Edited version of private advice

Authorisation Number: 1052343301120

Date of advice: 19 December 2024

Ruling

Subject: GST - sale of investment property

Question 1

Is the sale of the Property a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No.

This ruling applies for the following periods:

XX XXX XXXX to XX XXX XXXX

The scheme commenced on:

XX XXX XXXX

Relevant facts and circumstances

You are not registered for GST, nor have you ever been registered for GST.

On XX XXX XXXX you, and your spouse entered into a sale contract to purchase the Property, which comprises a total of XX land area for $XXX.

Settlement of the Property occurred on XX XXX XXXX

No GST applied to your purchase of the Property.

Your spouse passed away on XX XXX XXXX and the remaining interest in the Property was transferred to you.

You are the sole owner of the Property.

Your intention at the time of purchasing the Property was for investment purposes.

You did not acquire the Property as part of a business nor for a commercial purpose and consider the Property to be held on capital account.

You have not derived any income from the Property.

At the time of purchase, the Property had an existing dwelling and a small shed. The shed was destroyed during a weather event and a replacement shed was constructed from the insurance proceeds.

The Property was historically used for farming (prior to circa XXXX). However, the Property has not been used for any commercial or agricultural purpose since you acquired the Property.

There have been no material capital improvements to the Property during your period of ownership. Any works carried out were related to general maintenance of the Property. The replacement of the shed following the weather event was not an improvement on the previous shed that was destroyed.

The minor renovations carried out on the Property are as follows:

•                     repairs to leaking plumbing damage in bathroom

•                     replacement of kitchen cupboard due to general wear and tear (original material was old chipboard)

•                     a bore was installed on the block and equipped with a submersible pump to the value of approximately $XXX. Your spouse carried out the majority of the works, however the equipment cost was approximately $XXX.

A related party of yours has lived in and maintained the Property during the period of ownership. No rent was paid by the related party to you.

Since XX XXX XXXX, the related party incurred approximately $XXX in maintenance expenses while living in the Property.

The related party does not pay for any other charges or expenses on behalf of you.

You pay all the council rates and insurances. There is no town water connected and accordingly no water rates incurred.

You applied for a development permit application to have the dwelling and surrounding area cut off from the rest of the Property for the purposes of gifting the dwelling and surrounding area to your relative.

Your development application was approved on XX XXX XXXX. It proposed for the Property to be reconfigured into two lots. The plan indicates that the approximate areas of Lot 1 and Lot 2 are XX land area and XX land area, respectively. Proposed Lot 1 contains the shed and the house.

The Property was not advertised for sale; however, a real estate agent phoned you after you applied for the development permit to enquire whether you were interested in selling the Property. The Buyer approached you following the real estate agent enquiry. You had recently lost your spouse and the compensation offered by the Buyer was generous.

You entered an Option Deed (the Deed) dated XX XXX XXXX, with the Buyer.

You intend to dispose of the Property for $XXXX, inclusive of a $XXXX deposit, in the XXXX financial year.

The Deed details the obligations of the parties and stipulates all amounts are exclusive of goods and services tax (GST), specifically the:

•                     call option fee ($XXXX)

•                     purchase price ($XXXX), and

•                     security deposit ($XXXX).

The Deed stipulates the following:

•                     You have made an application to the Local Government for a development permit which approves the reconfiguration of the Property.

•                     You are not obligated to undertake any of the work required to complete reconfiguration of the Property, nor to produce the creation of separate titles deriving from the Property.

•                     You are not to complete the reconfiguration of the Property without the Buyer's prior written consent, which the Buyer may give or withhold in its absolute discretion.

The Call Option has not been exercised and therefore the sale contract has not yet been executed. The sale contract for the Property is a Contract for Commercial Land and Buildings (Sale Contract).

The Sale Contract specifies the current use of the Property as 'Dwelling - large house site'.

The development permit will not be supplied to the Buyer. As the Buyer does not require the subdivision to be completed, the Property will only be subdivided if the sale to the Buyer does not proceed.

The Property will be sold with vacant possession; your related party will not continue to live on the Property from the settlement date.

The dwelling on the Property will not be demolished prior to the settlement date.

You will undertake the disposal yourself and have not employed the services of project managers or property developers in relation to the investment.

You have not claimed any costs as a business expense, and if any costs are incurred, they will be capitalised.

No interest has been incurred or claimed as a tax deduction during your ownership of the Property.

You will not borrow funds to finance any part of the transaction.

Your main residence is on the adjoining block. The main residence for you and your spouse was built on this land.

You have never held any other investment properties or development assets in your own name.

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

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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Taxable supply

Section 9-40 provides that an entity is liable for GST on any taxable supplies that it makes.

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.

The requirements of paragraphs 9-5(a) and 9-5(c) are satisfied since the Property will be sold for consideration and the Property is connected with the indirect tax zone (as the Property is located in Australia).

We now need to consider:

•                     whether the sale of the Property will be supplied in the course or furtherance of an enterprise carried on by you (paragraph 9-5(b)); and

•                     since you are not currently registered for GST, whether you are required to be registered for GST at the relevant time (paragraph 9-5(d)).

Enterprise

Subsection 9-20(1) of the GST Act provides that the term 'enterprise' includes, among other things, 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 definition of 'carrying on' an enterprise can be found in section 195-1 of the GST Act 'carrying on 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.

