Edited version of private advice

Authorisation Number: 1051745602274

Date of advice: 26 August 2020

Ruling

Subject: GST and sale of property

Question

Will the sale of your property known as Lot 4912 Skyline Drive, Stage 49 Waterford Rise, Warragul Victoria constitute a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

Relevant facts and circumstances

You are not registered for GST.

You applied for an Australian business number (ABN) on dd/mm/yyyy with an ABN being issued effective from dd/mm/yyyy. Your main activity is described as a property investor renting or leasing residential premises.

Individual A is the Trustee. Individual A is also a beneficiary.

On dd/mm/yyyy you purchased vacant land (the Property). The price of the vacant land was $xxx,xxx.

You acquired the Property with the intention of building a residential house for rental purposes.

You entered into a construction contract with a builder on dd/mm/yyyy and construction commenced shortly thereafter. The price to construct the house was $xxx,xxx. Construction was completed in mm/yyyy.

Costs associated with the purchase and construction of the Property were financed via a bank loan with a term of 30 years.

Following the completion of construction in mm/yyyy, the Property has never been rented out.

You do not and have never owned any other properties. The Trustee (Individual A) owns a commercial property which is leased out to his business, ABC Pty Ltd. The property is a factory purchased in Individual A's name in yyyy.

You did not apply for GST registration as you never intended to sell the Property. Your intention was to rent the Property out indefinitely.

In March 2020, the Victorian government, along with the rest of Australia, was put into lock down due to the COVID-19 pandemic.

There was uncertainty in the property market and your belief was that the prospect of receiving a reasonable rental amount for the Property was slim.

As a result you realised that your ability to service the bank loan was no longer possible and were experiencing financial stress.

You decided to put the Property on the market for sale in an effort to re-coupe some of the costs associated with the purchase of the Property and construction costs.

The estimated sale price is approximately $xxx,xxx.

Individual A is a mechanic by trade and income of Individual A is generated from his mechanical business (ABC Pty Ltd). Individual A has operated this business since yyyy. Individual A has no experience in property development.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-40

Reasons for decision

In this ruling,

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

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

·         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

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 the sale of the Property is made in the course or furtherance of an enterprise you carry on. If so, the next question we will need to consider is whether you are required to be registered for GST.

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

·         in the form of a business; or

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

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) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). 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.

Application to your situation

In this case, you acquired vacant land in mm/yyyy. You acquired the Property for the purpose of building a residential dwelling as an investment as a rental property.

You entered into a construction contract with a builder in mm/yyyy and construction was completed in mm/yyyy. Costs associated with the construction was financed through a 30-year bank loan.

You have never previously been involved in property development or the construction of new premises.

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. This is a one-off project that is not considered to being carried out in a manner similar to other property development businesses.

Given the above, we do not consider your activities in regard to the purchase of the land, construction of the dwelling and pending sale to have been done 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

Application to your situation

Paragraph 247 of MT 2006/1 discusses that where property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. As discussed above you acquired the Property for the purpose of building a house as an investment as a rental property.

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 buying, building and selling the Property in this instance, is not an enterprise for GST purposes. Factors that we considered include;

·         Your property was acquired for the purpose of building a house for investment.

·         You have not previously engaged in similar activities.

·         Due to unforeseen circumstances in relation to the COVID-19 pandemic, specifically in Victoria, you have found yourself in the position of being unable to service your loan and have determined that you need to now sell the Property.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion your intention for holding the Property was not for the purpose of trade. Whilst there has been a change in your intentions, that is to sell the Property as opposed to use the property for lease, 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 pending sale of the Property as being done in the form of an adventure or concern in the nature of trade.

Conclusion

The activities you have undertaken in regard to the construction of new residential premises and the subsequent sale of the Property are not considered to be done in 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 Property.

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.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).