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Edited version of your written advice
Authorisation Number: 1051280519338
Date of advice: 11 October 2017
Ruling
Subject: GST and registration
Question 1
Are you required to register for goods and services tax (GST)?
Answer
Yes.
Question 2
Do the anti-avoidance provisions, Division 165 of the A New Tax System (Goods and Services Tax) Act 1999, apply to your sale of the property to Entity C (the Grantee)?
Answer
As the answer to question 1 is yes, we do not need to consider the anti-avoidance provisions.
Relevant facts and circumstances
You are not registered for GST.
You were previously registered for GST from DDMMYYYY to DDMMYYYY.
Entity B is the sole director and secretary.
You have no employees.
In circa 1999 you purchased a commercial property (the buildings complex) (the Property) which you hold for property development purposes and rental.
The Property is comprised of a commercial building in poor condition with no toilet or office facilities and gravel hard stand area.
Intention at the time of purchase
Your intention in purchasing the Property was to own a commercial building factory as an investment.
The Property was acquired on the basis that you would either develop the Property or alternatively sell to a developer. You have held the Property for its potential value and have actively sought to sell the Property to a developer.
Change in intention during time the Property was held
Over time your intention to hold the Property has changed and you have actively sought to dispose of the Property due to the following:
● The nature of the area has changed significantly.
● In YYYY the Council implemented a new plan for the area in order to change the nature of the area and phase out industrial activities in the area.
● Demand for your commercial building reduced dramatically. Alternative facilities were by then being erected in an alternative area and potential tenants moved out there instead.
● In YYYY the Global Financial Crisis (GFC) also reduced demand for the specialised nature of the building.
● In YYYY Council again implemented a newer plan which again reduced the viability of an industrial facility in this location.
● In YYYY Council introduced further changes for the immediate area and the area was becoming less and less attractive as an industrial facility.
Rental History
Initially the whole facility was rented to one large tenant for storage.
You lost a large tenant in YYYY.
Due to the specialised nature of the building and the changing use of the area such tenants were hard to come by.
The Property has not been continuously rented. There was a gap in rental receipts for several years as the Property was not rented from YYYY to YYYY.
The Property was always offered for rent even when vacant.
After the loss of your major tenant and a turndown in the demand for such a facility minor changes were made to attract smaller tenants.
The Property is primarily used for rental on a casual basis to eclectic tenants.
Rents received were used to help pay the finance and holding costs.
The income received from the rents did not cover the loan repayments. You have continued to refinance and increase your debt to keep solvent.
Steps taken to sell the Property
The following steps were taken to sell the land over the years it was held:
● You have constantly engaged real estate agents to sell the Property through the ownership period.
● For sale signs were constantly displayed.
● An Expression of Interest was issued in YYYY. No offers were received that were higher than the debt you were carrying.
● You have held auctions.
● On several occasions sales contracts were issued but fell through.
● In YYYY negotiations took place to sell which did not eventuate.
● No plans have ever been drawn up to accompany a development application.
● Concept drawings were prepared at one time to enhance sale prospects.
● Occasionally, a local architect firm has prepared concept plans on spec (no cost to you) as marketing tools and these were offered to any potential buyers to progress further if interested.
You have not sought to obtain a zoning change or lodge any development applications.
Prior to deregistering for GST you were collecting GST on the commercial rents from within the buildings complex and lodging quarterly business activity statements.
The Property is your sole asset. In YYYY an adjacent lot was sold off to help with the holding costs and loan repayment.
You (Grantor) entered into a Deed of Call Option (the Deed) dated DDMMYYYY with Entity C (Grantee) for the sale of the Property for $X to Entity C. You have provided a copy of the Deed.
The Deed required you to deregister for GST so the Property can be sold exempt of GST.
You receive a payment (inclusive of GST) for each calendar month that the Grantee seeks to increase the length of the option period.
The first X payments were to reduce the deposit for the purchase of the property. The seventh and subsequent payments are in addition to the consideration for the Property.
Leasing arrangement
Entity B is registered for GST. You entered into a lease agreement with Entity B to lease the entire buildings complex. This allowed you to deregister for GST as your turnover is less than the $75,000 registration turnover threshold.
Entity B sub leases the individual units within the building complex and collects the rents previously paid to you. There are no written agreements. The leases are verbal and paid month by month.
