Edited version of private advice

Authorisation Number: 1052113712179

Date of advice: 24 May 2023

Ruling

Subject: GST - enterprise

Question

Will you be liable to pay GST if you Property B, pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No.

Relevant facts and circumstances

You are not registered for GST as a partnership or individually, nor have you been registered for GST in the past.

You currently reside at <address>, which is a rental.

Property A

On <date>, you acquired Property A.

You currently rent out Property A. You intend for Property A to be your main residence.

Property B

On <date>, you entered a contract to purchase land at Property B.

Your original intention when you acquired the Property B was to build an investment property on the land for long term rental.

In <month year>, you began construction of a residential home on Property B.

To finance the build of Property B, you acquired a construction loan (Loan) from a bank and refinanced the mortgage on Property A to assist in putting down a 20% deposit.

The Loan term is for X years on a variable interest only repayment. Your loan summary states the loan purpose is 'building a house for investment'.

Construction of Property B is estimated to be completed around <month year>.

Property C

In <month year>, you entered into a contract for a house and land package at Property C. You anticipate settlement will occur around <month year>.

You have paid a deposit of X% of the contract price and around $X in stamp duty. You require a loan to satisfy the remainder of the contract price.

Your intention when you acquired the Property C was to build an investment property on the land for long term rental.

You intend to build on Property C a 4-bedroom 2-bathroom house on a single level.

At the time of entering the Property C contract, you were advised by your broker via email that you had sufficient equity to obtain a loan. However, your lender's requirements have since changed, and interest rates have increased. Your broker has now advised you that you do not have sufficient equity to obtain a loan and you will need to sell an asset to satisfy the remainder of the contract price. If you renege on your purchase of Property C, you will lose your deposit and may be subject to other contractual penalties.

You do not want to sell the Property A as you intend for it to be your main residence.

You are now considering selling the Property B after construction is complete. This would allow you to have a sufficient equity contribution to obtain a loan for the remaining balance of the Property contract price and to fulfil your contractual obligations for Property C.

You have not claimed any input tax credits for the development of Property B or Property C.

You have not undertaken any business of buying and selling land or property development in the past.

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 1999 section 23-5

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

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

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

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

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

Reasons for decision

In this ruling, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
• all reference materials referred to are available on the ATO website (ato.gov.au).

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

GST is payable on any taxable supply you make. Under section 9-5, 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 (Australia); and

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

However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed.

In your case, we consider that the sale of Property B would not be GST-free or input taxed. This means your supply will be taxable if the requirements specified in paragraphs 9-5(a) to (d) are satisfied.

In this instance, you will be selling Property B for consideration, being the sale price of the Property. The supply will be connected with the indirect tax zone because the sale is done in Australia. However, you are not registered for GST. The primary issue to be resolved is whether the supply of Property B will be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b)). If so, a further issue to be considered is whether you are required to be registered for GST (paragraph 9-5(d)).

Enterprise

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)).

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

The leasing of a property will fall within the scope of an 'enterprise' for under paragraph 9-20(1)(c). This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

In your case, you are currently carrying on an enterprise of leasing as demonstrated by your acquisition of Property A and leasing it out. Your acquisition of Property B and Property C was done with the intention of developing them for leasing purposes, and so is a continuation of your leasing enterprise. As noted in the facts, you are contemplating selling Property B to help fund the purchase and development of Property C for long-term rental. The sale of Property B, therefore, would be in the course or furtherance of your leasing enterprise. Paragraph 9-20(1)(c) is therefore satisfied.

GST 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 (in your case the threshold is $75,000).

As discussed above, your activities 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 meets the registration turnover threshold of $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.

In your case, it is necessary to determine whether your projected GST turnover meets the registration turnover threshold.

Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(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 (GSTR 2001/7) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

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.

Paragraphs 258 and 259 of 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) contain guidance on the distinction between trading/revenue assets and investment/capital assets. While MT 2006/1 discusses these principles in the context of entitlement to an ABN, these principles in paragraphs 258 and 259 have equal application to determining whether the sale of something is a revenue or capital asset for GST registration purposes. Paragraphs 258 and 259 provide the following:

• Assets can be categorised as trading/revenue assets or capital/investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.
• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

In your case, although a profit may arise as a result of selling Property B, this Property was intended to be used as a leasing asset and not purchased with the intention of resale at a profit. Further, we note that the term of the bank loan is X years and is for the purpose of 'building a house for investment'. This supports your initial intention to continue holding the property for a prolonged period of time, as opposed to it being used as a trading asset.

Considering the relevant facts of this case, we consider the sale of Property B would constitute the transfer of a capital asset for the purposes of section 188-25 and is disregarded when calculating your projected GST turnover.

Given the above, your GST turnover does not meet the $75,000 registration turnover threshold. Therefore, you are not required to be registered for GST under section 23-5.

Conclusion

The sale of Property B will not be a taxable supply as all the elements of section 9-5 have not been satisfied. GST is not payable on the sale under section 9-40.

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