Edited version of private ruling

Authorisation Number: 1011617149753

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Ruling

Subject: GST and sale of subdivided property by an unregistered vendor

Questions

1. Is GST payable on the sale of allotment A comprising a house and the surrounding land?

2. Is GST payable on the sale of allotment B comprising a partly constructed building and land?

3. If GST is payable on either or both sales, if the vendor and purchaser(s) agree to apply the margin scheme to either or both sales, how is the value of each allotment calculated for the purposes of applying the margin scheme?

Advice/Answers

1. No, GST is not payable on the sale of allotment A.

2. No, GST is not payable on the sale of allotment B.

3. Not applicable as GST is not payable on either sale.

Relevant facts

Entities A, B and C purchased a property prior to 1 July 2000.

Currently Entity A and Entity C own the property.

The property comprised vacant land.

Entities A and B purchased 50% of the property and Entity C purchased 50% of the property as tenants in common.

The original intention of the parties was to build a house to be used as the principal place of residence of Entities A and B. It was also considered a future investment that would benefit both parties.

Shortly after acquisition, the house was built and has always been used solely as a principal place of residence.

Several years after purchase, the parties considered constructing a building to let.

A development application was lodged and approved for the construction of the building on the land.

A certain time later, some work was done, however construction ceased shortly after and was never completed.

The property was purchased under a single contract and on the one title. The house and the partly constructed building remain on one title today.

Entity A eventually acquired Entity B's interest in the property.

To this date, the property is owned 50% each by Entities A and C as tenants in common.

Entities A and C now wish to sell the property. In order to maximise the proceeds on sale, it is planned to subdivide the property into two allotments:

§ allotment A comprising the house and surrounding land, and

§ allotment B comprising the partly constructed building and surrounding land.

Entities A and C will then sell the two subdivided allotments to third parties. No improvements will be undertaken to the property after subdivision and prior to sale.

The expected sale proceeds will be in excess of $75,000 for each subdivided allotment.

Entities A and C have never been registered for GST and do not have a partnership ABN or TFN.

Entities A and C did not engage in a business partnership.

The property was not entered as a business asset in books of account.

No building contractors were engaged to carry out any building works.

No finance was obtained to acquire the property or to fund the building works. Each party contributed out of their own funds towards the acquisition costs and building costs.

Both parties had a day to day involvement in the work on the building.

The ongoing expenses for the property were paid 50% each out of funds held by each party.

No joint bank account was held for the development of the property.

No income was derived by Entities A and C from the property. It was intended that any rental income received from leasing the building would be shared equally by the parties.

Entities A and C have not purchased any other properties. They or any entity to which they are associated has not been involved in any previous property development activities.

Entity A and Entity C are not currently registered or required to be registered for GST.

Neither party has claimed any GST credits in respect of expenses incurred for the property.

Neither party claimed any income tax deductions in respect of expenses incurred for the property.

Reasons for decision

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies. Under section 9-40 of the GST Act, you are liable for GST on any taxable supply that you make.

Under section 9-5 of the GST Act, you make a taxable supply if:

§ you make the supply for consideration

§ the supply is made in the course or furtherance of an enterprise you carry on

§ the supply is connected with Australia, and

§ you are registered or required to be registered for GST.

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

'You' as defined under sections 195-1 and 184-1 of the GST Act can mean one or more entities. It includes an individual, a trust or a partnership.

In this case, the property is owned 50% each by Entity A and Entity C as tenants in common.

Entities A and C propose to subdivide the property situated in Australia into two allotments which they will sell for monetary consideration. Entities A and C are not currently registered for GST.

Therefore the central issues in this case are whether the sale will be a supply that is made in the course of carrying on an enterprise and whether Entities A and C are required to be registered for GST.

Carrying on an enterprise

Under section 9-20 of the GST Act, an enterprise includes, among 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, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Goods and Services Determination GSTD 2006/6 (GSTD 2006/6) and Miscellaneous Tax Ruling MT 2006/1 (MT 2006/1) provide guidance on the meaning of carrying on an enterprise for GST purposes.

Paragraph 234 of MT 2006/1 advises that generally, a business includes trade engaged in, on a regular or continuous basis, while 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 has the characteristics of a business deal.

Therefore, a one-off transaction may amount to the carrying on of an enterprise.

Both paragraph 13 of GSTD 2006/6 and paragraph 244 of MT 2006/1 advise that 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 140 of MT 2006/1 advises that carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied.

Registration and GST Turnover

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise, and your GST turnover meets the registration turnover threshold which is currently $75,000.

The term 'GST turnover' includes both current GST turnover and projected GST turnover. Current GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the previous 11 months. Projected GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the next 11 months.

In calculating your current and projected GST turnover, section 188-25 of the GST Act specifically excludes from the calculation of projected GST turnover, the supply of a capital asset by way of transfer of its ownership, and any supply made as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

The Commissioner's view on the application of section 188-25 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7). Paragraph 31 of the ruling provides that a capital asset is generally an asset that is part of 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. This can be contrasted with a revenue asset, which is described in paragraph 33 of this ruling as an asset 'turned over and bought and sold in the course of trading operations'.

In addition, paragraph 35 of GSTR 2001/7 provides that if you derive income 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.

Paragraph 36 of GSTR 2001/7 states that:

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.

Application of the law to this case

In this case, the original intention of the parties was to build a house to be used as the principal place of residence. It is advised that it was not originally intended to construct the building. The house was built shortly after construction and has always been used solely as a principal place of residence. Additionally the property was purchased as an investment asset for Entities A, B and C. It was not entered into books of account as a business asset. When GST registered, neither party claimed any GST credits in respect of the property nor has either party claimed any income tax deductions in respect of the property. Consequently, the property was originally held as a capital asset of both parties.

Several years after purchase, Entities A, B and C considered constructing the building to let and a development application was approved. Though a certain time later some work was done, construction ceased.

When Entities A, B and C made plans and commenced activities for constructing the building to let, such as lodging the development application, it could be considered that they commenced carrying on a leasing enterprise. Whilst the house was used as a principal place of residence and that portion of the property remained a capital asset, Entities A, B and C also started constructing the building on the property and intended to let it for rental income. It could be argued they commenced carrying on a leasing enterprise and the portion of the property containing the partly constructed building would be an asset of that leasing enterprise.

However, even if this was the case, the portion containing the partly constructed building would form part of the profit-yielding structure of the leasing enterprise and, as such, is a capital asset. Consequently, notwithstanding whether the sale of allotment B is in the course of carrying on a leasing enterprise, allotment B is a capital asset.

Entities A and C now wish to sell the property. No improvements will be done but to maximise sale proceeds, they will subdivide the property into the two allotments. Entities A and C are not currently registered for GST. Allotment A contains the house which is a capital asset and allotment B contains the partly constructed building which is also a capital asset. Therefore, regardless of the enterprise issue, the sale of these capital assets would be disregarded for GST turnover calculation purposes pursuant to paragraph 188-25(a) of the GST Act. Additionally, with respect to allotment B, paragraph 188-25(b) provides that any supply made as a consequence of ceasing to carry on an enterprise is also disregarded for GST turnover calculation purposes.

Consequently, Entities A and C's GST turnover is below the registration threshold and they are not required to be registered for GST. As such, no GST is payable on the sale of either allotment A or allotment B.