider that the Taxpayer does not have a current GST turnover that is at or above the registration turnover threshold, that the first part of the test in paragraph 188-10(1)(a) of the GST Act is not satisfied and that the Taxpayer is not required to register for GST under the test in paragraph 188-10(1)(a).

Projected GST turnover:

The test in paragraph 188-10(1)(b) of the GST Act is whether the Taxpayer’s projected turnover is at or above the turnover threshold. Subsection 188-20(1) defines projected GST turnover:

(1) Your projected GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are 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 for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Section 188-25 requires a number of supplies to be disregarded in working out the Taxpayer’s projected GST turnover. In particular paragraph 188-25(a) states:

In working out your *projected annual turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours;…

Paragraph 37 of GSTR 2001/7 provides that ‘transfer of ownership’ means the transfer of the whole of the beneficial interest in the capital asset with or without legal title. There will be a transfer of ownership of the Property when the Taxpayer sells the developed Property to a purchaser.

The GST Act does not define ‘capital asset’. Paragraph 31 of GSTR 2001/7 provides that ‘capital assets’ refers to those assets that make up ‘the profit-yielding subject’ of an enterprise which may be described as the business structure set up for the earning of profits. Paragraphs 33 to 35 of GSTR 2001/7 state:

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An 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.

Applying paragraph 35 to the present case, even if the sale of the developed Property is an isolated transaction in relation to the Taxpayer, the Property is a revenue asset rather than a capital asset because the means by which the Taxpayer derives its income is through the disposal of the Property.

Given that the cost of acquiring the Property and erecting the dwelling is estimated to be at least $[ ] and it was stated in the ruling request that construction of the dwelling is likely to be completed within three months, the Taxpayer is likely to sell the developed Property for more than $[ ] within the next twelve months. Consequently the Taxpayer’s projected GST turnover is at or above the registration turnover threshold for the purposes of paragraph 188-10(1)(b) and the Taxpayer will be required to register for GST pursuant to section 23-5 of the GST Act.

Question 3

Summary

The sale of the developed Property by the Taxpayer will be a taxable supply and the Taxpayer will be required to account for GST in respect of that supply.

Detailed reasoning

Section 7-1 of the GST Act provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act provides that an entity (‘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.

The requirements in section 9-5 are satisfied. In relation to paragraphs 9-5(a) and (b) respectively, the Taxpayer will supply the developed Property for consideration and, for the reasons set out in relation to Question 2, the Taxpayer will be carrying on an enterprise.

In relation to paragraph 9-5(c), the supply of the developed Property will be connected with the indirect zone (i.e. Australia, subject to certain exclusions) as subsection 9-25(4) of the GST Act provides that a supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

Paragraph 9-5(d) is also satisfied as the Taxpayer is required to register for GST for the reasons set out in Question 2.

The supply of the developed Property will not be input taxed. Although subsection 40-65(1) provides that a sale of real property is input taxed to the extent that the property is residential premises (as defined) to be used predominantly for residential accommodation, paragraph 40-65(2)(b) provides that the sale of residential premises is not input taxed to the extent that 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 developed Property will fall within paragraph (a) of the definition of ‘new residential premises’ in subsection 40-75(1):

(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

There are no provisions of the GST Act which would make the sale of the developed Property by the Taxpayer GST-free.

The Taxpayer may be able to apply the margin scheme in working out the amount of GST (i.e. pay GST equal to 1/11^th of the difference between the sale price and the price paid by the Taxpayer to acquire the Property (excluding the costs of developing the Property, although the Taxpayer will be entitled to claim input tax credits in respect of those costs) provided the Taxpayer and the purchaser agree in writing.

If, following development of the Property, the Taxpayer decides not to sell the Property but to rent out the Property, the Taxpayer may have to make increasing adjustments under section 129 of the GST Act in respect of acquisitions related to the development of the Property for which the Taxpayer claimed input tax credits. Goods and Services Tax Ruling GSTR 2009/4 explains the Commissioner’s view on when such adjustments arise in relation to acquisitions made in constructing new residential premises.

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