Edited version of private advice

Authorisation Number: 1051706935098

Date of advice: 26 June 2020

Ruling

Subject: GST and sale of vacant land

Question

Will the sale of the property by A and B, be a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the sale of the property by A and B will not be a taxable supply in accordance with section 9-5 of the GST Act.

Relevant facts and circumstances

You, (Individual A and Individual B), entered into a Contract for the sale and purchase of land (the Contract) with Entity X (the vendor/developer) on X XX XXXX. The Contract was for the purchase of a 462 sqm vacant block of land (the property). The settlement of the Contract took place on X XX XXXX. The sale price of the property was $XX.

At the time of the purchase, you were in a relationship with each other and had purchased the property with the intention of building your principal place of residence on it. The ownership of the property was shared 50/50 between the two of you.

The Contract was marked as "margin scheme will be used in making the taxable supply".

You have no current or historical GST registration either individually or as a partnership, jointly or severally. You funded the purchase of the property via savings, a loan from the bank and an interest free loan from your parents.

On X XX XXXX, being the settlement date of the Contract, you entered into a lease agreement with the vendor/developer for the lease of the property to the vendor/developer. Some of the terms of the lease are as follows:

1      The vendor/developer would pay you a rent of $XX per annum. You have included your half share of this rental income in each of your individual tax returns.

2      In return you allowed the vendor/developer to place a portable office on the block so that the vendor/developer could use the site to make future land sales. The portable office and all works were carried out at the expense of the vendor/developer and removed by the vendor/developer when the lease was terminated.

3      The initial term of the lease was X months from X XX XXXX. The vendor/developer however exercised several options under the lease agreement to extend the lease which was eventually terminated in XX XXXX.

The property is currently vacant land.

You purchased this particular lot as there were no remaining lots of comparable size and positioning left in the subdivision due to the high demand within the subdivision resulting in you having to enter into the lease agreement with the developer.

Since purchasing the property, you have separated and are no longer in a relationship with each other. You have therefore decided to sell the property rather than build your principal place of residence on it as you had initially intended.

Neither of you have ever sold real estate previously.

Individual A purchased a block of land in XX on X XX XXXX. Individual A contracted a builder to construct a house and a granny flat on the land and construction was completed in XX XXXX. Individual A has been earning rental income from this property and still owns the property as at the date of issue of this ruling.

Individual B does not own any other properties apart from the property as at the date of issue of this ruling.

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 subsection 9-20(1)

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

Paragraph 9-20(1) of the GST Act provides that an enterprise includes an activity or series of activity done, on a regular or continuous basis, in the form of a lease of property.

You have leased the property continuously from the date of purchase in XX XXXX to XX XXXX at which time the lease was terminated and you decided to sell the property. You are therefore considered to be carrying on a leasing enterprise in relation to the property.

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 provides that carrying on an enterprise includes activities done in the commencement or termination of the enterprise (paragraph 94).

Paragraph 140 of MT2006/1 states:

Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Therefore, your sale of the property will be undertaken in the course of carrying on your leasing enterprise.

Further, your sale of the property will be made for consideration and the property is in Australia. You are however not registered for GST and therefore it needs to be determined if you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered under the GST Act if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold which is currently $75,000.

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 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:

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'.

'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 your case, you are conducting a leasing enterprise from the property and as such the property will constitute a capital asset of your leasing enterprise.

The sale of the property, therefore, is a supply of a capital asset and consideration from the sale will not be included in the calculation of the projected GST turnover for the purposes of section 188-25 of the GST Act.

As your turnover from your leasing enterprise does not exceed the registration turnover threshold for GST purposes, you are not required to be registered for GST and therefore the positive limbs of section 9-5 of the GST Act will not be met in relation to your supply of the property. The sale of the property will therefore not be a taxable supply.

Note

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 of acquiring the asset 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:

The greater the frequency of similar transactions the greater the likelihood of trade.

Accordingly, if you continue to purchase and sell property for gains, all your activities will need to be assessed as a whole to establish whether you are carrying on an enterprise of property development.

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