Edited version of private advice

Authorisation Number: 1051782664392

Date of advice: 23 November 2020

Ruling

Subject: Goods and services tax and sale of new residential premises

Question

Will the sale of your property known as X, 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. The sale of your property known as X, will not be a taxable supply under section 9-5 of the GST Act as you are not considered to be carrying on an enterprise when selling the property. You therefore will not be liable for GST on the sale of the property.

You will need to notify the purchaser in writing that they do not have a GST withholding obligation and do not need to pay a GST withholding amount from the contract price of the property to the Australian Taxation Office (ATO) when purchasing the property. This can be included in the sale contract or in a separate document prior to settlement.

Relevant facts and circumstances

You are an employee dentist and you are not registered for GST.

You borrowed money to purchase a vacant block of land known as X. Settlement of the purchase took place in 2016.

You purchased the vacant land with the intention of building a new home, which would be used for your retirement and a holiday home for your elderly parents in the interim.

Your parents are now elderly and are unable to travel overseas or for that matter long distances. They live a certain distance away and it was reasonable to assume originally that parent number 1 would have been able to drive to the new home, spend weekends there and enjoy fishing on the lake.

You borrowed money and engaged Y to construct a custom designed home on the vacant land. Construction of the home started in 2019 and is now 99% completed. An occupancy certificate for the home in question was granted in 2020. You still need to complete some landscaping and do some finishing touches to the property.

The zoning of the property is low density residential. You were not involved in the construction of the new home other than hiring the builder to build it.

Lately your elderly parents have been diagnosed with an illness. With your elderly parents being sick and needing to remain close to doctors, shops and so on, it became apparent that the new home will no longer be able to be enjoyed as a family home.

The new home is too far away from your work to be used as your principal place of residence and you are not ready to retire from work. You do not want to rent the home as you want to avoid it being destroyed by the tenants.

You have not occupied the house in question at all as both parents require care on your days off work and further the house is not finished. You have not used the property in question for any purpose.

You cannot hold onto the house unlived in.

You never intended to build the home as a business venture.

You have not advertised the sale of the new house yet. Only enquiries have been made.

You have not claimed any income tax deductions in relation to the property in question.

You have no experience in property development. You have not carried on any property related business activities at other locations and you have no intention to do so.

In 2011 you built a house and you currently use it as your principal place of residence. This is the only house you have built in addition to the new home.

You own a few investment properties.

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

Reasons for decision

Summary

The sale of your property known as X, will not be a taxable supply under section 9-5 of the GST Act as you are not considered to be carrying on an enterprise when selling the property. You therefore will not be liable for GST on the sale of the property.

Detailed reasoning

GST is payable on taxable supplies.

An entity makes a taxable supply if they meet the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a)  you make the supply for *consideration; and

(b)  you make the supply 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.

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

(*Denotes a term defined in section 195-1 of the GST Act)

The issue in this case is whether the sale of the property is made in the course or furtherance of an enterprise that you carry on. If so, the next question is whether you are required to be registered for GST.

Enterprise

In accordance with section 9-20 of the GST Act, an enterprise includes, amongst other things:

•         an activity or series of activities done in the form of a business

•         an adventure or concern in the nature of trade

•         leasing out property on a regular or continuous basis.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for the purposes of determining whether an entity carries on an enterprise for GST purposes.

Paragraphs 170 to 232 discuss the 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 or 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 out in a similar manner to that of other businesses in the same or similar trade;
• activity is systematic, organised and carried out in a business like way 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 and 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 may turn on its own particular facts, the determination of the question is generally a result of a process of weighing all the relevant indictors.

Application to your situation

In this case, you acquired the vacant land with intention of building a residential dwelling to be used as a family home by you and your elderly parents.

You entered into a construction contract with a builder and an occupancy certificate for the home was granted recently. Costs associated with the construction were financed through a bank loan.

You have never previously been involved in property development or the construction of new premises apart from the current house you built and live in.

We consider that the activities you have undertaken do not display the salient indicators 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 be carried out in a manner similar to ordinary property development businesses.

Given the above, we do not consider your activities in regard to the purchase of the land, the 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

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 states:

244. An adventure or concern in the nature of trade include a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and 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.

Paragraphs 262 and 263 of MT 2006/1 state:

262 The question of whether an entity is carrying on an enterprise often arises where there are on-offs or isolated real property transactions.

263 The issue to be decided is whether activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or adventure or concern in the nature of trade (profit-making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context, a number of public rulings have been issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127, TD 92/128)

Based on the information given you acquired the vacant land for the purpose building a house to use for family purposes - you had planned to use the house as your retirement home and in the interim allow your parents to use the house as their holiday home. You did not intend to engage in a profit making venture. Therefore, we consider the activities undertaken in buying, building and selling the property in this instance is not an enterprise for GST purposes.

Further, given the private and family reasons behind your purchase of the vacant land, the construction of the home and your planned sale of the property, we consider that your sale of the property will be a sale of a private asset, rather than a sale of a trading asset of a business or adventure or concern in the nature of trade.

Accordingly, your sale of the property will not be a supply made in the course of furtherance of an enterprise that you carry on. Therefore, GST will not be payable on your sale of the property as it will not be a taxable supply under section 9-5 of the GST Act.

Other information

GST at settlement

From 1 July 2018, purchasers of residential properties may be required to withhold a GST amount from the contract price and pay it directly to the ATO. The remainder of the sale price is paid to the property supplier. This potentially applies to:

• New residential premises
• Land that could be used to build residential buildings

Suppliers must notify purchasers in writing as to whether they have a GST withholding obligation or not when they sell (subject to certain exceptions).

Suppliers must determine if they are running an enterprise. Even a one-off property sale could mean they have a GST obligation.

More information on GST at settlement is available at ato.gov.au

As we have determined that you will have no GST liability when you sell the new property, you will need to notify the purchaser in writing that they do not have a GST withholding obligation and do not need to pay a GST withholding amount from the contract price of the property to the ATO. This can be included in the sales contract or in a separate document prior to settlement.

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