Edited version of private advice

Authorisation Number: 1051940387254

Date of advice: 19 January 2022

Ruling

Subject: GST and sale of a capital asset

Question

Is the sale of the Property 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 Property is an asset of a leasing enterprise and the sale is not a taxable supply.

Relevant facts and circumstances

You have been carrying on a leasing business of residential properties and are not registered for GST in your own names.

On AAAA you acquired the original property as a residential investment property. The original property contained an existing dwelling in the form of a house. This property was acquired by you as co-owners.

For several years, the original property was rented continuously to unrelated parties.

Intention to develop the original property into two residential properties

On BBBB you decided to develop the original property into two new townhouses, with the intention of renting out the two townhouse units. After hiring a surveyor to handle the completion of drawings, permits etc, you entered into a contract to demolish the house on the original property.

On CCCC, the demolition of the original property was completed. The original property was leased until it was demolished. All demolition works were undertaken by a specialist demolition company.

On DDDD, you signed the contract with a builder at arm's length, to undertake all works to build two townhouse units on the site of the original property. All construction works were carried out by a registered builder. You had very minimal involvement in any elements of the construction project, apart from landscaping and gardening after construction was completed.

The build contract price for the two units was $FFF. The construction was funded by refinancing their loan. The term of the single loan for the two properties is GG years. You state you did not claim input tax credits for the costs of building the townhouse units as they intended to hold them as long-term rental investments.

On HHHH, construction of the townhouses was completed, you provided a copy of the Occupancy permit. The landscaping and gardening were completed by the you over the following couple of months.

When the townhouses were nearing completion, you signed the Authority to lease with ... for both properties A and B. Rental is expected to be $...per week. Both townhouses were advertised for rental lease in IIII.

On KKKK, you obtained a schedule of depreciation and capital allowances for the Property.

Since no tenant was found for the Property A for L weeks, you reduced the expected rent from $.../week to $..../week in order to secure a tenant.

The Managing Agent supports your assertions that you were ready and willing to rent out both Property A and B by providing evidence.

You spent a few months attempting to lease out Property B but were unsuccessful. As the property A took ...months to lease (longer than anticipated) and the desired rent return was not achieved, you advised the Managing agent to withdraw Property B from the market for lease in order to consider listing it for sale.

On MMMM, the Property B was listed for sale. You exchanged contract for a buyer on ...to sell the property for at $... (GST exclusive). You state that your family business closed due to COVID on NNNN which coupled with the Property B not being rented for a few months, caused financial concerns to you and has further contributed to your decision to sell the Property B.

You will continue to carry on your leasing enterprise with Property A even after Property B is sold.

You have never been registered for GST as you have only ever carried on a residential leasing enterprise. Neither of you, nor any entities that you controlled were ever involved in any form of property development for sale. You have only held long term property investments for leasing.

Reasons for selling the Property

As a result of the COVID forced business termination, you state that you no longer had the business income to service the existing level of debt. Hence you made the decision to sell Property B.

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 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Detailed reasoning

Section 9-40 of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides 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 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.

Based on the facts provided, the Property is owned by two individuals thus we first need to examine whether the Property will be provided by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership.

Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership of co-owners. For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the Property.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration and the property is located in the indirect tax zone respectively.

Therefore, we need to consider:

• whether your sale of the Property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and
• whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Paragraph 9-5 (b) of the GST Act -Whether the sale is made in the course or furtherance of an enterprise that you carry on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst 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, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Section 195-1 provides that "carrying on" an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

You are carrying on an enterprise of leasing residential properties. The sale of the Property will be a sale made in the course or furtherance of an enterprise that you carry on.

Based on the facts provided, we do not consider that you are carrying on an enterprise of property development because:

•         The Managing Agent provided evidence that they have the authority from you to lease both property A and B.

•         The Managing Agent stated that property A took some months to lease and that you needed to reduce your expected rent in order to secure a tenant.

•         You have also provided explanations of financial pressures from the family business which contributed to your change of intention from leasing to selling the Property.

Paragraph 9-5 (d) of the GST Act -Whether you are registered or required to be registered for GST

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the new property that you have constructed.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. Subsection 23-15(1) of the GST Act provides that your registration turnover threshold (other than a non-profit body) is $75,000.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a)    your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b)    your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover (section 188-15 of the GST Act) and projected GST turnover (sections 188-20 and 188-25 of the GST Act), the following supplies (amongst others) are not included in the calculation:

• supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).
• supplies that are not for consideration.
• supplies that are not made in connection with an enterprise that you carry on.
• supplies that are not connected with the indirect tax zone.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) 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.

On the facts as they currently exist, we consider that the sale of the Property B would be the sale of a capital asset in the course of your leasing enterprise (which you will continue with the leasing of property A) and will be excluded from your projected GST turnover.

As a result and based on the other information you have provided, your GST turnover will not meet the registration turnover threshold and you will not be required to be registered for GST at the time of your sale of the Property. Therefore, the requirement of paragraph 9-5(d) of the GST Act will not be met.

As not all of the requirements of a taxable supply under section 9-5 of the GST Act will be met at the time of sale, the sale will not be a taxable supply.

GST at settlement

From 1 July 2018, purchasers of residential properties 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).

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 Property, 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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