Edited version of private ruling

Authorisation Number: 1011511129906

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Ruling

Subject: GST and sale of a residential house

Question

Will the sale of one of your rental properties be a taxable supply if it has been rented out for less than five years?

Answer

No, the sale of your rental property will not be a taxable supply if it has been rented out for less than five years.

Relevant facts and circumstances

· You, intend to purchase a block of land to build some residential houses (houses) in order to rent them out.

· You are not a property developer and this will be the first time you engage in any development activity.

· You will not be claiming any input tax credits on the construction costs of the above houses.

· You are a director of a company which carries on a separate enterprise.

· You do not carry on an enterprise in your individual capacity.

· You wish to find out the goods and services tax (GST) implications of sale of such rental properties, in case if you had to sell them within five years of their construction due to financial problems.

· Currently, you are not registered for GST.

Reasons for decision

GST is payable on taxable supplies.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

· you supply a thing for consideration; and

· that supply was made in the course of an enterprise that you carry on; and

· that supply was connected with Australia; and

· you are registered or required to be registered for GST; and

· the supply not GST-free or input taxed.

In your case, you plan to build some houses for rental purposes. What needs to be determined is whether the sale of one of those rented houses within five years of their construction will constitute a taxable supply and whether GST will be payable on such a sale.

In applying the above elements of a taxable supply to your circumstances:

· You will be selling one of the rented houses for consideration (that is the sale price).

· For GST purposes, sale of capital assets of an enterprise is an activity in the course of carrying on that enterprise. The house is a capital asset of your leasing enterprise. Therefore, the sale of the house will be made in the course of your leasing enterprise.

· The supply will be connected with Australia as the house is located in Australia.

· You are not registered for GST. Therefore, what remains to be determined is whether you will be required to be registered for GST.

Are you required to be registered for GST because of the sale of the house?

Under section 23-5 of the GST Act, you are required to be registered for GST if:

· You are carrying on an enterprise; and

· Your GST turnover meets the registration turnover threshold.

Registration turnover threshold

Currently, the registration turnover threshold is $75,000 (for entities other than non-profit entities).

Generally an entity meets the registration turnover threshold where their projected GST turnover meets the registration turnover threshold irrespective of their current GST turnover.

When calculating an entity's projected GST turnover, certain supplies are excluded. The following two supplies are such exclusions:

· input taxed supplies (such as leasing of residential properties)

· sale of capital assets

Input taxed supplies

Under subsection 40-35(1) of the GST Act, the supply of residential accommodation by way of lease is an input taxed supply. Therefore, any rental income that you receive from your residential leasing enterprise will be disregarded in the calculation of your projected GST turnover.

Sale of capital assets

Under paragraph 188-25(a) of the GST Act, in working out your projected GST turnover any supply made by way of transfer of capital asset of yours is disregarded. As stated above, when you sell a house which is being used in the course of your leasing enterprise, you will be selling a capital asset of your enterprise. As such, you are not required to include the sale proceeds of that house in the calculation of your projected GST turnover.

If you do not carry on any other enterprise (other than the leasing enterprise) your projected GST turnover will be less than $75,000. Therefore, your GST turnover will not meet the registration turnover threshold. Consequently, the second requirement of section 23-5 of the GST Act (which is about who is required to be registered for GST) will not be met and as such, you will not be required to be registered for GST.

In your case, you are carrying on an enterprise of leasing. However, your GST turnover does not meet the registration turnover threshold. Therefore, you will not be required to be registered for the purposes of section 23-5 of the GST Act.

Under the given circumstances, when you sell one of the rental properties you will not satisfy all the requirements of a taxable supply. As you will not be required to be registered for GST the fourth element of a taxable supply (paragraph 9-5 (d) of the GST Act) will not be satisfied. Accordingly, the sale of your rental property will not be a taxable supply and no GST liability will arise.

New residential premises

Under subsection 40-65(1) of the GST Act, a sale of a real property is input taxed to the extent that such property is residential premises to be used predominantly for residential accommodation. However, under subsection 40-65(2) of the GST Act the sale of residential premises are not input taxed to the extent that the residential premises are commercial residential premises or new residential premises.

For the purposes of section 40-65 of the GST Act, residential premises are new residential premises if they have not been previously sold and the premises have been only used to provide residential accommodation for less than five years, since the construction. Accordingly, if a residential rental property is sold by a property developer within five years of its construction, it will be considered as a sale of 'new residential premises'. It constitutes a taxable supply subject to GST.

However, under the given circumstances, where the supply fails to satisfy all the requirements of a taxable supply, it is not necessary to consider whether it is GST-free or input taxed. Regardless of whether it is a sale of new residential premises, no GST will arise. Therefore, the sale of your rental property will not be a taxable supply even if it may be considered as new residential premises.

Additional information:

Please note that this advice has been prepared on the basis of a set of given circumstances. Where such circumstances differ to any extent, this advice will not be applicable.

Further, where required the onus of proving that the intention of:

· constructing the houses was for them to be used in a leasing enterprise and

· selling the house was because of financial problems

will rest on you. This ruling is merely based on the facts that you have presented.