Edited version of private advice

Authorisation Number: 1052047204759

Date of advice: 24 October 2022

Ruling

Subject: GST and sale of a rental property

Question 1

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell property located at X (the property)?

Answer

No

This ruling applies for the following periods:

This ruling begins in the tax period commencing 1 July 20XX and ceases in the tax period ending 30 October 20XX.

The scheme commences on:

X July 20XX

Relevant facts and circumstances

• The property in question is situated at X. The contract of sale that you provided described it as XX (the property).
• You acquired the property for over $XXX under the contract of sale dated 20XX.
• The property was purchased by re-financing your pre-existing home loan over your residence and in so doing entered into an investment loan.
• Your intention at the time of purchase of the original property was to offer it for rent after some light renovation in pursuit of the rental appraisal originally obtained to receive bank finance.
• You provided a copy of a rental appraisal dated 20XX issued by a property manager. It indicates that the original structure at X would return rental income in a range of $X - $X per week with some minor additions such as new carpet, paint and blinds. Or, with some additional work (the kitchen renovation) the expected range increased to $X to $X per week.
• After you purchased the property, you discovered that there was asbestos throughout. You provided a copy of a notice to remove non-friable asbestos stating that the work was to be conducted between XX and XX 20XX. It states the asbestos coverage was in both the internal and external linings of the whole house.
• It was then determined that the main dwelling was unsafe for habitation and you subsequently demolished and rebuilt with construction finalising toward the end of 20XX. The property now consists of X structures The structure at A is smaller.
• You commenced construction on A approximately 20XX and ceased XX 20XX. Construction on B began approximately 20XX and ceased XX 20XX.
• The X stages were made under separate development applications. Application for the A build was submitted in 20XX. Application for B was submitted 20XX.
• During the construction of A the main structure at B was uninhabitable and was not held out for rent during this period.
• You provided a copy of the financing documentation issued by A Bank dated 20XX. The key features set out therein are as follows:
  • Your existing home loan was $X over a period of XX years.
  • The investment loan is approximately $X for a period of XX years.
  • The loan is co-financed to DD.
  • The investment loan was broken down into $X to purchase the original property and $X for changes to the property.
  • Your total borrowings were stated as $X.
  • Your salary and wages were $X per fortnight.
  • Income from 2 other property investments was $X and $X per week. These investments are stated as XX% owned.
  • The payments on the investment loan are to be interest only for the first X years.
• The construction costs were as follows:
  • B - Approximately $XX as per building quotation.B
  • A - Approximately $XX as per construction quotation A.
• You rented the A whilst constructing the main residence.
• As your intent was to rent B, the primary dwelling, rental income on the primary dwelling was valued as per the rent appraisal at the time of sale; however, this may no longer be correct due to the significant construction on the property.
• The primary dwelling on B has now rented successfully and you are therefore in receipt of rental income.
• A has been rented out consistently since it's construction, receiving $XX pa. or $X per week for the 20XX financial year.
• You intended to keep the property indefinitely, initially as a negative gearing investment asset and eventually transitioning into a passive income investment asset.
• You now intend to sell A and B as they are on the one title and not a subdivision.
• You decided to sell the property because there is residual difficulty in the rental market as a result of the COVID-19 lockdowns. Additionally increasing interest rates are now a factor. You also noted that the current booming housing market was another factor you considered in making the decision to sell. You estimate the sale may fetch $XX.
• You are a working in a field unrelated to property development and do not have skills as a property developer.

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 Paragraph 23-5(a).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15.

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-15(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20(1)(a).

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

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

Taxation Administration Act 1953 Section 14-250 of Schedule 1.

Taxation Administration Act 1953 Subsection 14-255(1) of Schedule 1.

Reasons for decision

Question 1

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell property located at the property?

Summary

It is not a taxable supply made in the course of any enterprise you conduct because you are not required to be registered for GST.

Detailed reasoning

Please note all references to legislation are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

Section 9-5 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 to the indirect tax zone (Australia); and

(d)  you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case, the sale of the property will be made for arm's length consideration and is located in Australia. As such, we will consider whether the sale of the property is made in the course or furtherance of an enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

You are currently renting the property in the form of A and B. This is an enterprise as it meets paragraph 9-20(1)(c). That is, the property is supplied on a regular or continuous basis in the form of a lease.

Therefore, we consider you are carrying on an enterprise. The acquisition of the land with the old house, construction of the residential dwellings at A and B, their rental and subsequent sale of the property would all be considered to be a series of activities done in the course or furtherance of your rental enterprise.

However, under that enterprise, you did not register for GST as you were not required to register as you were below the turnover threshold. Residential rent is an input taxed supply under section 40-35. As discussed later these are not taken into account when determining your registration threshold.

