Edited version of private advice

Authorisation Number: 1051814556785

Date of advice: 11 March 2021

Ruling

Subject: GST and sale of duplex unit

Question

Will Goods and services tax (GST) be payable on the sale of the duplex located at address X under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of the duplex located at address X will not be a taxable sale under section 9-5 of the GST Act. Therefore, there will be no GST liability to pay on the sale of the duplex.

You will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the duplex 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

Individual A and individual B (you) work full-time as professionals for a professional services business conducted by a related trust entity that is registered for GST. The trust owns the business premises.

You do not individually or as a partnership operate an enterprise and have no plans to do so. You are not registered for GST.

You acquired the property located at (address X) in (year) for (price).

You held X property for many years and the property was rented throughout the whole period prior to the commencement of the development project on the X property.

Your development involved demolishing the house on property X; subdividing the land into 2 lots and building a duplex unit on each subdivided lot. Duplex 1 is built on property X and Duplex 2 is built on property XA.

The initial purpose of the subdivision was to build one duplex unit for your main residence and the other one was going to be for the parents/parents-in-law to live in.

DA plans for the duplex commenced in (year) with building works commenced in (year) and these were completed in (year). There was no amalgamation of land to create the development site and it was quite a high spec architectural build.

There was significant delay with council approval because of stormwater and driveway changes. The construction was completed on (date) with the occupancy certificate finalised on (date).

You did not organise the construction yourselves and did not set up a business organisation to manage the development. The construction of the duplex was managed by Y with the construction cost including professional fees totalling over (amount).

The construction of the duplex was funded by the equity from refinancing a loan against your current main residence and your own savings. There was no construction loan applied. However, with the completion of construction, you encountered some cashflow issues due to unexpected building and holding costs (in part due to significant council delays for over (number) months). You have been unable to refinance your current home loan which is at nearly twice the current average home loan rate.

To improve your cash flow, you decided to sell Duplex 1 and to lease Duplex 2. You have hired Z to organise the sale of Duplex 1.

You have not claimed any tax deductions for the construction of the Duplex and you are of the view that they should be included as the cost base of the property for capital gains tax purposes when the Duplex is sold.

You have no history of buying and developing land for profitable re-selling. You have not registered for GST and your related entity that participated in the construction and subdivision activity has not registered for GST as well.

You have purchased a few residential properties over the years and derived rental income from these 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

GST will not be payable on your sale of the Duplex located at address X as your sale of the Duplex is not a taxable sale under section 9-5 of the GST Act.

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

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New tax System (Goods and Services Tax) Act 1999 (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 defined term in section 195-1 of the GST Act)

The indirect tax zone means Australia.

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as:

•         you will sell Duplex 1 for consideration; and

•         the sale of Duplex 1 will be connected with Australia as the property is located in Australia.

Therefore, what remains to be determined is whether your sale of the Duplex will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as currently you are not registered for GST.

Whether the sale will be made in the course or furtherance of an enterprise that you carry on

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 purpose 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.

You purchased property X as an investment property and derived rental income from that property until the subdivision of the property started. In that rental period you were carrying on a leasing enterprise and the property was a capital asset.

The leasing enterprise ceased when the subdivision started and the building of the duplex on each lot. The purpose of the subdivision and the building of the duplex on which lot was for your family and your parents-in-law to stay in the duplex. In this instance the duplex were not built for trading purposes and would be capital assets that you would hold in these circumstances.

However, your circumstances changed due to financial difficulty, and you decided to sell Duplex 1 and rent Duplex 2.

According to Miscellaneous Tax Ruling MT 2006/1, assets can change their character from a capital/investment asset or a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

In this instance we need to determine if the sale of Duplex 1 will be made in the course of an enterprise that you carry on.

In the form of a business

Paragraphs170 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 refence 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 business 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.

Based on the facts provided, we do not consider that your actions of subdividing the property, building the duplex on each lot and selling Duplex 1 constitute activities 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

In your case:

•         you originally purchased property X for investment purposes and derived rental income from that property;

•         your activities of ceasing the leasing enterprise, subdividing the land into two lots and building a duplex on each lot were motivated by your desire to have your family and your parents-in-law use the new constructed duplex for personal use as a family home;

•         You are not in the business of property development;

•         Due to a change to your circumstances (financial difficulty) you have decided to sell Duplex 1 and lease Duplex 2 in order to improve your cash flow and ease your financial difficulty.

In this case, after weighing up all the facts we consider that your sale of Duplex 1 will be the sale of a capital asset rather than a sale of a trading asset of a business or adventure or concern in the nature of trade.

Conclusion

Accordingly, your sale of Duplex 1 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 Duplex 1 since it will not be a taxable supply under section 9-5 of the GST Act as paragraph 9-5(b) would not be satisfied.

Please note that the sale of Duplex 1 will not be a taxable supply in this instance; however if you carry on similar activities in the future, the outcome for GST purposes may be different.

Other information

GST at settlement

From 1 July 2018, purchasers of residential property may be required to withhold an 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 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 Duplex 1, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sale contract or in a separate document prior to settlement.

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