Edited version of private advice

Authorisation Number: 1051693221476

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Ruling

Subject: GST, the requirement to register and taxable supplies

Question 1

Are you required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

If the answer to Question 1 is 'Yes', will the sale of a newly constructed residential unit be a taxable supply in accordance with section 9-5 of the GST Act?

Answer

Not applicable

This ruling applies for the following period(s)

3 June 2020 - 2 June 2024

The scheme commences on

2019

Relevant facts and circumstances

Individual 1 and Individual 2, collectively referred to as 'You' are not registered for GST.

You are long term real estate investors dealing in leasing residential properties for the purpose of wealth creation.

In addition to your primary place of residence, you own a number of rental properties.

Turnover generated from the leasing of the residential properties is approximately $xxx,xxx per annum.

You do not have any other business interests.

Your wealth investment strategy is to continue to purchase or build further properties for rental investment purposes as funding permits.

You have never constructed any properties previously.

You have sold one property in the past which was your primary place of residence.

In 2019, you purchased property situated at a specified location (the Property).

The Property has an existing residential dwelling on x,xxxm².

Your intention at the time of purchasing the Property was to lease the existing residential dwelling and construct an additional two residential units on the rear of the Property also for the purposes of leasing.

Construction of the units on the Property has not commenced to date. Plans for the dwellings are currently being finalised for DA approval.

You anticipate construction will commence in the second or third quarter of the 2020/2021 year.

You anticipate construction will be completed around June/July 2021.

Whilst financing in relation to construction costs have not been confirmed, it is likely 50% of the costs will be funded from your personal savings with the remaining 50% funded through borrowings from a financial institution.

At the time you purchased the Property both Individual 1 and Individual 2 were employed as managers.

Following the purchase of the Property Individual 1 was required to cease work for an anticipated period of 12 - 24 months due to physical and mental health issues.

Health permitting, Individual 1 intends to return to the workforce around June 2021.

Individual 2 is still employed on a full-time basis.

Upon completion of construction of the two units on the Property, both units are intended to be kept as long-term investment properties to add to your existing residential rental portfolio.

However due to your intent to purchase additional property into the future, your ability to obtain finance may require you to sell one of the newly constructed units (Unit X) to reduce your debt level in order to continue buying investment properties.

Prior to any sale (if required), Unit X will be leased in line with your wealth investment strategy.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Paragraph 9-5(d)

Section 9-20

Section 9-40

Section 23-5

Section 40-35

Division 129

Subsection 188-10(1)

Section 188-15

Paragraph 188-15(1)(a)

Section 188-20

Paragraph 188-20(1)(a)

Section 188-25

Section 195-1

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

·   reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question 1

Section 23-5 provides that you are required to register for GST if you are carrying on an enterprise and your GST turnover meets the GST registration turnover threshold (currently $75,000).

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among 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

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d)   ...

Section 195-1 clarifies that the phrase carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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, which in accordance with paragraph 20 is also applicable to the construction of the term 'enterprise' in the GST Act, provides guidance as to when an enterprise is considered to be carried on. This approach is confirmed in 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?.

Paragraphs 303 to 322 of MT 2006/1 discusses activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents.

In this case you own a number of properties which have been acquired over a number of years. You lease the properties generating an annual turnover of approximately $xxx,xxx. Your activities constitute an 'enterprise' as defined for GST purposes. The sale of a rental property will fall within the scope of being 'made in the course or furtherance of an enterprise that you carry on'.

GST registration turnover threshold

Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if:

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

(b)   your projected GST turnover is at or above the turnover threshold.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraph 188-15(1)(a) and paragraph 188-20(1)(a) provide that input taxed supplies are not taken into account when calculating your current and projected turnovers respectively.

Section 40-35 provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) is input taxed.

Therefore, your turnover generated from the rental of your residential properties (approximately $xxx,xxx per annum) is not included in the calculation of your current or projected GST turnover.

In addition, section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

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.

33.   Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34.   'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35.   If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36.   Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose provides guidance on issues relevant to this case. Whilst GSTR 2009/4 is discussed in the context of the application of Division 129, the principles contained are relevant in this case.

Paragraph 39 of GSTR 2009/4 provides that a distinction can be made between things that are being held for the purpose of sale (revenue asset) as part of an enterprise being carried on by an entity, and things such as business plant and machinery (capital asset) used by an entity in carrying on an enterprise.

Paragraph 41 of GSTR 2009/4 contains a number of indicators or characteristics to assist in determining whether an entity holds a thing for the purpose of sale (revenue asset) including:

·  the subject matter - if a thing provides either a regular or periodic income (such as through rental income) or personal enjoyment to the owner it is more likely to be an investment rather than a trading asset; however, a large quantity of goods is likely to point towards trade;

·  the length of period of ownership - trading assets are generally traded within a short time after acquisition;

·  the frequency or number of similar transactions - the greater the frequency of transactions the greater the likelihood of trade;

·  >improving a property beyond merely preparing it for sale - this suggests an element of trade;

·  the circumstances responsible for a sale; and

·  motive (if an objective assessment of the other factors is not conclusive).

In your circumstances you have acquired multiple residential properties over several years. The properties are held for the purpose deriving income through the rental/leasing of the properties. This approach is the basis of your wealth investment strategy. It is not your intention to acquire or construct residential properties for the purpose of trade or sale. Your sole income from your enterprise activities to date has been generated from the rental of your investment properties.

Given the above and in the absence of history to the contrary, we consider that your residential properties are held for investment purposes and as such regarded as 'capital assets'.

In your circumstances, where Unit X is held for the purpose of leasing and you contemplate the need for sale at some time in the future, the sale of the unit will maintain its character of a capital asset. The proceeds from the sale of the unit will be disregarded from your projected GST turnover pursuant to section 188-25.

In these circumstances, your GST turnover will not meet the registration turnover threshold of $75,000 and you are not required to be registered in accordance with section 23-5.

Question 2

Not applicable

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

Section 9-5 provides that 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 to the indirect tax zone (Australia); and

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

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

You are not registered for GST and as discussed above, you are not required to be registered.

Consequently, all of the criteria of a taxable supply have not been met (specifically, paragraph 9-5(d)).

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