The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

Any activity or series of activities you conducted may be considered to be an 'enterprise' for GST purposes if it amounts to a business, or is the form of a business, or is a one off adventure in the nature of trade as the activities of construction and eventual sale are in the commencement and termination of that rental enterprise.

The premises (both A and B) were only constructed within the last X years and are considered to be 'new residential premises' as defined in the GST Act.

As section 188-25 may be engaged in this case, we need to consider all enterprises you may be conducting in assessing your projected turnover and consequently, we need to determine if you were also engaged in the form of a business of property development or a one off adventure in the nature of trade in making the sale.

The Commissioner, in Miscellaneous Taxation Ruling MT 2006/1 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) provides guidance on the meaning of the term 'enterprise' for GST purposes.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is still on making an assessment of the factors indicating a business.

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•          a significant commercial activity;

•          the purpose and intention of the taxpayer in engaging in the activity;

•          an intention to make a profit from the activity;

•          the activity is or will be profitable;

•          repetition and regularity of activity; and

•          the activity is organised and carried on in a businesslike manner.

These factors in turn are derived from a number of common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in matters including FCT v Whitfords Beach Pty Ltd (1968) 120 CLR 191 (Whitfords Beach), Federal Commissioner Of Taxation v. Williams (1972) 127 CLR 226, and Casimaty v FCT 97 ATC 5135 (Casimaty). A leading case considering isolated transactions is FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 (Myer). The principles in this case amongst others were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. These principles are considered later in these reasons.

These cases indicate that the question whether a business is being carried on is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. Considering your arrangement, you purchased the property with the intention of holding it long term as a place to rent as mere residential premises initially hoping to make use of negative gearing and eventually transitioning to a passive investment. This indicates that, when you purchased it, you did not have the intention to acquire and sell at a profit. The facts also indicate that you subsequently discovered that due to the abundance of asbestos used in the original structure you could not rent it without removing the asbestos. This led to a decision to demolish and replace the existing residence but first you built a smaller residence and rented that out whilst construction continued on the main structure. This change is not indicative of a profit motive.

In terms of assessing the scale of your activity, it is one suburban block in a rural setting. On this basis there is low repetition and small scale.

The facts indicate that there is not a significant commercial purpose or intention on your part in this arrangement. This arrangement is not a subdivision but merely a replacement of the original residence and an additional smaller residential space. You retained experts but only to the extent of hiring a builder. This factor, of itself, does not point to an enterprise. In Whitfords Beach, a factor pointing to the business character of the arrangement is the skill of the parties. It is noteworthy that you are not employed in any sector related to building or construciton. This factor suggests it is less likely to be a business-like venture.

You acquired the property for more than $XX. You also spent $XX for the construction of B and $XX for A's construction These amount to XX and it is acknowledged there were potentially more costs as your total borrowing was stated as XX. As it is not a subdivision you expect to sell the land with both structures for about XX. These facts indicate that a profit is likely or will be made. This factor points to the activities being more business-like. Again this factor is, by itself, not sufficient to point to the activities being in the form of a business as it needs to be considered against the entirety of the facts.

On balance we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit making undertaking or scheme. It is not at all large scale, you do not have a business plan for developing the property as the original intent was to rent the property but you had to alter your plans on discovery of the uninhabitability of B. You have not financed the arrangement in a way that a business would ordinarily finance a development as you borrowed against your family home.

As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression.

An 'adventure or concern in the nature of trade' refers to transactions that have a commercial nature which are entered into for a profit making purpose.

Paragraph 237 of MT 2006/1 states:

The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, See McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 6 in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph in 13 TR 92/3 provides that:

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a)  the nature of the entity undertaking the operation or transaction

(b)  the nature and scale of other activities undertaken by the taxpayer

(c)   the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d)  the nature, scale and complexity of the operation or transaction

(e)  the manner in which the operation or transaction was entered into or carried out

(f)    the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g)  if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h)  the timing of the transaction or the various steps in the transaction.

These factors are considerably similar to the factors considered above. The arrangement is a planned rental activity that had to be altered significantly due to factors beyond your control. As a result the funding required increased but not excessively so. The scale is very small, you are not employed in a related field and you were looking to take advantage of negative gearing. The arrangement is not complex and the nature of the property is that it was not acquired with profit in mind but rather as a rental and subsequent capital accretion. You constructed new dwellings but this was largely as a replacement for what was already present.

There are no other land parcels being adjoined to yours, you do not operate as a property developer as you have never done this before and have no future plans to do so.

After weighing up all of the information, we consider that you are not carrying on an enterprise of developing the land.

Registration

Section 23-5 states that you are required to be registered for GST if:

(a) you are carrying on an enterprise; and

(b) your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed previously, your activities of purchasing the property, building residential dwellings, renting the property and sale of the property fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above.