You have exchanged the Contract for sale with some changes made to the original contract attached to the Deed. You have provided a copy of the updated Contract for sale.
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 Subsection 9-17(1)
A New Tax System (Goods and Services Tax) Act 1999 Section 23-5
A New Tax System (Goods and Services Tax) Act 1999 Section 188-10
A New Tax System (Goods and Services Tax) Act 1999 Section 188-20, and
A New Tax System (Goods and Services Tax) Act 1999 Division 165.
Reasons for decision
In this reasoning, please note:
● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au
● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
Question 1
Enterprise
It must be determined whether the activities surrounding the sale of the Property amount to the carrying on of an enterprise being an adventure or concern in the nature of trade.
Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) lists a number of activities that are enterprises. One of these is an activity or series of activities done in the form of an adventure or concern in the nature of trade.
Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides guidance on what activities will amount to an enterprise in the form of an adventure or concern in the nature of trade. 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 has the characteristics of a business deal. MT 2006/1 bases its analysis on former income tax provisions that ensured that ‘profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme’ is captured.
MT 2006/1 identifies six badges or identifying features of trade as set out below: These badges provide ‘common sense guidance’ in reaching a conclusion as to whether an adventure or concern in the nature of trade is being carried on.
No |
Badge of trade |
Comment |
1. |
The subject matter of realisation This badge of trade considers the form and quantity of the property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be investment than a trading asset. |
The Property has been available for rental during the period you owned the land. The rents received were used to help pay the finance and holding costs. It is noted that the rental did not cover the loan payments and there is a gap of several years where the property was not rented. You have not sought to invest a lot of money in improvements seeking to maximise the rental potential of the Property as the facility is in poor condition. |
2. |
The length of period of ownership A trading asset is generally dealt with or traded within a short time after acquisition. |
The Property has been held long term since 1999. |
3. |
The frequency or number of similar transactions The greater the frequency of similar transactions the greater the likelihood of trade. |
There has only been one other sale of land by you which was the sale of an adjacent lot. It was sold off to help with the holding costs and loan repayments. |
4. |
Supplementary work on or in connection with the property realised Improving the property beyond preparing an asset for sale, to bring it into a more marketable condition and to gain a better price suggests an element of trade. |
The Property is in poor condition. There has been minimal work on the Property. Concept drawings have been obtained to enhance the prospects of sale. |
5. |
The circumstances that were responsible for the realisation Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. |
There were changes in the nature of the area. There were a number of changes over the years phasing out industrial activities in the area. The nature of the area has changed significantly during the time the Property has been held which has had an influence on your intention. There were a number of attempts to sell the Property over the years. |
6. |
Motive Motive is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. |
You own a commercial property which you hold for property development purposes and rental. The Property was acquired on the basis that you would either develop the Property or alternatively sell to a developer. You have held the property for its potential value. You wanted to own a commercial building as an investment. |
In addition MT 2006/1 includes a list of factors in relation to isolated transactions and sales of real property that provide assistance in determining whether activities are an adventure or concern in the nature of trade is being carried on. If several of these factors are present it may be an indication that an adventure in the nature of trade is being carried on:
No |
Factor |
Comment |
1. |
There is a change of purpose for which the land is held. |
There were a number of changes over the years phasing out industrial activities in the area. The nature of the area has changed significantly during the time the Property has been held which has had an influence on your intention. As these changes occurred, your intention to hold the property long term changed and you have actively sought to dispose of the property but with little success. |
2. |
Additional land is acquired to be added to the original parcel of land. |
No additional land added. |
3. |
The parcel land is brought into account as a business asset. |
No clear evidence on this factor. |
4. |
There is a coherent plan for the subdivision of the land |
N/A. |
5. |
There is a business organisation – for example a manager, office and letterhead. |
There are no employees. There is only a sole director and secretary. |
6. |
Borrowed funds financed the acquisition or subdivision. |
The Property purchase was financed with borrowed funds. |
7. |
Interest on money borrowed to defray subdivisional costs was claimed as a business expense. |
N/A. |
8. |
There is a level of development of the land beyond that necessary to secure council approval for the subdivision. |
N/A. Only concept plans were developed to assist in the sale. |
9. |
Buildings have been erected on the land |
No additional buildings have been constructed. |
MT 2006/1 recognises that in determining whether activities relating to isolated transactions are an enterprise or a mere realisation of a capital asset, it is necessary to examine all the facts and circumstances. No single factor will be determinative; rather it will be a combination of factors that lead to a conclusion as to the character of the activities.
Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income advises that a profit from an isolated transaction is generally income where:
● the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and
● the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.
TR 92/3 provides the following advice in relation to intention:
● The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case.
● It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.
● The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.
In relation to the last point the purpose over time for which the land has been used may change. For example, there may be a decision made after the purchase of the land to develop the property, for example see Federal Commissioner of Taxation v. Whitfords Beach 82 ATC 4031.
TR 92/3 highlights the importance of intention. You have advised the following concerning the purpose of holding the property:
● You hold the Property for development purposes and rental.
● The Property was acquired on the basis that you would either develop the Property or alternatively sell to a developer. The Property has been held for its potential value and you have actively sought to sell the Property to a developer. You have not sought to obtain a zoning change or lodged any development applications.
● You wanted to own commercial building as an investment.
It seems that there was initially an intention to develop the Property or to actively sell to a developer. It appears that the original plan has fallen through and you have actively sought to sell the Property over a number of years.
Taxation Determination TD 92/126 provides confirmation that if land was acquired for development, subdivision and sale and the plans for development were abandoned, the profit on the land is assessable for income tax.
It is acknowledged that there are factors that do point in the direction that the sale of the land is an adventure or concern in the nature of trade:
Factors – pointing to an adventure or concern in the nature of trade
● The Property has been on the market for a number of years. Only recently has the Property been able to be sold. The large number of attempts to sell may lead to a conclusion that the property was bought with the intention of resale at a profit.
● You have undertaken strategic steps with a view to facilitating this aim by engaging real estate agents, displaying for sale signs and procuring concept drawings to enhance the prospects of sale.
● No development has been undertaken to develop the Property into a commercial building. This could lead to the conclusion that either it was purchased with the intention of resale at a profit or there was a change of intention after the purchase. Rents did not cover the loan payments and there is a gap of several years where the property was not rented.
● There has been no substantial development of the Property to make the property more marketable. Only minor changes were made to the property to make it easier to rent. The building on the property is in poor condition.
Factors – pointing to a realisation of a capital asset
● The best evidence about intention is your advice you wanted to own a commercial building as an investment.
● The property has been available for rent throughout the period it has been held. It is currently rented.
● The only change made to the Property was to make it easier to rent by making some minor changes.
● The property has been held for a number of years since around 1999.
After examining all the facts and circumstances, on balance, we consider this is an adventure or concern in the nature of trade rather than a realisation of a capital asset.
Registration
Section 23-5 provides that 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.
The registration turnover threshold is currently $75,000.
You cancelled your GST registration from DDMMYYYY as your GST turnover from the leasing of the entire buildings complex to Entity B was below the registration turnover threshold.
However, at this time pursuant to the Deed you had granted to the Grantee a call option for the purchase of the Property.
Goods and Services Tax Determination GSTD 2014/2 Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999? provides guidance on call options granted over real property.
Relevantly, paragraphs 16 and 17 state:
16. Where an entity has exercised a call option to compel the transfer of real property, for GST purposes, the call option fee does not form part of the consideration for the property.
17. This is the case even if the agreement between the parties specifies that the call option fee forms part of the price for the supply of the real property. The operation of section 9-17 varies what may be the outcome under contract law.
Paragraph 21 of GSTD 2014/2 further provides that in the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property.
As such the granting of the call option was a separate supply with the payment attributable at that time.
The term ‘real property’ is defined in section 195-1 and relevantly includes a personal right to call for or be granted any interest in or right over land.
Section 188-10 provides that 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.
Of relevance here is your projected GST turnover. Section 188-20 provides that 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 input taxed supplies.
In this case you have sold a right to call for or be granted a right over an interest in a taxable supply of commercial property. The further consideration you received was a taxable supply and included in your GST turnover calculation.
As your projected GST turnover was not below the turnover threshold, you continued to meet the turnover threshold and were required to be registered for GST under section 23-5. Therefore, you should not have cancelled your GST registration.
In addition we have considered section 188-25 which is about the requirement to register and the sale of a capital asset. As this is an adventure in the nature of trade and not a realisation of a capital asset this section does not apply.
Question 2
As the answer to question 1 is yes, we do not need to consider the anti-avoidance provisions, Division 165.
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