Edited version of private advice

Authorisation Number: 1052358099217

Date of advice: 5 February 2025

Ruling

Subject: GST - sale of property

Question 1

Is the business (You) making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when you sell a property?

Answer 1

No.

This ruling applies for the following period:

XX February 2025 to XX February 2029

Relevant facts and circumstances

The company (You) are not registered for GST.

In late 20XX, you purchased XX townhouses and have leased them.

In early 20XX your director passed a resolution to purchase vacant land (the Property).

Your intention was to build and lease the dwelling to a related company that one of your directors is also a director of, for the purpose of leasing.

You commenced construction on a single storey brick veneer residential dwelling containing X bedrooms, X bathrooms, a kitchen, dining, living areas and single car garage.

Construction of the Property was completed in 20XX.

You have not claimed any GST credits for the construction of the dwelling.

The Property has not been leased or rented since its construction.

At the time you acquired the Property in 20XX, your intention was the build the residential dwelling for the purpose of leasing it to the related company.

You or any of your directors have not undertaken similar activities of property development in the past.

You are currently in the process of selling the Property due to the following factors:

•                     You have grown unhappy with the location of the Property and delays that occurred during the construction.

•                     Your director was diagnosed with a serious melanoma and was taken away from their primary business and taken extra dividends to fund the treatments for their disease. This has caused a significant change in the liquidity of your business.

•                     You have been advised by your accountant that the sale of the Property will correct the liquidity of the assets between you and the related company.

In late 2024 you changed the intention of use for the Property and made a director's resolution to sell it, noting the financial stress that was being placed on the related company.

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 11-20

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

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

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

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

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise noted.

Question

Is the business (You) making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when you sell property?

Detailed reasoning

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 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.

If you meet the criteria set out above, the supply of the Property was a taxable supply. The application of these provisions is set out below.

Supply for consideration and connected with the indirect tax zone

You stated you intend to sell the Property and it is assumed that the sale will be made for consideration at arms' length which satisfies paragraph 9-5(a).

You are an entity domiciled in Australia and the Property is located in Australia. Subsection 9-25(4) states that 'A supply of real property is connected with Australia if the real property is in Australia'. Therefore, you satisfy paragraph 9-5(c) as the sale is connected to the indirect tax zone (Australia).

The sale will not be GST-free and on the assumption that the sale is of new residential premises, the sale will not be input taxed.

The remaining criteria for discussion are paragraphs 9-5(b) which is about whether a particular supply is made in the course of an enterprise, and paragraph 9-5(d) which is about whether you are registered or required to be registered for GST. These are discussed in turn below.

Supply in the course of your enterprise

The term 'enterprise' is defined in section 9-20. Specifically, under subsection 9-20(1), 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.

Paragraph 9-20(1)(c) is highly relevant as the leasing of the other properties located in XX that are owned by you constitute an 'enterprise' under this limb of the definition in section 9-20.

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. The acquisition of the vacant land, construction of the residential accommodation on the Property may be in the course or furtherance of your enterprise. Additionally, this would also include the disposal of the Property as an activity in the course of your enterprise.

At paragraph 270 of MT 2006/1, the Commissioner explains that he considers activities that involve isolated transactions, where land is sold with the intention of resale at a profit (which would be ordinary income) to amount to an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An intention to sell Property at the time of acquiring it may be an indicator of the sale being an adventure or concern in the nature of trade. The question is necessarily one of fact and degree.

On the facts provided, your director made a resolution to acquire land at a time in 2021 with the intention to design and construct a residence that you would lease to another related company for residential accommodation. After making the resolution to purchase the Property, you engaged a builder immediately after making the resolution to provide plans for the construction of a suitable dwelling. In the three years while the dwelling was undergoing construction your director was advised that there may be liquidity concerns with the related company that you were wishing to lease the property to. This was caused in part by delays and difficulties in completing the construction. During the same period, one of your directors was diagnosed with a serious medical condition. You have not leased the Property at any stage because the abovementioned problems are precipitating the sale. However, you intend to continue the leasing enterprise you conduct on other similar properties you hold. Your activities in purchasing and looking to sell the Property does have some features of a property development enterprise, but those features only came about because of factors beyond your control. For example, you did not hold the Property for a longer period because factors such as illness intervened. Also, the fact that the asset may be sold at a profit does not, of itself, result in the activity being commercial or business-like in nature. It is also noted you do not have any background in property development.

For these reasons we conclude that the sale of the Property is being made in the course of the leasing enterprise rather than property development related activity.

Given that you are not registered for GST, the remaining is issue to be resolved is whether you were required to be registered for GST in making a supply of the Property.

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).

As discussed above you are carrying on an enterprise of leasing and thus you satisfy paragraph 23-5(a) of the GST Act.

The next issue to consider is whether your GST turnover is $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.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. Your rental properties are an input taxed supply of residential premises. As such, rental proceeds in relation to the rental of the properties are not included in the calculations of your 'current GST turnover' or your 'projected GST turnover'. The remaining factor in your turnover is whether the sale would be included in the calculation.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

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 discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

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.

Considering the above and the facts of this case we consider the sale of the Property would constitute the transfer of a capital asset for the purposes of section 188-25. Since the Property is a capital asset it cannot be included when calculating your projected GST turnover. The facts supporting the treatment of the Property as a capital asset include:

•                     The Property was initially intended to be acquired for the primary purpose of providing lease income in keeping with your pattern of business practice to date.

•                     The change of use of the Property was caused by significant health concerns causing cash flow issues rather than to pursue a one-off profit-making undertaking or scheme.

•                     The initial steps of acquiring the Property did not show a clear objective intention to sell it as part of your enterprise.

We note some factors point to the potential for the Property to be trading stock, given that you have not derived your rental income from the use of the Property, and you have not held it for a particularly long period.

On balancing the factors above, we find the Property is capital and as capital assets are not included in GST turnover, your GST turnover will not meet the registration turnover threshold and you are not required to be registered for GST.

As you are not required to be registered, paragraph 9-5(d) is not met and as a result, this element of a taxable supply is not present.

Conclusion

The sale of the Property is made in the course or furtherance of an enterprise you carry on. The sale is made for consideration and is located in Australia. Additionally, it is not input taxed nor is it GST-free. However, since you are not required to be registered for GST, the sale of the Property will not be a taxable supply.

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