Edited version of private advice

Authorisation Number: 1051528143425

Date of advice: 7 June 2019

Ruling

Subject: Property development and registering for GST

Question

Is the Trust required to be registered for Goods and Services Tax (GST) when it constructs and sells Z new townhouses?

Answer

Yes, the Trust is required to register for GST when it constructs and sell Z new townhouses.

This ruling applies for the following period:

mid 20XX to mid 20XX

The scheme commences on:

mid 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust is not registered for GST. The trustees of the Trust are a X and Y.

The Trust purchased the property in 20XX for $XX. The property comprised of XX square meters on a corner block with a residential premises on it. The Trust borrowed funds to finance the purchase of the property.

The Trust purchased the property for private investment purposes, that is, to rent the existing residential premises and to provide land for the trustees' children in the medium long term when the children become adults.

The Trust did not acquire the property for development purposes or for profit-making purposes. Neither the Trust nor its trustees have any experience in any aspects of the property development industry.

Neither the Trust nor its trustees are builders or have any history of developing properties.

In 20XX, one of the trustees resigned from its job overseas for family reasons. This removed the Trust's primary capital source which resulted in the Trust not being able to meet the costs of holding the property.

Given this change in financial circumstances, the Trust is now required to sell the property. However, due to the downturn in the housing market, the sale of the property in its current form is expected to realise a value of approximately $XX which will generate a substantial loss for the Trust.

In 20XX, the Trust engaged an architect to prepare plans for a Z townhouse development on the property with the intention of selling the property with approved plans. The planning permit was issued by the relevant Council on 20XX.

However, a real estate agent advised the Trust that even with this permit, the sale of the property will only realise a value of approximately $XX.

Accordingly, the Trust now proposes to demolish the existing residential building on the property, subdivide the land and to build Z new townhouses on the property (development activities) with the intention of selling the Z new townhouses.

The Trust will have to borrow funds to finance its development activities.

The Trust estimates this should achieve a breakeven result which will allow the Trust to dispose of the property and pay off its debts, thus avoiding insolvency.

The Trust contends that no profit is expected from the project.

The Trust will be taking a passive or hands-off approach to the development and will be engaging a builder to undertake the build and a real estate agent to market and sell the Z new townhouses.

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 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

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 Paragraph 188-25(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(b)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This section states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

(* denotes a defined term under section 195-1 of the GST Act)

Carrying on an enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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...

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) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN.

Goods and Services Tax Determination GSTD 2006/6 Goods and however services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6)confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal (Paragraph 234 of MT 2006/1).

The Trust advised that it and its trustees had never been involved in property development before and that its development activities were entered into due to the financial difficulties its trustees were currently facing. In the absence of other facts, the development activities of the Trust may be a once-off undertaking and may not be the beginning of an ongoing property development business, however, it is still necessary to determine whether the development activities will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset. That is, it is necessary to determine if the Trust's development activities are undertaken in the form of an adventure or concern in the nature of trade in accordance with paragraph 9-20(1)(b) of the GST Act.

Paragraph 13 of GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 provides that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Paragraphs 258 to 260 of MT 2006/1 provide that assets can change their character from investment to trade but these assets cannot be held at the same time for both purposes.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

·        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.

From the facts provided, we consider that the development activities and subsequent sales of the Z new townhouses by the Trust will be in the course of carrying on an enterprise in the form of an adventure or concern in the nature of trade because:

·        there is a change in purpose for which the property was held. The original purpose of using the property as an investment property changed to that of developing the property for sale,

·        the relatively short period of time for which the property was held as an investment property,

·        the Trust intends to demolish the existing building, subdivide and construct Z new townhouses on the property,

·        the Trust will borrow funds to finance the construction of the Z new townhouses,

·        the demolition of the existing residential premises and building of the Z new townhouses constitutes a level of development of the property beyond that necessary to secure council approval for the subdivision,

·        all architectural planning, construction, marketing and sales will be completed by professionals and trade contractors and

·        the Trust intends to sell the Z new townhouses on completion.

Given the above, we consider that the Trust will be conducting an enterprise of property construction and development when it demolishes the current residential premises on the property and constructs Z new townhouses for resale.

GST turnover meets the registration turnover threshold

As the Trust is not registered for GST, it needs to be established whether or not the Trust is required to be registered for GST in relation to the sale of the Z new townhouses.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

(a)   your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

(b)   your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a)   Supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises that are not new residential premises).

(b)   Supplies that are not for consideration.

(c)   Supplies that are not made in connection with an enterprise that you carry on.

(d)   Supplies that are not connected with Australia.

Further, in working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of the expected supply.

As discussed above, the Trust's activities of building and selling the Z new townhouses constitute the carrying on of a property construction and development enterprise. Therefore, the sale of the Z new townhouses by the Trust will not constitute the disposal of capital assets and paragraph 188-25(a) of the GST Act does not apply. The Trust is going to be deriving income from the disposal of a revenue asset even if the disposal is part of a one-off transaction.

Further, in working out the Trust's projected GST turnover, paragraph 188-25(b) of the GST Act requires that any supply made or is likely to be made solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise, is disregarded.

In this regard, paragraphs 46 and 47 of GSTR 2001/7 state:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Therefore, the sales of the Z new townhouses by the Trust will not satisfy paragraphs 188-25(a) and 188-25(b) of the GST Act, and the consideration received from the sales of the Z new townhouses will need to be included in the calculation of the Trust's projected GST turnover.

As the Trust anticipates the sale proceeds of each of the Z new townhouses to exceed $75,000, the Trust will meet the registration turnover threshold and therefore will be required to be registered for GST.

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if you make the supply for consideration, in the course of furtherance of an enterprise that you carry on, the supply is connected with an indirect zone, and you are registered or required to be registered. Further, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

As the supplies of the Trust by way of sale of the Z new townhouses meet all the requirements of section 9-5 of the GST Act and are not GST-free or input taxed, the sales of the Z new townhouses will be taxable supplies and subject to GST.

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