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) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6) provides that the guidelines in MT 2006/1 equally apply to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. An enterprise could therefore incorporate a single or one-off transaction such as the building and sale of real property.

Paragraphs 159-160 of MT 2006/1 include the following guidelines:

(159)      Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

(160)      It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Paragraphs 170 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

•                     a significant commercial activity;

•                     an intention of the taxpayer to engage in commercial activity;

•                     an intention to make a profit from the activity;

•                     the activity will be profitable;

•                     the recurrent or regular nature of the activity;

•                     the activity is systematic, organised and carried on in a business-like manner and records kept;

•                     the activities are of a reasonable size and scale;

•                     a business of product; and

•                     the entity has relevant knowledge or 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.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. This paragraph provides that:

•                     a business encompasses 'trade engaged in, on a regular or continuous basis'

•                     an adventure or concern in the nature of trade includes 'an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal'.

Paragraph 244 of MT 2006/1 explains that 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or a capital/investment asset held for either investment or personal enjoyment. 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.

The Commissioner's view on badges of trade in MT 2006/1:

The subject matter of realisation

(247)      This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

The length of period of ownership

(249)      A trading asset is generally dealt with or traded within a short time after acquisition...

The frequency or number of similar transactions

(251)      The greater the frequency of similar transactions the greater the likelihood of trade.

Supplementary work on or in connection with the property realised

(252)      Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

The circumstances that were responsible for the realisation

(253)      Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions of sales of real property.

Paragraph 263 of MT 2006/1 provides that the issue to be decided is whether these activities are of a revenue nature (that is, have the characteristics of a business deal) and therefore an enterprise. Where they are not of a revenue nature, then the transaction could be a mere realisation of a capital asset. The activities which are a mere realisation of a capital/investment asset are not a business or an adventure or concern in the nature of trade and therefore no enterprise is being carried out.

Paragraph 265 of MT 2006/1 outlines some factors which could determine whether or not the activity is done in the form of a business or in the form of an adventure or concern in the nature of trade. They are:

•                     there is a change of purpose for which the land is held;

•                     additional land is acquired to be added to the original parcel of land;

•                     the parcel of land is brought into account as a business asset;

•                     there is a coherent plan for the subdivision of the land;

•                     there is a business organisation - for example a manager, office and letterhead;

•                     borrowed funds financed the acquisition or subdivision;

•                     interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•                     there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•                     buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your situation

In this situation, none of the factors in Paragraph 265 of MT 2006/1 apply to indicate the supply of the Property is done in a form of a business.

While an activity such as the selling an asset may 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 or would be being carried on.

You purchased the Property in XXXX with the intention of using it as an investment asset. During the period of ownership, the Property was occupied by a related party. The accommodation was supplied rent-free during the period of occupation. The Property did not generate any form of ongoing income during the entire period of your ownership. The Property was not bought into account as a 'business' asset and expenses have not been claimed as business expenses.

It was approximately XX years since you purchased the Property, before you applied for a development permit application to have the dwelling and surrounding area cut off from the rest of the property. The intention of the planning permit application was to subdivide the Property and gift the dwelling and surrounding area to your relative. No additional land was purchased throughout this time in connection with the Property. There has been no supplementary work carried on in connection with the Property, apart from the general repairs and maintenance of the Property. The rebuild of the shed was to replace the original shed destroyed in a weather event. There has been no capital improvement to the Property during the period of ownership.

You held the Property for a prolonged period of time - approximately XX years before entering into the Deed to sell the Property.

The Property was never advertised for sale. You were approached by the Buyer following a real estate agent enquiry regarding selling the Property. You had just lost your spouse and the purchase offer came with generous compensation. You have never held any other investment properties or development assets in your own name, nor have you undertaken any business of buying and selling land or property development in the past. The sale of the Property is an isolated transaction.

On balance, having considered the facts of the case against the badges of trade and other factors listed above, we consider the activities you have undertaken in the acquisition, maintenance and sale of the Property do not amount to an enterprise for GST purposes under subsection 9-20(1). We consider your disposal of the Property to be a mere realisation of a capital asset. Accordingly, the requirement specified in paragraph 9-5(b) is not satisfied and your supply of the Property will not meet all the requirements of section 9-5 to be a taxable supply. As such GST is not applicable to the sale.

GST registration

Section 23-5 of the GST Act 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 for businesses (and $150,000 for non-profit entities)).

Application to your situation

As discussed previously, your activities do not fall within the scope of 'carrying on an enterprise' thus paragraph 23-5(a) is not satisfied. You are therefore not required to be registered for GST.

Conclusion

Based on the facts presented to us, we have concluded that the activities carried out, leading to the sale of the Property will not amount to carrying on an enterprise for GST purposes.

Hence, the requirement of paragraph 9-5(b) will not be satisfied under these circumstances as the sale will not be made in the course or furtherance of an enterprise.

As the sale of the Property will not be made in the course or furtherance of an enterprise that you carry on, you will not be required to be registered for GST under section 23-5. Since you are also not currently registered or required to be registered for GST, paragraph 9-5(d) will also not be met.

Therefore, as paragraphs 9-5(b) and 9-5(d) have not been satisfied, you will not be making a taxable supply in relation to the sale of the Property.

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