Disclaimer
You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051276397226

Date of advice: 5 September 2017

Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the proposed lot that has resulted from the subdivision of a residential property?

Answer

Yes.

Relevant facts and circumstances

You, a superannuation fund, are the owner of the Property.

The Property was purchased a number of years ago. The Property is a residential block with an old house.

You acquired the Property to generate rental income to provide for the retirement of your beneficiaries.

Since the purchase of the Property it had been rented to third party tenants that have been subject to residential leases.

There is no mortgage on the Property.

Your beneficiaries have decided that as they had reached preservation age, they would retire from work. They had begun a transition to retirement phase that moved to an account based pension recently. They would fund their retirement by living off pension income from the superfund.

To ensure that there are sufficient pension funds available, you engaged a surveyor to explore the possibility of subdivision of the Property.

You decided that the Property will be subdivided into two blocks - one with the existing house that would be retained and continue to generate rental income (Lot 1) and one vacant parcel that would be sold (Lot 2).

You engaged the surveyor and development consultants to prepare applications and submissions to Council and related parties. You funded the costs and this has been to the order of a certain sum and is ongoing.

The consultants began preparing plans and submissions to Council a year ago and you received the development consent recently. You provided a copy of the Conditions of Development Consent and the plan/drawing.

The plan/drawing shows that the proposed Lot 2 contains the garage, an area of concrete slab and an area with awning.

The proposed Lot 2 has never been offered for sale nor have you taken any steps to do so.

As a result of the Council public consultation process relating to the proposed development, you were approached directly by a local person who made an offer to purchase the proposed Lot 2. The proposed purchaser for the proposed Lot 2 is willing to pay a certain sum and at their cost to undertake and complete all civil works necessary to satisfy Council and related statutory requirements for subdivision.

An alternative option is for you to engage the external Surveyor to obtain quotes and complete the civil works to meet local and statutory requirements. If you undertake the civil and related statutory works to complete the subdivision to registration with Land Titles, the total costs could be approximately a certain sum. These costs will be funded from your existing cash flow and resources and you will not need to borrow any funds from other sources to complete the subdivision.

You do not currently have any contracts for the sale while you await the GST private ruling.

At the time of sale, the Property, including the proposed Lot 2, forms part of the assets of your enterprise.

The proposed sale is a necessary divestment of your asset on behalf of your beneficiaries to fund retirement living expenses.

You have not previously been engaged in any subdivision activities or any business of land development nor do you intend to undertake any such activities in the future.

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 9-30(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4).

A New Tax System (Goods and Services Tax) Act 1999 section 40-65.

A New Tax System (Goods and Services Tax) Act 1999 section 184-1.

Reasons for decision

Summary

You are making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the proposed Lot 2.

Detailed reasoning

GST is payable on the sale of the subdivided blocks if you are making a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

(* denotes a term defined in section 195-1 of the GST Act.)

The term ‘you’ in the GST Act applies to entities generally.

The meaning of entity as defined in section 184-1 of the GST Act includes a superannuation fund.

Based on the information provided, the sale of the proposed Lot 2 is for consideration and the sale is connected with Australia as the land is in Australia. As such, the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. Furthermore, you are registered for GST. Hence, the requirement of paragraph 9-5(d) of the GST Act is also satisfied.

It remains to be determined whether the sale of the proposed Lot 2 is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act, and whether the sale is GST-free or input taxed.

Whether the sale of the proposed Lot 2 is in the course of an enterprise that you carry on

Goods and Services Tax Ruling GSTR 2004/8 considers the requirement in paragraph 9-5(b) of the GST Act that the supply be made in the course or furtherance of an enterprise. Paragraphs 28 and 29 state:

Paragraph 30 of GSTR 2004/8 lists the following characteristics which strongly indicate that a sale of a thing has a connection with an enterprise:

Each of these points will indicate a connection, and not all of the points need to be satisfied.

Since your acquisition, the Property was used for your leasing enterprise and formed part of the assets of the leasing enterprise. The proposed Lot 2 is part of the Property that was used for your leasing enterprise. The reorganisation of the Property and the selling of the proposed Lot 2 are in the course or furtherance of your enterprise. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Whether the sale is GST-free or input taxed

The sale of the proposed Lot 2, in the circumstances described is not GST-free. It remains to be determined if the sale is input taxed.

Paragraph 9-30(2)(a) of the GST Act provides that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation.

The term 'residential premises' is defined in section 195-1 to mean land or a building that:

Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) considers how the GST Act applies to supplies of residential premises.

Paragraphs 6 and 7 of GSTR 2012/5 consider the definition of residential premises and state:

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

Paragraphs 47 and 92 of GSTR 2012/5 consider whether vacant land is residential premises -

As outlined in GSTR 2012/5, for land to be residential premises, there must be a building on the land that has the physical characteristics of a residence.

From the drawings provided, proposed Lot 2 contains the garage that is used in conjunction with the house in proposed Lot 1. There are no other buildings on proposed Lot 2 that have sufficient physical attributes to characterise it as being able to be, or intended to be, occupied as a residence.

The sale of the proposed Lot 2 is not the supply of real property that is residential premises. Hence, the supply is not an input taxed supply under section 40-65 of the GST Act.

Subsection 9-30(4) of the GST Act provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

In considering the application of subsection 9-30(4) of the GST Act to the supply of the vacant land it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies). This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

Since your acquisition, you have used the Property solely in connection with your leasing activities in making supplies that are input taxed.

Paragraph 97 of Goods and Services Tax Ruling GSTR 2003/3 considers the application of subsection 9-30(4) of the GST Act and it states:

In this case, the Property which contains a house is supplied by way of lease of residential premises. This supply is input taxed. The Property will be subdivided into two blocks with proposed Lot 1 containing the existing house that would be retained and continue to generate rental income. Proposed Lot 2 which contains the garage will be sold as it is in excess to your requirements. The subdivision of the Property and the sale of proposed Lot 2 is a separate use of the land and not merely incidental to the residential leasing activities.

As the use of proposed Lot 2 is not solely in connection with your input taxed supplies, the sale of the proposed Lot 2 is not taken to be an input taxed supply under subsection 9-30(4) of the GST Act.

Furthermore, the sale of proposed Lot 2 is not an input taxed supply under any other provision of the GST Act or under a provision of another Act.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the sale of proposed Lot 2 is a taxable supply.

Additional information

Generally, the amount of GST payable on the sale of real property is equal to one-eleventh of the sale price. If eligible, you may be able to use the margin scheme on the sale of the proposed lot. Under the margin scheme the amount of GST payable on the sale is one-eleventh of the margin for the sale.

The guide GST and the margin scheme will assist you in working out your eligibility to use the margin scheme. You can also refer to Goods and Services Tax Ruling GSTR 2006/8 which outlines how the margin scheme applies to a supply of real property acquired on or after 1 July 2000.

You are entitled to input tax credits for acquisitions relating to the subdivision of the Property if the requirements of section 11-5 of the GST Act are satisfied. Refer to information on our website on Claiming GST credits.

All publications referred to above are available on our website www.ato.gov.au


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).