Edited version of private advice

Authorisation Number: 1051727098381

Date of advice: 18 August 2020

Ruling

Subject: Main residence exemption - CGT - GST

Question 1

Are you entitled to apply the capital gains tax (CGT) main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to the sale of your property?

Answer

Yes

Question 2

Does the sale of your property constitute a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

You purchased a block of land in 20xx.

The purchase price was $xx.

You purchased the block of land with the intention of building your domestic residence on it.

The size of the land is less than two hectares.

You are in the business of carrying out minor domestic building repairs and renovations which include your labour and contract costs for residential clients.

You spent a considerable amount of your time in the construction of the new building.

The construction of the new house was considered by you as private and personal and therefore simply a use of your time and skills to save other building costs.

You incurred design and construction costs.

Occupancy was granted by the registered Building Inspector in 20yy.

You have been living in the new building since the building completion.

You sold the property and you made a capital gain from the sale.

The sale price was $yy.

The reason for selling is due to financial pressure.

The property was your main residence throughout the ownership period.

You did not choose another property as your main residence.

You did not use the property to produce any assessable income.

You are not currently registered for GST. You were previously registered for GST. Your main business activity was the provision of home renovation and building services, home handyman services, etc.

Your ABN was cancelled.

You did not claim any GST on the costs associated with the construction of the building.

You have not carried out any such construction on an intended profit-making basis in your own name in the past.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-150

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(c)

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

Reasons for decision

Question 1

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset in which you have an ownership interest.

Buildings and land are CGT assets as defined under section 108-5 of the ITAA 1997 and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997.

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or loss made from a CGT event that happens to a dwelling which is your main residence.

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any gain or loss arising from a CGT event that occurs in relation to that dwelling.

Generally, if you build a dwelling on land you already own, the land does not start to qualify for an exemption under the main residence exemption provisions until the dwelling actually becomes your main residence.

Section 118-150 of the ITAA 1997 allows you to apply the main residence exemption to land for up to four years before you build a dwelling that becomes your main residence. You can only make this choice if the dwelling becomes your main residence as soon as practicable after the building work is finished and it continues to be your main residence for a minimum of three months

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

In your case, you purchased a block of land on in 20xx with the intention of building your domestic residence; the occupancy was granted in 20yy and you lived in the building for a period of time before the sale.

You treated the property as your main residence throughout the ownership period; you did not choose another property as your main residence and you did not use the property to produce any assessable income.

Therefore, you are entitled to apply the CGT main residence exemption under section 118-110 of the ITAA 1997 to the sale of your property.

Question 2

Section 9-40 of the GST Act provides that you are liable to pay GST on any taxable supply that you make.

Section 9-5 of the GST Act states 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.

The issue in this case is whether your activities of purchasing the vacant land for the purposes of constructing your principal place of residence and the subsequent sale of the property some years later are done in the course or furtherance of an enterprise that you carry on. If so, as you are not currently registered for GST, we will need to consider whether you are required to be registered for GST.

Subsection 9-20(1) of the GST Act 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)   ...

However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity, or series of activities, done by an individual without a reasonable expectation of profit or gain.

The question of whether an entity is carrying on an enterprise is examined 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.

The Goods and Services Tax Determination: 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? GSTD 2006/6 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.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

In the form of a business

Paragraphs 170 to 179 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:

(d)          a significant commercial activity;

(e)          a purpose and intention of the taxpayer to engage in commercial activity;

(f)            an intention to make a profit from the activity;

(g)          the activity is or will be profitable;

(h)          the recurrent or regular nature of the activity;

(i)            the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

(j)            activity is systematic, organised and carried on in a businesslike manner and records are kept;

(k)           the activities are of a reasonable size and scale;

(l)            a business plan exists;

(m)         commercial sales of product; and

(n)          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.

Paragraph 180 of MT 2006/1 discusses that an enterprise may be carried on a small scale stating:

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

In this case, given the facts we consider that you are not carrying on an enterprise in the form of a business because your activities by themselves were not a commercial activity nor was your intention to undertake a commercial activity but a private activity of building your principle place of residence.

Next we will consider whether your activities are an activity in the form of an adventure or concern in the nature of trade.

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

Paragraph 244 of MT 2006/1 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.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

·                     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.

In this case your activities were motivated by your desire to use the newly constructed premises as your principal place of residence. You carried through this intention and lived in the house for some years.

However, due to financial pressures you have since sold the property.

In weighing up all of the facts of this case, we do not consider your activities to constitute an adventure or concern in the nature of trade. Your activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes.

Furthermore, your activities were not done with the expectation of generating a profit. As discussed above, it was your intention at the time of acquiring the vacant land to build a dwelling to use as your primary residence. You have resided in the dwelling since construction was completed until sold.

In conclusion, your activities do not fall within the definition of an 'enterprise' for GST purposes. The sale of the Property does not satisfy paragraph 9-5(b) and as such is not a 'taxable supply'.

Please note however that whilst the sale of the Property is not a taxable supply in this instance, in the situation you carry on similar activities in the future, the outcome for GST purposes may be different.

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