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Edited version of your written advice

Authorisation Number: 1051350940621

Date of advice: 22 March 2018

Ruling

Subject: GST and sale of residential units

Question

Is your sales of two new residential units that were intended as long term rentals (the properties), the supply of capital assets under section 188-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, your sales of the properties are supplies of capital assets under section 188-25 of the GST Act.

Relevant facts and circumstances

You are a Medical Therapist and are not registered for goods and service tax (GST).

You purchased vacant land in your personal name. The land was purchased subject to the margin scheme. You obtained finance to purchase the land.

You subdivided the land and engaged a builder to build two side-by-side residential units on it (the properties). You have not claimed any input tax credits for the construction costs of the properties. You obtained finance to fund the build.

On completion, the properties were rented out. Your intention was to keep the properties as long term rentals.

Since the construction and subsequent rental of the properties, your financial and personal circumstances have changed considerably, and given these changed circumstances, you have decided to sell the properties.

The properties are now sold with the contracts signed and settlement having taken place.

Relevant legislative provisions

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 188-25

Reasons for decision

Section 23-5 of the GST Act provides that you are required to be registered under this Act if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold.

Pursuant to section 188-10 of the GST Act your GST turnover will meet the registration turnover threshold where your projected GST turnover meets the relevant threshold (irrespective of your current turnover).

Section 188-25 of the GST Act provides that in working out your projected GST turnover you can disregard any supply made or likely to be made by way of a transfer of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 Goods and service tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) explains the Commissioner’s view on the operation of section 188-25 of the GST Act. In particular, paragraphs 31 and 32 of GSTR 2001/7 state:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

In relation to the properties you sold and from the information you have provided, you are conducting a leasing enterprise and the properties would constitute the capital assets of that leasing enterprise.

Therefore the sales of the properties are supplies of capital assets for the purposes of section 188-25 of the GST Act.

Note

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner’ view on the meaning of carrying on an enterprise.

MT 2006/1 provides that assets can change their character from investment which is capital in nature to trade and therefore revenue in nature (paragraphs 258 to 260). If the activities on an objective assessment have the characteristics of trade, the person’s motive is not relevant (paragraph 254). The characteristics of trade are explained in paragraphs 243 to 261 and include the length of period of ownership and the frequency or number of similar transactions. In particular attention is drawn to paragraph 251 of MT 2006/1 which states:

Accordingly, if you continue to develop properties, those activities will need to be assessed to establish whether you are considered to be carrying on an enterprise of property development. As such any future property sales that you are likely to make are not covered by this ruling.

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