Edited version of private advice

Authorisation Number: 1051837031867

Date of advice: 12 May 2021

Ruling

Subject: GST and real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when you sell one of the properties?

Answer

No, the sale of the property is not done in the course or furtherance of an enterprise and is therefore not a taxable supply.

The scheme commences on:

13 May 2013

Relevant facts and circumstances

A superannuation fund purchased the property. The superannuation fund was registered for GST at the time of the purchase and the intention was to develop the vacant land as an investment. The sale of the property to the superannuation fund was not a taxable supply.

The superannuation fund subsequently made an in-specie distribution of the property to you. Planning approval was granted to develop the property and development approval was subsequently to construct two semi-detached premises.

Construction was completed and each premises is occupied by your two sons. No rent is received by you in relation to the occupancy.

You intend to sell one of the properties to one of your sons for an amount that is less than the market value of the property.

You are not registered for GST and do not carry on an enterprise in relation to property development. Neither you, nor any associated entity has previously undertaken property development, construction or sales.

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

Generally, a sale will be subject to GST if it is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Under section 9-5 of the GST Act, you make a taxable supply if:

•         you make a supply for consideration (payment); and

•         the supply is made in the course or furtherance of an enterprise that you carry on; and

•         the supply is connected with the indirect tax zone (Australia); and

•         you are registered, or required to be registered for GST; and

•         the supply is neither GST-free, nor input taxed.

When you sell one of the properties to your son, you are making a supply of that property. The amount you receive for that sale is the consideration for the supply. Although the GST Act contains provisions about supplies that are made to associates for consideration that is less than market value, those provisions are only applicable if the other elements of section 9-5 of the GST Act are met.

If the sale of either property is not 'in the course or furtherance of an enterprise that you carry on', then the sale is not subject to GST. An enterprise is defined by section 9-20 of the GST Act and includes activities done 'on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. By allowing your sons to occupy the premises, you have granted a licence to occupy those premises and consequently, you have satisfied this part of the definition of carrying on an enterprise. However, paragraph 9-20(2)(c) of the GST Act specifically excludes activities that are done by an individual 'without a reasonable expectation of profit or gain'. Because you are not receiving payment in return for allowing your sons to occupy your premises, there can be no reasonable expectation of profit or gain from granting the licence to occupy. Consequently, you are not carrying on an enterprise in relation to the ongoing occupancy granted to your sons.

Even though the ongoing granting of occupancy to your sons is not an enterprise for the purposes of the GST Act, the sale of those properties may still be considered activities done in the course or furtherance of an enterprise. The definition of enterprise in section 9-20 of the GST Act also includes 'an activity... done ... in the form of an adventure or concern in the nature of trade'. The meaning of the term 'activity, or series of activities' for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity. The Miscellaneous Taxation Ruling, 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) discusses when isolated transactions may constitute an enterprise. Paragraph 244 states 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 ...' and the following 'badges of trade' are discussed from paragraph 247:

•         The subject matter of realisation

This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. Your acquisition of the property and construction of the two premises did not generate income as you have allowed your children to occupy those premises.

•         The length of period of ownership

A trading asset is generally dealt with or traded within a short time after acquisition. Construction began relatively shortly after you acquired the property in the context of property ownership as a non-trading asset.

•         The frequency or number of similar transactions

The greater the frequency of similar transactions the greater the likelihood of trade. You have indicated that neither you, nor any entity that you are associated with or related to have undertaken property development activities previously.

•         Supplementary work on or in connection with the property realised

The development of the properties that you have undertaken suggests an element of trade.

•         The circumstances that were responsible for the realisation

Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. In this case, you are selling the property to your son which tends to indicate that the sale is not commercial in nature.

•         Motive

If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. Motive is also important in cases if there is a change in character of the asset. Although the motive of the superannuation fund may have changed from the time it purchased the property to the time it made the in-specie distribution to you, it is your motive in holding and subsequently selling the property to your son that is relevant. It appears that your motive in selling the property is not commercial in nature and this is evident in the fact that you are selling it for an amount that is below market value.

•         Trade versus investment assets

Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. As you have not received any rental income from your ownership of the properties, it cannot be concluded that you have held the properties as investment assets.

MT 2006/1 discusses isolated transactions involving the sale of real property and, at paragraph 265, states:

265. ... If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

•         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.

However, paragraph 266 of MT 2006/1 emphasises that the specific facts and circumstances surrounding the sale must be carefully considered:

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

On balance, your sale of one of the properties to a family member does not exhibit the hallmarks of a commercial transaction. This is because the property could be readily sold on the open market to attain an increased price. Furthermore, you have not undertaken property development previously and have allowed your sons to occupy the premises without paying rent. These factors indicate that the sale to your son is not done on commercial terms but done for private, personal reasons. Consequently, the sale of the property is not a supply made in the course or furtherance of an enterprise.

As the sale is not made in the course or furtherance of an enterprise, the sale is not a taxable supply under section 9-5 of the GST Act and no GST applies to the sale.

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