Edited version of private advice

Authorisation Number: 1051558814175

Date of advice: 8 August 2019

Ruling

Subject: GST and sale of residential premises

Question 1

Will the supply of the Premises be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Is the supply or sale of the Premises subjected to the GST withholding at settlement pursuant to section 14-250 under Schedule 1 of the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

Relevant facts and circumstances

You purchased a property and moved into the property as your main residence.

After living in the property for a year you considered your options in building a new residence on the land.

You decided to demolish the existing house and build a new family home and a granny flat for your parents to live in. During the design process you decided that the construction of a larger secondary dwelling would be more suitable. The final design was a X bedroom townhouse for you to reside in and a semi-detached X bedroom townhouse (the Premises) for parents

You applied to the Bank for a loan. It was a principle and interest loan with a variable rate of interest.

The loan document provided that:

·   It was to build two investment properties and the purpose was for residential investment purposes; and

·   You received rental income of $X per month

You moved into rental accommodation whilst your original existing private residence was being demolished and during the construction of the new dwellings.

During the construction phase, one of your parents was diagnosed with cancer and the parents decided they needed to stay in their existing rental accommodation which was closer medical treatment.

Toward the end of the construction period X was experiencing a reduction in wages and XY was only working casual hours in their job. The added financial pressure of paying rent at $X a week during construction whilst also paying the investment loan mortgage payments led to the decision that you would not be able to afford to keep the Premises. You decided that you would attempt to sell the Premises on completion.

You moved into your new residence, and finished off the landscaping for both properties. You engaged a real estate agent to list the Premises.

An offer was accepted for the sale of the Premises, and in preparation of the contract the conveyancer made you aware of the new GST withholding rules under the TAA 1953 in relation to the sale of new residential property.

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 Subsection 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1)(b)

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

Taxation Administration Act 1953 Section 14-250, Schedule 1

Reasons for decision

·   all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

·   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

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides you make a taxable supply if:

(a)  you make the supply for consideration; and

(b)  the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)  the supply is connected with the indirect tax zone; and

(d)  you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Of relevance is whether you are making a supply of the Premises in the course or furtherance of an enterprise that you carry on and if so, whether you are required to be registered for GST.

Section 9-20 relevantly defines enterprise to include an activity, or series of activities, done:

·   In the form of a business

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

·   On a regular or continuous basis, in the form of a lease, license or other grant of an interest in property

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

It is necessary to consider whether your activities are in the form of a business or an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. The issue is whether the property development and subdivision has changed to a revenue asset as a result of your decision to undertake development activities on your land.

The Goods and Services Tax Determination GSTD 2006/6: Goods and 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? provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, lists indicators of carrying on a business:

·   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.

Paragraph 179 of MT 2006/1 states that 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 this case you had lived on the property as your primary place of residence. You have not previously been involved in the development of property. Your intention in developing the property was to build a new house for you and the Premises for your parents. There is an absence of a strong profit intention.

Given the facts provided, we consider that the activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. We do not consider that your actions of obtaining a planning permit and selling the Premises as a whole alone constitute being activities in the form of a business.

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

Paragraph 234 of MT 2006/1 provides that 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.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

·   the subject matter of the realisation;

·   length of period of ownership;

·   frequency or number of similar transactions;

·   supplementary work on or in connection with the property realised;

·   circumstances that were responsible for the realisation;

·   motive

Paragraph 244 of MT 2006/1 clarifies 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 with such transactions being of a revenue nature. However, the sales of the family home or 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.

As discussed above, you previously lived on the property as your primary place of residence. You have not previously been involved in the development of property. Your intention in developing the property was to build a new house for you and your spouse and the Premises for your parents. Given the facts provided you do not have a history of buying and selling property of a regular or consistent basis. You moved into one of the houses and you advised that you were required to sell the Premises due to illness and financial difficulty.

Your motive for selling the Premises is due to your parents' illness and to mitigate against the financial difficulty you encountered due to your reduction in wages in comparison to the level of debt associated with funding the construction of the venture.

The Commissioner has formed the view that based on the information provided, you did not intend to engage in a profit making venture and therefore the activities undertaken in construction and selling of the Premises in this instance, is not an enterprise for GST purposes. Factors that we considered include;

·   Your property (original property) was acquired as your principal place of residence.

·   You have stated you have not previously engaged in the similar activities.

·   The construction of the Premises was planned for your parents to live in, however due to health issues of one of Shaun's parents, coupled with your financial difficulties, the plan did not proceed.

·   Your circumstances indicate you did not acquire the property on a speculative basis but for a private or non-commercial purpose.

·   You entered into a 'construction loan' to finance the expenses related to the build. On completion of the build, the loan converted to a standard housing loan being serviced by repayments from your salary and wages.

We note however that you did not provide evidence in relation to your planned proposal to lease the property and that the property was advertised for sale upon completion.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion your intention for holding the Premises was not for the purpose of trade. Whilst there has been a change in your intention, that is to sell the Premises as opposed to using the Premises for your parents or for leasing, our view is that this fact, on its own, is not sufficient to regard your activities as being a commercial-like undertaking.

As such we do not consider your activities of constructing new residential premises and subsequent sale of the Premises as being done in the form of an adventure or concern in the nature of trade.

On this basis, the supply of the Premises is not a taxable supply pursuant to

section 9-5.

Question 2

A requirement for GST withholding at property settlement was that the supply or sale of a property is a taxable supply, for example taxable new residential premises: refer to section 142-250 under Schedule 1 of the TAA 53 and Law Companion Ruling LCR 2018/4: Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property. In this case, the supply or sale of the property is not a taxable supply since you are not carrying on an enterprise of property development. Therefore, GST withholding at property settlement rules does not apply to your case.

Conclusion

The activities you have undertaken in regard to the sale of the Premises are not considered to be the course of an enterprise that you carry on.

Therefore you have not made a taxable supply as defined in section 9-5 and GST is not applicable to the sale of the Premises and therefore the GST at settlement legislative provisions do not apply to this transaction, that is, the sale of the Premises.

Additional Information

Where there is a history or pattern of property development activities, then

this may be considered, together with other factors, there is an enterprise under subsection 9-20(1)(a) or sub section 9-20(1)(b).

When, or if, a supply is made of other properties in the future, the GST implications will depend on the surrounding circumstances at the time of the supply.

Please note that we have not considered the capital gains tax consequences of the sale of the premises in this private ruling.

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