Edited version of private ruling

Authorisation Number: 1011587168724

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Ruling

Subject: GST and carrying on an enterprise

Questions

1. Are you carrying on an enterprise for GST purposes?

Answer: Yes, you are carrying on an enterprise for GST purposes.

2. Will the sale of your townhouses be subject to GST? If it is, then does the margin scheme apply to the sale?

Answer: Yes, the sale of your townhouses will be subject to GST. The margin scheme may apply to the sale, where the requirements of section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Relevant facts and circumstances

You purchased a residential property in Australia to live in and moved into the house on the property soon after.

Due to family reasons the location of the property was not suitable for you to live in. Therefore, you moved out from the property and began to rent it out.

You decided to take advantage of high property prices and applied to build a few townhouses on that land. You did not intend to sell the land with the original house; but decided to subdivide the land and construct new dwellings to sell.

You received the approval to subdivide the land. You did not acquire any additional land to facilitate the subdivision.

You borrowed funds to carry out the property development on your land.

You did not have any previous involvements in subdivision work and you do not intend to engage in property development activities in the future.

You are a salaried employee and have no connection to the building and construction industry.

The property with the original house was used for rental purposes until late last year. You have claimed rental expenses in relation to the rental period for income tax purposes.

The existing house on the property was demolished. You engaged a builder to construct townhouses on that land and the work will be completed shortly. The townhouses were built for the purposes of selling and not for renting out.

You have sold the townhouses and settlements are expected to take place in the near future.

You are not registered for goods and services tax (GST).

Reasons for decision

1. Carrying on an enterprise

GST is payable on taxable supplies that an entity makes.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that an entity makes a taxable supply if:

· the supply is made for consideration;

· in the course or furtherance of an enterprise the entity carries on;

· the supply is connected with Australia; and

· the entity is registered or required to be registered for GST.

However, the supply is not taxable to the extent that it is GST-free or input taxed.

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

Based on the facts of your case, the sale of the houses will satisfy the requirements of first and third elements of section 9-5 of the GST Act. Therefore, we must determine if the sale will satisfy the remaining elements of section 9-5 of the GST Act. That is, whether you will be making the supply in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST. Further, we need to consider if the supply will be GST-free or input taxed under any of the provisions in the GST Act.

In the course of carrying on an enterprise

'Enterprise' is broadly defined in section 9-20 of the GST Act. The term, 'enterprise' is defined in section 9-20 in the GST Act to include, amongst other things, an activity, or series of activities done:

· in the form of a business; or

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

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of the 'entity carrying on an enterprise' for the purposes of entitlement to an Australian Business Number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

As stated in section 9-20 of the GST Act, an enterprise includes an activity or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade. 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. A business encompasses trade engaged in on a regular basis. 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. However, it does not extend to the mere realisation of investment or private assets such as the family home and private cars.

This means that an asset sold at a profit, does not, of itself, result in the activity being commercial in nature. Therefore, we need to determine whether the sale of your houses constitutes an activity (solely or partly) in the course of an enterprise.

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.

At paragraph 260 of MT 2006/1 it is stated that assets can change their character but cannot have a dual character at the same time.

Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities 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.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

These factors are as follows:

· 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 subdivision; and

· buildings have been erected on the land.

In determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above. However, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

In applying the above factors to your case, we find that there has been a change of purpose for which the land was held. Initially, you bought the property to be used as your residential premises. However, having lived on that property for a very short period you found that it was no longer suitable for that purpose. You moved out from the property and used it as a rental property. You have claimed rental expenses in relation to the property for income tax purposes. Subsequently, you decided to take the advantage of high property value and built a few houses on the land to sell. Therefore, there has been a change of purpose for acquiring the property.

Your activities indicate that you had a coherent plan for the subdivision of land. You obtained the approval from the council for the subdivision of land and construction of the townhouses on the existing land. You borrowed funds to carry out the relevant development work on the land.

As stated in the facts, there has been a level of development of the land beyond what is necessary to secure council approval for the subdivision of land to facilitate the sale of the property.

Subsection 9-20(2) of the GST Act states that an enterprise does not include an activity, or series of activities done by an individual, or a partnership (all or most of the members of which are individuals) without a reasonable expectation of profit or gain. In your case, you have demolished the existing house and built the townhouses on the relevant land. You advised that your intention was to take advantage of high property prices and thus, make a profit by constructing the townhouses for sale.

Based on the information provided, you did not acquire any additional land to be added to the original parcel of land. Your property development activities were limited to the existing land. You did not employ a business organisation and did not have a manager or office to carry out the subdivision and the construction work.

You state that previously you have not been engaged in any property development and do not intend to develop any property in the future.

Nevertheless, the intention of constructing the townhouses has not been for private or rental purposes. Based on the information provided, we are of the view that the townhouses were constructed with a reasonable expectation of profit or gain by way of sale; and your isolated property development activities amount to an enterprise.

As such, the supply of your townhouses will be made in the course of carrying on an enterprise for the purposes of the GST Act.

2. GST liability on the sale

As discussed above, GST liability only arises in respect of a supply where it satisfies all the requirements of section 9-5 of the GST Act. We note that currently you are not registered for GST. However, we need to consider if you are required to be registered for GST.

Section 23-5 of the GST Act provides that you must register for GST in Australia if:

· you are carrying on an enterprise, and

· your GST turnover meets or exceeds the registration turnover threshold.

The registration turnover threshold for an entity such as yours is AUD $75,000.

Your GST turnover meets or exceeds your registration turnover threshold if either:

· your current GST turnover is AUD $75,000 or more (excluding GST) and the Commissioner is not satisfied that your projected GST turnover is below AUD $75,000; or

· your projected GST turnover is AUD $75,000 or more (excluding GST).

Your 'current GST turnover' is the value of all supplies that you make, or are likely to make in the current month, plus all the supplies that you have made in the previous 11 months. However, you only include those supplies that are made for consideration, are connected with Australia and are not input-taxed.

Your 'projected GST turnover' is the value of all supplies that you make, or are likely to make in the current month, plus all the supplies that you are likely to make in the next 11 months. However, you only include those supplies that are made for consideration, are connected with Australia and are not input-taxed.

In your case, we have determined that your isolated property development activities amount to an enterprise. Although your current GST turnover does not meet the registration turnover threshold, with the sale of your townhouses your projected GST turnover will exceed the registration turnover threshold. Thus, you will be required to be registered for GST in respect of the sale of your townhouses.

Further, the supply of your townhouses will not be GST-free or input taxed under any of the provisions in the GST Act.

Consequently, the sale of your townhouses will be a taxable supply as all the requirements of section 9-5 of the GST Act will be satisfied. Thus, GST will be payable on the sale of your townhouses.

Margin scheme

Under the margin scheme, the GST is payable on 1/11^th of the margin. If the property was not a taxable supply to you (e.g. you had acquired the property from a vendor who was not registered for GST or as an existing residential property), you may be able to apply the margin scheme for the sale of your townhouses where the requirements of section 75-5 of the GST Act are satisfied.