Edited version of private advice

Authorisation Number: 1052241404255

Date of advice: 17 April 2024

Ruling

Subject: GST - property subdivision and sale

Question

Is your sale of the property a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the sale is not made in the course of your enterprise.

This ruling applies for the following periods:

From the tax period commencing 1 July 2001

Ending the tax period 30 June 2028.

The scheme commenced on:

1 September 2001

Relevant facts and circumstances

You purchased a residence as an investment property in 20XX for $XX.

You are registered for GST and you report on a quarterly basis. Your ABN is redacted.

Another adjacent property was purchased for $XX with the intention of holding it long-term as an investment property.

Both properties were rented up to the 20XX tax year.

During the 20XX tax year, both properties were knocked down and the 2 blocks, were amalgamated.

Three high-end luxury units were constructed on the new joint block known as the property.

Your intention was to keep all three units long-term - two for family and the upstairs unit for you to live in as you got older due to lift accessibility.

Construction on the new units commenced in 20XX and was completed in 20XX. The occupancy certificate issued 20XX.

The new units were subsequently leased out to tenants.

Between May 2022 and October 2023, the Reserve Bank of Australia increased the cash rate from 0.1% to 4.1%. This increased your monthly repayments on the bank loan to an unsustainable level.

This was far in excess of the rental return of $X per month.

You increased the number of days you worked per week to attempt to retain the three apartments.

Despite all this, you still could not keep up with the interest rises. As a result, you decided to sell one of the units to pay down some debt so that you can hold on to the other two units.

The units are part of your retirement strategy and unit one was to have been as well, however, the loan repayments were too high and you cannot afford to keep the property.

No input tax credits were claimed on the construction costs of the three new units, however, GST was charged on the sale of Unit 1.

You amalgamated your existing home loans into a loan from a bank, being $X and added a construction loan for $X to bring your total borrowing to $XX including fees and charges and other personal debts.

A mortgage was registered to the bank over the property as collateral.

An appraisal dated 2020 by X showed the penthouse property at the property was capable of being rented at $X per week.

An appraisal dated 2020 by X showed Unit 1 at the property was capable of being rented at $X per week.

An appraisal dated 2020 by X showed Unit 2 at the property was capable of being rented at $X per week.

You first advertised Unit 1 for rent in 20XX. In 20XX, when Unit 3 became available for re-leasing, very few enquired. At this point you had increasing concern with the rises in interest rates by the reserve bank each month.

Unit 1 was sold in 20XX.

The contract of sale for Unit 1 (the contract) at the property shows it sold for $X to the purchasers.

You are the listed vendor on the contract and your ABN is given in the GST withholding details.

The contract indicates that the sale was taxable to an extent and indicates that the margin scheme will apply to the sale.

The contract also indicates that none of the options set out below were chosen:

This sale is not a taxable supply because (one or more of the following may apply) the sale is:

•         not made in the course or furtherance of an enterprise that the vendor carries on section 9-5(b))

•         by a vendor who is neither registered nor required to be registered for GST (section 9-5(d))

•         GST-free because the sale is the supply of a going concern under section 38-325

•         GST-free because the sale is subdivided farm land or farm land supplied for farming under Subdivision 38-O

•         input taxed because the sale is of eligible residential premises (sections 40-65, 40-75(2) and 195-1).

The contract indicates that the purchasers were to withhold GST on the sale.

You have previously subdivided and constructed a pair of Duplexes at another place.

In ordering the construction of the Penthouse and the two units at the property, the types of consultants hired to subdivide and build the three units areArchitect; Construction; Surveyors; Real Estate Agents; and Depreciation Reports.

With the exception of the Duplexes and the development the property you have no experience in property development. You sold one of the Duplexes in an attempt to reduce previous debt and the second was sold to reduce the construction loan on the property. You rented the Duplexes from 19XX to 20XX.

You do not intend to sell the other units in the property.

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 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.

