Edited version of private advice

Authorisation Number: 1051840271548

Date of advice: 20 May 2021

Ruling

Subject: GST and sale of new residential premises

Question

Will you be liable to pay GST when you sell one of the duplex units built on your property located in Australia?

Answer

Yes. You will be liable to pay GST when you sell one of the duplex units as the sale will be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

You will need to notify the purchaser in writing that they have a withholding obligation and need to pay a 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.

This ruling applies for the following period:

20 May 20XX to 20 May 20XX

Relevant facts and circumstances

You are not registered for GST.

In late 20XX, you purchased your family home located on an address in Australia (property) for $x.

The property was beautifully presented and had been recently renovated. However, once you moved into the property, you realised that the workmanship was second-rate particularly in the bathrooms and kitchen. As time went on, you became increasingly displeased with the renovation and layout of the home.

Through the expertise of professional tradespeople, you assessed the condition of the property and the cost required to address:

• Structural issues which included things such as uneven floors (caused by collapsing foundation stumps), corroding and broken gutters, roof leaks, and water seepage in the bathroom floor (caused by inadequate waterproofing) which led to mould growth and wood rot in crawl spaces; and
• Standard of living issues such as poor insulation due to gaps in the window frames/wooden floors, and the breakdown of cooling/heating systems (such as the ducted heating) thereby making it very difficult to regulate the temperature of the house.

You considered that it was just too expensive to fix issues with the house and renovate to your standards.

In early 20XX, you met with several real estate agents who all advised that if you were to sell the property, you would make a substantial loss on your investment.

After careful consideration, it was decided that if you wanted to have a home that had everything you hoped for and in the design and style you dreamed of, the only remedy was a knock-down/rebuild development.

You spent the following weeks researching recent developments in your area and the process and costs associated with construction. Based on your research, building a single dwelling would put you in a position where you would overcapitalise on your investment and be unable to realise the value of the land. You also noticed that dual-occupancy developments in your area were prevalent due to the standard sizing of the blocks.

You engaged an architect who advised you that the optimal option was to build two side-by-side dwellings in order to maximise the use of the land.

The application for a planning permit was submitted to the local Council in mid- 20XX and was approved in late 20XX. A building permit will be lodged prior to the commencement of construction.

You engaged with various builders in mid-20XX; however, due to the weak housing market, the lack of capital, and your personal circumstances, you decided to postpone the build and undertake some minor renovations (such as painting, installing split system air conditioning) to improve your standard of living. Due to further deterioration of the property, you resumed looking for a builder in the late 20XX and engaged with your current builder in late 20XX. Subsequently you signed the building contract in early 20XX.

The cost of the project including the original purchase cost of the property total $x. Your savings will fund approximately 20% of the construction cost and the remaining 80% is being funded through a construction loan.

You will sell one of the units and conservatively estimate a sale price of $x. If the unit is sold for the price you hope for, the project is predicted to come out even, give or take $x, with the upside of a brand new home designed to your specification with high end fixtures and fittings.

The construction is intended to commence in mid-20XX and expected to finish in early 20XX.

It is the first and only time that you will undertake this type of project.

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Summary

The sale of the duplex unit will be a supply of new residential premises that will satisfy all the requirements in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sale will not be input taxed or GST-free; therefore, the sale will be a taxable supply. Accordingly, you will be liable to pay GST on the sale.

Detailed reasoning

GST is payable on a taxable supply.

Section 9-5 of the GST Act states:

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 with the indirect tax zone; and

(a)       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 under section 195-1 of the GST Act)

The sale of the duplex unit will be made for consideration. The sale will be connected with Australia as the unit is situated in Australia. The requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act above will be satisfied.

What remains to be determined is whether the sale of the duplex unit will be made in the course or furtherance of an enterprise that you carry on [paragraph 9-5(b)] and whether you are required to be registered when you sell the unit [paragraph 9-5(d)].

Paragraph 9-5(b)

For the purposes of paragraph 9-5(b) of the GST Act, an 'enterprise' is defined in section 9-20 to include amongst others 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.

