Edited version of your written advice

Authorisation Number: 1051332021823

Date of advice: 15 February 2018

Ruling

Subject: Application of GST to a sale of real property

Question

Will you be making a taxable supply under Division 9 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the property?

Answer

No. You will not be making a taxable supply under Division 9 of the GST Act when you sell the property.

Relevant facts and circumstances

● You signed a contract to purchase a block of land in Victoria (the property)

● The contract settled in 2016

● The provisions in the contract do not state the sale was subject to ‘margin scheme’, ‘GST’, ‘farming business’ or ‘going concern’

● After the purchase, no farming business nor rental activity has ever been conducted on the property

● You held a visa subclass 188 when the property was purchased and settled. You are not treated as a resident for taxation purposes

● Till present, you have not been granted a permanent residence visa

● You purchased the property with the intention of building your own residence

● You engaged a surveyor and draftsman to prepare a design for your home at a very basic level. Once you were aware that it is quite difficult to build a residential home at the property, you immediately asked the draftsman to stop the design works. As you have never had any experience in the construction industry in Australia, you felt that building a residential property would be too complex for you. In addition, the location of the land is far from the central business district and rather inconvenient for you

● You never had an intention to subdivide the property

● You have now decided to sell the property

● You have never registered for ABN (Australian business number) or GST (goods and services tax).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5 and 9-20

Reasons for decision

Section 9-5 of the GST Act provides that an entity makes a taxable supply if:

a. the entity makes the supply for consideration, and

b. the supply is made in the course or furtherance of an enterprise that the entity carries on, and

c. the supply is connected with the indirect tax zone, and

d. the entity is registered or required to be registered.

In your case, of most relevance, is the question of whether your supply of the property is in the course or furtherance of an enterprise that you carry on.

Section 195-1 of the GST Act defines ‘carrying on’ an enterprise to include doing anything in the course of the commencement of an enterprise.

Relevantly, the term ‘enterprise’ is defined in section 9-20 of the GST Act as 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.

An activity is essentially an act or series of acts that an entity does. Entities can undertake a wide range of activities with varying degrees of interrelationship.

In the form of a business

The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

In FCT v. Swansea Services Pty Ltd [2009] FCA 402 at paragraph 99, McKerracher J. observed that the words 'in the form of' do not support a suggestion that form alone may prevail over substance. However, he said that they do 'have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby.

The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

Although the phrase 'in the form of a business' is broad, it requires a focus on and understanding of the concept of a business.

Section 195-1 of the GST Act defines 'business' to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way.

The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion, some indicators are:

• a significant commercial activity;

• a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

There is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

In the form of an adventure or concern in the nature of trade

There is no definition of 'in the form of an adventure or concern in the nature of trade' in the GST Act.

However, the concept of 'an adventure or concern in the nature of trade' has arisen in the context of Australian and United Kingdom (UK) revenue law. While UK law is of assistance in understanding this concept, it is considered that Australian revenue law and judicial decisions should be the starting point to give it meaning.

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.

In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier 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' was included in a taxpayer's assessable income.

As a matter of statutory interpretation, the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Isolated transactions and sales of real property

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

Taxation Ruling TR 92/3 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature.

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.

Paragraph 265 of MT 2006/1 lists the following factors that assist in determining whether activities are a business or an adventure or concern in the nature of trade (profit making undertaking or scheme):

● 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.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above but there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

In isolated transactions where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income), the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade

Application of the law and rulings to your situation

You acquired the property with the sole purpose of constructing your residence on it and you never had the intention of subdividing the property.

Your activity in relation to seeking advice about construction and planning was at a very basic level and was directed at your plan to build your residence, not towards the subdivision of the property.

Viewed against the indicators of business as set out in TR 97/11, your activities do not indicate they are in the form of carrying on a business. Similarly, viewed against the indicators listed at paragraph 265 of MT 2006/1, your activities do not indicate they are in the form of an adventure or concern in the nature of trade.

Your intention in purchasing the property was to build your own residence on it and this intention has not changed. As the activities you had so far conducted do not indicate they are done in the form of a business or in the form of an adventure or concern in the nature of trade, your activities do not constitute the carrying on of an enterprise for GST purposes. Therefore, you will not be making a taxable supply when you sell the property.

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