Edited version of private advice

Authorisation Number: 1052249209350

Date of advice: 24 May 2024

Ruling

Subject: GST - sale of a new residential property

Question

Is the sale of the property located at address (Unit XX) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of Unit XX is not a taxable supply.

This ruling applies for the following period.

Any tax periods ending on or after 1 July 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

On DDMMYYYY, Person A and Person B (you) acquired a property as joint tenants located at address (the Property) for $amount.The Property contains an existing residential premises and is zoned in Australia.

You are not registered for GST purposes.

After the acquisition of the Property, you leased the residential premises until it was demolished in MMYYYY.

On DDMMYYYY, planning permit was received from the council for the construction of a number units at the Property.

You engaged a builder to subdivide the land and build the two units on the land.

The construction of the two units were undertaken, and it was completed in MMYYYY.

Your initial intention when you purchased the Property, was to build side by side units and for you to occupy address (Unit XX) (your relative) was to address (Unit XX).

Your relative is a non-resident residing overseas and planned to migrate to Australia.

You have provided a written agreement between you and your relative regarding the construction of Unit XX and how you would apportion the incurred expenses for the development of the units.

The incurred expenses for the development of the units was approximately $amount. Your portion of the expenses was funded by a loan from the bank and your relative transferred you $amount for their portion of the expenses.

You provided copies of bank statements showing the transfers for the expenses and email correspondence from your relative for commencement of building Unit XX.

In MMYYYY, you decided to rent out Unit XX after completion for approximately number of years until your relative migrated to Australia.

You leased Unit XX from early YYYY until MMYYYY when the tenant's rental contract expired.

You have provided evidence of you transferring funds of incurred rental income to your relative.

Your intention was to transfer Unit XX into your relative's name once they migrated to Australia. However, due to the effect of the COVID-19 pandemic, financial and personal circumstances, your relative changed their motive and around MMYYYY decided not to migrate to Australia.

Since your relative is no longer migrating to Australia, you have made the decision to sell Unit XX to make funds available to account for your financial losses. You will keep Unit XX as it is your main residence.

The transfer agreement of Unit XX to your relative has been revoked.

You and your relative had a verbal agreement on apportioning the proceeds from the sale. It was agreed that your relative would receive their portion of the expenses incurred of $amount, and nothing else associated with the sale. You will receive the remaining proceeds from the sale.

In (month, year), you entered into a contract for the sale of Unit XX for $amount, with settlement to occur in MMYYYY.

You do not intend to undertake any property development in the near future.

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 section 40-35

Reasons for decision

In this reasoning, unless otherwise stated,

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

•         all legislative terms marked with an asterisk (*) are defined in section 195-1 of the GST Act;

•         where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act; and

•         all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if you meet the following requirements:

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.

All of the above requirements of a taxable supply under section 9-5 must be met for the supply to be a taxable supply.

In this case, you will supply the property for $amount.

Unit XX is a residential property and is zoned in Australia.

The supply satisfies the requirements of paragraphs 9-5(a) and (c) above as the supply is made for consideration and is connected with the indirect tax zone.

As such, what remains to be considered is whether the sale of Unit XX will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as currently you are both not registered for GST.

We will now consider paragraphs (b) and (d) of section 9-5.

Enterprises

The term 'enterprise' is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or series of activities done:

•         in the form of a business

•         in the form of an adventure or concern in the nature of trade.

The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity, or series of activities, done:

•         by an individual without a reasonable expectation of profit or gain.

The question of whether an entity is carrying on an enterprise is examined 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).

In the form of a business

Paragraphs 170 to 232 of MT 2006/1 discuss the factors to consider when determining whether an activity or series of activities are done in the form of a business.

Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? lists indicators of carrying on a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other business in the same or similar trade;

•         activity is systematic, organised and carried out in a business-like way and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge and skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Based on the facts provided, we do not consider that your activities of demolishing the existing residential premises, building the units and selling Unit XX, constitute activities done in the form of a business.

In the form of an adventure or concern in the nature of trade

Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•         the subject matter of the realisation;

•         length of period of ownership;

•         frequency or number of similar transactions;

•         supplementary work on or in connection with the property realised;

•         circumstances that were responsible for the realisation;

•         motive

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing 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.

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

In your case, your activities when you purchased the Property in YYYY and leased the existing residential premises until it was demolished in MMYYYY, were motivated by your desire to use Unit XX as your main residence and transfer Unit XX to your relative to live in once they migrated to Australia. Your activities were not done with the expectation of generating a profit, as you are not in business as a builder and did not purchase the Property and build the number of units with the purpose of making a profit. As your relative was not migrating to Australia for number of years, you made the decision to lease Unit XX out. You transferred the funds you received for the rental income to your relative. Due to changes in your relative's circumstances, they decided not to migrate to Australia. Therefore, you have decided to sell Unit XX to make funds available to account for financial losses. The transfer agreement between you and your relative for Unit XX has been revoked. You will reimburse your relative for their portion of the expenses they incurred.

After weighing up all the facts of this case, we do not consider your activities carried on in relation to the Property constitute an adventure or concern in the nature of trade. The activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes. Therefore, the sale of Unit XX would be considered a mere realisation of a capital asset.

GST Registration

Section 23-5 explains 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).

In this case, the sale of Unit XX would be a mere realisation of a capital asset and would not constitute an enterprise for GST purposes. As such you are not required to be registered for GST.

As you are not registered or required to be registered for GST, not all of all elements of section 9-5 are satisfied, and as a result the sale of address (Unit XX) will not be a taxable supply.

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