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Edited version of your written advice
Authorisation Number: 1051433774069
Date of advice: 1 October 2018
Ruling
Subject: GST and sale of a new residential property
Question 1
Does the goods and services tax apply to the sale of the property?
Answer
Yes.
Question
If so can the margin scheme be applied to the sale?
Answer
Yes.
Relevant facts and circumstances
Years ago your parents bought land and constructed a house on the land.
You inherited half of the property and purchased the other half of the property from your sibling.
You built a house on the land.
Council required kerb and guttering, pavement and road construction for the existing house.
You had to sell the house as council requirements increased the costs dramatically affecting your budget.
You are not registered for GST.
You are subdividing the property into two plots.
The survey for subdivision is currently being carried on by professional surveyors.
A real estate agent has been contracted to sell the new residence.
The new house was built by a construction company.
You have not been engaged in home construction and subdivision in the past and are not going to be engaged in home construction and subdivision in the future.
Apart from unexpected kerbing and guttering, pavement and construction of a road for the existing house council required landscape requirements and demolition of the existing garage that would cause shadows.
Relevant legislative provisions
A New Tax System (Goods and Tax) Act 1999 section 9-5
A New Tax System (Goods and Tax) Act 1999 subsection 9-20(1)
A New Tax System (Goods and Tax) Act 1999 section 11-20
A New Tax System (Goods and Tax) Act 1999 section 23-5
A New Tax System (Goods and Tax) Act 1999 subsection 75-5(1)
Reasons for decision
Among other things the definition of the term ‘enterprise’ in subsection 9-20(1) includes that an enterprise is 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; or
(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
There is no single test that determines whether a business is being carried on.
To be conducted ‘in the form of a business’ the activities would need to have the essential appearance or characteristics of a business.
In your case, you have not been engaged in home construction and subdivision in the past and are not going to be engaged in home construction and subdivision in the future. Therefore, based on the facts provided, we are satisfied that you are not in the business of land development.
Therefore, paragraph 9-20(1) (a) will not be satisfied.
In the case where an entity does not or will not be selling properties on a regular or continuous basis paragraph 9-20(1)(c) will not be satisfied.
However, the term ‘enterprise’ also includes an activity or series of activities carried on ‘in the form of an adventure or concern in the nature of trade’. An adventure or concern in the nature of trade may include isolated transactions, that do not amount to a business, but which have the characteristics of a business deal.
The question of whether an entity is carrying on an enterprise often arises where there are ‘one-off’ property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.
Miscellaneous Taxation Ruling MT 2006/1The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers, amongst other things, the meaning of certain key words and phrases used to define ‘an enterprise’.
We refer to paragraph 244 of MT 2006/1 which states:
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...
Specialist surveyors were engaged to carry out the subdivision. Construction work was undertaken by a construction company and a real estate agent has been contracted to sell the new residence.
Further, council required kerb and guttering, pavement and construction of a road for the existing house and imposed landscape requirements and demolition of the existing garage that would cause shadows.
A house was built on the land; as such, there is a coherent plan for subdivision of the land and there is a level of development of the land beyond that necessary to secure council approval for subdivision.
You have borrowed funds from the bank to finance the subdivision and construction. The scale of the activities undertaken suggests that the subdivision and development of the property has a commercial character.
The development of the property and the subsequent sale of the newly constructed house are activities that would constitute an enterprise. Having applied all the principles listed above to your circumstances, we conclude that in subdividing the land and constructing a house on the land you are carrying on an enterprise.
Therefore, paragraph 9-20(1) (b) will be satisfied and the property development is considered to be an enterprise.
Are you required to be registered for GST?
Under section 23-5 of the GST Act, an entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.
Currently, the registration turnover threshold is $75,000 (or $150,000 for a non-profit body). This means that you will be required to be registered for GST when the house is sold and your turnover meets or goes above the GST registration threshold.
Additional information
Section 11-20 of the GST Act provides that entities that are registered for GST are entitled to claim input tax credits for creditable acquisitions that they make. Therefore, when you are registered for GST, you may be able to claim the proportion of GST that you have paid on your acquisitions to the extent that they relate to the development costs of the property that you are selling.
Margin scheme
Under subsection 75-5(1) of the GST Act, the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.
According to the information provided you can apply the margin scheme to the sale of the property.
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