Edited version of private advice

Authorisation Number: 1052127468057

Date of advice: 5 July 2023

Ruling

Subject:GST and rental property subdivision

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 units Y and Z located in Australia?

Answer

No. The sales of both units will not be in the course of an enterprise you conduct and will not be a taxable supply.

Question 2

Are you required to give notification to the purchaser or purchasers of units Y and Z located in Australia, pursuant to subsection 14-255(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) that they must withhold GST?

Answer

No. You must give notice to the purchaser that they will not be required to withhold GST.

This ruling applies for the following period:

1 July 2022 to 30 June 2023

The scheme commenced on:

17 February 2021

Relevant facts and circumstances

• You purchased a vacant lot situated in Australia (the property). The contract of sale that you provided described it as vacant possession.
• You entered the contract for $X after 2000.
• You are the sole legal owner of the property.
• Your intention at the time of purchase of the property was to subdivide and build a rental property and occupy the other as a residential property. The two properties created from the subdivision will be units Y and Z, Australia.
• You hired a builder who made a development approval application for construction of a duplex to be completed with two separate titles pursuant to that development approval.
• The construction costs will be slightly under $W.
• The cost of the loan and money spent to date amount to about $V million.
• You have provided a copy of pre-loan interview document which was sought for an application for finance of $U for construction costs of owner occupied and investment property. The document indicates that the property is co-financed with your husband.
• Your spouse is not a property developer and has engaged in a similar activity whereby they bought and built a property which is currently held for rent.
• You have changed your mind and decided to sell both unit Y and Z as rising interest rates have increased costs. Based on your current bank interest rate of #%, it equates to $T p.a. just on the interest alone and given the other holding costs including insurance and rates reinforces your need to sell.
• You expect to sell each unit in the range of $S and $R.
• You anticipated a rental return of approximately $Q per week.
• You have no experience in property development.
• You were a part time salesperson.
• You do not have an Australian Business Number (ABN) and you are not registered for goods and services tax (GST).
• You have not rented nor advertised either of the two units for rent.
• You will not reside in one of the units as originally intended. You changed your mind as your child is currently still at school and you have decided not to move until they finish.
• The occupancy certification has not yet issued.

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, Subsection 9-20(1)

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

A New Tax System (Goods and Services Tax) Act 1999, Subsection 23-5(a)

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

A New Tax System (Goods and Services Tax) Act 1999, Section 40-75

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 units Y and Z located in Australia?

Summary

No. The supplies are not supplies made in the course of any enterprise you conduct and are not taxable supplies.

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.

Under section 40-65, a sale of residential premises is input taxed unless they are new residential premises. Subsection 40-75(1) defines 'new residential premises' amongst other things as premises that have not been previously sold or subject to a long term lease. As the premises in question are newly constructed and have not yet received an occupancy certification, they are new residential premises. Accordingly, we need to determine if they will be supplied by way of a taxable supply.

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 the indirect tax zone (Australia). As such, we need to 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.

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.

Under the first limb of the definition, subparagraph 9-20(1)(a), an issue to be decided is whether you conducted an activity or series of activities that amount to a business, or is in the form of a business of property development. Under the second limb, subparagraph 9-20(1)(b), we need to assess whether your activities are a one off, adventure in the nature of trade in dealing with the units as the activities of construction and eventual sale potentially are in the commencement and termination of a property development enterprise.

Finally, under subparagraph 9-20(1)(c), the definition of 'enterprise' states that leasing, licencing or other grants of land can amount to an enterprise. It is noteworthy that you intended to lease one unit, and those activities could potentially be an enterprise by way of a lease or licence. However, you did not advertise the property but only made enquiries as to its feasibility and instead chose to sell the unit during its construction. As such, we consider you did not take enough steps to commence a rental enterprise via a lease, licence or other grant of real property. Accordingly, we can exclude subparagraph 9-20(1)(c) from further consideration in this ruling.

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. You purchased the property as vacant land with the intention of building a two-title subdivision; one unit to be your residence and the other as an investment property to be rented out as a leasing enterprise. During the construction phase, you did not register for GST and have not claimed any input tax credits or deductions. Based on your acquisition price and potential sale price and costs, there is the prospect of the activity being profitable. In terms of assessing the scale of your activity, it is one suburban block subdivision in a rural setting on which you constructed a duplex house. On this basis, there is low repetition and it is a relatively small scale activity.

The facts indicate that the level of commercial activity is on the lower end of the scale. Your initial purpose or intention in this arrangement was to keep the property. You retained an expert but only to the extent of hiring a builder who submitted the development application on your behalf and a real estate agent to conduct the sales. This factor, of itself, does not point to an enterprise. It is noteworthy that you are not employed in any sector related to building or construction and neither is your spouse who co-financed your activities. This factor suggests it is less likely to be a business-like venture.

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 large scale; you do not have a business plan for developing the property as your original intent was to live in one unit and rent the other. Your principal driver for entry into the sales is the change in market conditions increasing your costs.

As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise under section 9-20(1)(b) 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 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. You are undertaking this transaction as an individual and not in a corporate structure. The scale is very small, you are not employed in a related field. The arrangement is not complex and the nature of the property is that it was not acquired with profit in mind but rather as your residence and a rental property adjoining with subsequent capital accretion.

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. The activities you engaged in are not complex. The timing of your decision to sell the properties is coincident with a fall in the property market and a significant increase in interest rates.

We conclude that on balancing of the above factors, you are not engaged in an enterprise either on the basis of activities you conduct in the form of a business or that you were engaged in an adventure in the nature of trade.

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 above, your activities do not fall within the scope of 'carrying on an enterprise'. Consequently, as you do not meet paragraph 23-5(a) above, you are not required to be registered for GST.

Conclusion

Neither unit Y nor Z was intended to be acquired for the primary purpose of resale at a profit. Even though the supply will be made for consideration and is located in the indirect tax zone (Australia), it is not made in the course or furtherance of an enterprise you carry on and you are not required to be registered for GST. As a result, subparagraphs 9-5(b) and (d) are not met as 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 unit Y and Z.

Question 2

Are you required to give notification to the purchaser or purchasers of units Y and Z located in Australia, pursuant to subsection 14-255(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) that they must withhold GST?

Summary

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

Detailed reasoning

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 in question 1, prior to settlement of the property you must give written notice to the recipient stating that they are not required to withhold GST at settlement. 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.

Conclusion

In conclusion, you are not making the sales in the course of your enterprise and you are not registered for GST and nor are you required to be registered for GST. Consequently, you will not be making a taxable supply of either unit Y or Z. In these circumstances, 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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