The next issue to consider is whether your GST turnover is $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that 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 less than $75,000; or

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

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. Your rental of the property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises). As such, rental proceeds in relation to the rental of the property are not included in the calculations of your 'current GST turnover' or your 'projected GST turnover'.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours:

In working out your projected GST turnover, disregard:

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

(b) any supply made, or 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.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. 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'.

32. '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' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. 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 the character of an asset must be determined at the time of expected supply.

Taking into account the facts of this case, we consider the sale of the property would constitute the transfer of a capital asset for the purposes of section 188-25 and in the ordinary course of events would therefore be disregarded when calculating your projected GST turnover. As you have an existing enterprise of renting property, this is an input taxed activity but the sale of new residential premises is generally taxable. In the matter of Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation, [2022] AATA 628 (Collins) the entity making the supplies was an enterprise because its activities were conducted by a trustee of a complying superannuation fund thereby meeting the definition of 'enterprise' under subparagraph 9-20 (1)(da). Arguments put for the entity included that they were significantly reducing scale of their enterprise or making a capital supply under section 188-25.

The Administrative Appeals Tribunal determined that the entity was conducting an enterprise of property development in addition to it already being a 'deemed enterprise' as a consequence of it being a complying superannuation fund. Senior Member Olding found that as it was a property developer it could not significantly reduce the size of the enterprise by making a sale of what is its trading stock. Section 188-25 requires the entity to make an assessment for each of the enterprises it is conducting.

In Collins, the Tribunal held at [26] that, for the purpose of paragraph 188-25(a), the character of an asset must be determined at the time the supply is made or is likely to be made. Section 188-25 only arises for consideration where the supply is or would be made in the course of an enterprise the taxpayer carries on. The Tribunal accepted at [24] and [53] that the applicant's intention or object at the time the asset is acquired is not determinative and is of less significance than it is for the purposes of the capital versus revenue dichotomy in the income tax context. At the time of disposal you advised that your intentions in part relate to the booming property market. However, other factors in your contemplation are that there is residual complexity in the rental market as a result of the COVID-19 lockdowns. Additionally, increasing interest rates are now a factor in your plan to sell.

A property developer rarely holds land as capital. However, a landlord usually does hold it in that manner. As we made the finding earlier that the only enterprise you are operating is that of an ordinary landlord renting residential premises, we consider that under the Collins decision, paragraph 188-25(a) applies such that the supply of the premises despite being new residential premises as defined will be the supply of capital and not form a component in the calculation of your projected turnover. Furthermore, paragraph 188-25(b) may be open as you are ceasing or significantly reducing the scale of your rental enterprise.

The property was not intended to be acquired for the primary purpose of resale. Furthermore, you have derived your rental income from the use of the property as opposed to the trading of properties.

Given the above, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST.

Conclusion

The sale of the property will be made in the course or furtherance of an enterprise you carry on, made for consideration and is located in Australia. However you are neither registered nor required to be registered for GST. Consequently you will not be making a 'taxable supply' as defined when you sell the property.

Question 2

Are you required to give notification to the purchaser of the property pursuant to subsection 14-255(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Summary

As you are making a sale that is not a taxable supply, you must notify the purchaser prior to settlement. As a result, the purchaser is not required to withhold an amount of GST

Subsection 14-255(1) of Schedule 1 to the TAA provides that a supplier of residential premises by way of sale must, before making the supply, give to the recipient a written notice stating whether the recipient will be required to make a payment to the Commissioner under section 14-250 of Schedule 1 to the TAA.

Section 14-250 of Schedule 1 to the TAA provides that a recipient of a taxable supply in certain circumstances involving real property is liable to withhold an amount, and pay that amount to the Commissioner.

Given the analysis above in question 1, prior to settlement of the property you must give written notice to the recipient stating whether they are required to withhold GST and pay that amount to the Commissioner. In this case, your supply to the recipient is not a taxable supply and as such the recipient is not required to withhold GST under section 14-250 of Schedule 1 to the TAA.

Law Companion Ruling LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4) discusses GST notification requirements for vendors of residential premises. Paragraphs 58 and 59 of LCR 2018/4 state:

58. A vendor of residential premises or potential residential land must give a written notice to the purchaser before making the supply. The notice must state whether the purchaser is required to make a payment under section 14-250 in relation to the supply.

59. This requirement applies to all vendors of residential premises and potential residential land, not only those who are registered or required to be registered for GST. If the vendor is not registered or required to be registered for GST, they simply state that the purchaser is not required to make a payment.

In conclusion, you are not registered for GST and nor are you required to be registered for GST. As a result you are required to notify the recipient that the supply will not be a taxable supply. On receipt of this notification they will not be required to withhold and remit any GST on the sale.

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