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Edited version of your written advice
Authorisation Number: 1051276397226
Date of advice: 5 September 2017
Subject: GST and sale of real property
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?
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
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.
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:
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 for GST.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.
(* 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:
28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:
'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.
29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent
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:
● at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);
● at the time of sale it was applied in carrying on your enterprise to at least some extent; and
● it is sold as a transaction of your 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:
a) is occupied as a residence or for residential accommodation or
b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation
(regardless of the term of occupation or intended occupation) and includes a floating home.
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:
6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.
7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.
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 -
47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.
92. Vacant land cannot be residential premises. In Vidler v. Federal Commissioner of Taxation, Sundberg, Bennett and Nicholas JJ stated that 'vacant land is not land that is capable of being occupied as a residence or for residential accommodation'. This is because vacant land, of itself, does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.
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:
97. Where the owner of rented residential premises later subdivides the land into two blocks, one with a residential building and the other a vacant block, subsection 9-30(4) does not apply to the supply of the vacant block. The subdivision of the land is a use of the land that is not in connection with input taxed supplies. Vacant land is not residential premises as defined in section 195-1 of the Act. The supply of the vacant block needs to be considered under section 9-5.
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.
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
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