Reasons for decision

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 occupancy certification issued in 20XX, the property is new residential premises. Subsection 40-75(2) provides an exception that they are not new residential premises if they have been rented continuously for a period of five years since they were constructed. The facts indicate that unit one was rented to tenants until sale of the unit and, as this was less than five years, the property is still new residential premises. Accordingly, we need to determine if they will be supplied by way of a taxable supply.

To determine whether you are making a taxable supply of new residential premises, section 9-5 contains the key elements of a taxable supply and must be applied to determine the answer to the question set out above.

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 property has already sold, so the sale of the property was made for arm's length consideration. This satisfies paragraph 9-5(a). The property is located in the indirect tax zone (Australia). This satisfies paragraph 9-5(c). As the property was not rented continuously for a five year period when it was sold, there are no other factors that would make the sale input taxed and the facts provided do not indicate any possible GST-free treatment.

As such, whether the sale of the property is a taxable supply, will depend on whether the supply is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b). We note you are registered for GST and as such you meet paragraph 9-5(d). The analysis below focuses on whether the supply was made in the course of your enterprise.

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.

Please note an asterisk indicates a defined term in section 195-1.

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 property 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 subsection 9-20(2) provides:

an 'enterprise' does not include (GSTA, s 9-20(2)):

... an activity, or a series of activities, done:...

(b) as a private recreational pursuit or a hobby; or

(c) by an individual... (all the members of which are individuals), without a reasonable expectation of profit or gain...

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 or taxpayers 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 cases. The principles 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 first property for $X and rented it since approximately 2001. Additionally, you acquired a second property for $X in or around 2009. You borrowed $X to construct what is now the property. Your intention was to amalgamate and build a triple occupancy structure allowing one unit to be your residence when you retire (also known as the Penthouse) and keep the other two as a residence for your family to reside. During the construction phase, you did not claim any input tax credits or deductions despite making the sale contract for the property GST-inclusive. Based on your acquisition prices and loans there is no apparent prospect of the activity being profitable unless you sold the remaining units. However, you have stated that this is not your intention.

Your stated reason for selling the property was due to the rapid increase in variable interest rates which led to an increase of your loan repayments beyond your capacity to recoup rental income.

These facts indicate that the activity is not and will not be profitable.

In terms of assessing the scale of your activity, it is three units on two suburban blocks. On this basis, the scale of the activity is low. Additionally, there is low repetition given you only sold one unit.

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 in its entirety. You retained an expert but only to the extent of hiring a builder who conducted the development 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. You have a pre-existing GST registration that relates to your enterprise. This suggests the unit sale is less likely to be a business-like venture.

You stated you have had some previous experience with building at Duplexes. You held the property long term from 1998 to 2020 to rent. The first of these units was sold to pay off debt you held prior to the construction loan for the property. The second unit you sold in 20XX to try to reduce your construction loan on the property. You said that selling the second Duplex was commercially naïve as you reduced your equity in the property and simultaneously reduced rental income from it. You pointed out that you acted naively against bank and accountant's advice as you were concerned you may not be able to find suitable tenants when one of the property's unit leases expired and you received few responses from prospective tenants. These circumstances do not point to a coherent business plan nor that the property was being developed in a business-like way. Additionally, in our view, this is evidence of a pattern of behaviour of keeping units to rent rather than to sell.

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 and you did not have a business plan for developing the property as your original intent was to live in one unit and allow relatives to live in the other units. Your principal driver for entry into the sale of Unit 1 is the change in market conditions increasing your costs. Most importantly, you acquired the original properties for investment purposes prior to changing your intention to retire there. Given the lengthy period you held these properties, we consider this to be corroborative of your stated intention to keep them rather than buy to sell.

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. In our view your activities are of a personal nature as you intend to retire to the property and there is no prospect of a profit based on your intention to keep the remaining two units.

As the above factors are also relevant to one-off transactions, we conclude that 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. This means that paragraph 9-5(b) is not met in relation to whether you are conducting a property development either in the form of a business or as an adventure in the nature of trade.

Conclusion

The original property was not intended to be acquired for the primary purpose of resale at a profit and that intention did not change. 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 a development enterprise you carry on. Consequently, you did not make a 'taxable supply' as defined when you sold Unit 1.

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