You advised that this is the first and last project that you will undertake; thus, this is a 'one-off' or isolated real property transaction. The issue to be decided is whether the activities that you have been carrying on that will lead to the sale of the duplex unit are considered to be activities of carrying on a business or an adventure of concern in the nature of trade as opposed to the mere realisation of a capital asset.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. Goods and Services Tax Determination 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.

According to paragraph 264 of MT 2006/1, the cases of Statham & Anor v. Federal Commissioner of Taxation 105 (Statham) and Casimaty v. FC of T 106 (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farmland was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

From the Statham and Casimaty cases a list of factors can be ascertained that provides assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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 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.

While it is necessary to consider the factors in examining the facts and circumstances of each particular case, there may also be other relevant factors that need to be weighed up. No single factor will be determinative rather it will be combination of factors that will lead to a conclusion as to the character of the activities.

You purchased the property to be used as your family home and have now decided to subdivide the property, build two duplex units and sell one of the units. There was a change of purpose for which you held the land.

You did your research, consulted with real estate agents, engaged an architect to draw up plans, obtained a planning permit and entered into a building contract. There is a coherent plan for your project.

You are obtaining a construction loan to finance the project in addition to your existing mortgage. As you are building duplex units on the land, there is a level of development beyond that necessary to secure approval for the subdivision of your property.

You will use one of the duplex units for your residence and prefer not to hold on the other one. You estimate that the project will break even when you sell one of the duplex units at the price you hope for. However, the real benefit that you get from the project is that you will have a brand new home designed to your specification with high end fixtures and fittings.

Based on the information that you provided, we consider that your activities that will lead to the sale of the duplex unit amount to an adventure or concern in the nature of trade; thus, you are carrying on an enterprise as defined in section 9-20 of the GST Act. The sale of the duplex unit will be in the course of an enterprise that you carry on. The requirement in paragraph 9-5(b) will be satisfied.

Paragraph 9-5(d)

Section 23-5 of the GST Act provides that you are required to be registered if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for a non-profit body).

According to subsection 188-10(1) of the GST Act, your GST turnover meets a particular turnover threshold if:

(a)  your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b)  your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Section 188-25 of the GST Act provides that in working out your projected GST turnover, disregard:

(a)  any supply made, or are likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)  any supply made, or are likely to be made, by you solely as a consequence of:

                      i.         ceasing to carry on an enterprise; or

                     ii.        substantially and permanently reducing the size or scale of an enterprise.

Generally, the term 'capital assets' refers to the profit yielding subject of an enterprise. Capital assets can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income.

Capital assets are distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of an enterprise.

Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

You acquired your property in late 20XX and; in the early 20XX, you decided to subdivide the property and build duplex units on the land. While you are keeping one of the units to live in, you will not hold on the other unit as an investment asset and you will not use it as a capital asset to produce income. The other unit will be a revenue asset at the time of sale. Therefore, the sale of the unit is not disregarded in calculating your projected GST turnover.

Under paragraph 188-20(a) of the GST Act, input taxed supplies are also disregarded in calculating your projected GST turnover.

Section 40-65 of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupancy). However, the sale of 'new residential premises' is not input taxed.

Residential premises are 'new residential premises' if they:

(a)  have not been previously sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease; or

(b)  have been created through substantial renovations of a building; or

(c)   have been built, or contain a building that has been built, to replace demolished premises on the same land.

The duplex unit that you will sell will be new residential premises; thus, the sale will not be input taxed. The sale will be included in calculating your projected turnover.

As the duplex unit will be sold for more than $X, your projected GST turnover will be above the threshold; as such, your GST turnover will meet the registration turnover threshold. Paragraph 23-5(b) of the GST Act will be satisfied and you will be required to register for GST.

All the requirements in section 9-5 of the GST Act will be satisfied. The sale will not be an input taxed supply as determined above. There is not provision in the GST Act under which the sale will be GST-free. Therefore, the sale of the duplex unit will be a taxable supply. Accordingly, you will be liable to pay GST on the sale.

Input tax credits

Once registered for GST, you would be entitled to the input tax credits for your creditable acquisitions in relation to the project to the extent that those acquisitions are attributable to the duplex unit that you are selling. Where the price of an acquisition is for the two duplex units (for example, the total price payable under the building contract) you must make a fair and reasonable apportionment.

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