Edited version of private ruling

Authorisation Number: 1011631236124

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Ruling

Subject: GST and sale of residential property

Question 1

Is the sale of your new residential home a taxable supply?

Answer

No, the sale of your new residential home is not a taxable supply.

Question 2

Are you required to register for GST?

Answer

No, you are not required to register for GST.

Question 3

If you are required to be registered for GST and subsequently become registered, can you claim an input tax credit for goods purchased prior to being registered for GST as a decreasing adjustment?

Answer

Not applicable

Question 4

Are you able to use the margin scheme to calculate your GST liability?

Answer

No, you are not able to use the margin scheme to calculate your GST liability.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse purchased a residential property in 200X.

Your intention (at the time of purchase) was to rent and retain the existing property and subdivide the rear of the property, build a new residential property and rent it out.

However, as the house is almost completed, you are unsure whether to retain and lease out the new residential property or to sell the new residential property.

The property was purchased from a private individual and was not a taxable supply.

You are both currently not registered for GST.

Reasons for decisions

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1 & 2

Summary

The sale of your new residential property is not a taxable supply and you are not required to register for GST.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a taxable supply as follows:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you carry on; and

· the supply is *connected with Australia; and

· 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.

In order for a supply to be a taxable supply all of the requirements of section 9-5 of the GST Act must be satisfied.

The issues in this case are determining, whether the sale of your new residential home was made in the course of an enterprise that you carry on and whether you are required to be registered for GST.

Enterprise

An enterprise is defined in subsection 9-20 (1) of the GST Act as follows:

An enterprise is 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; or ……..

Purchasing a property with the intention of building a rental property for the purposes of renting it comes within the meaning of an enterprise. Thus, the building of a house in order to be rented out forms part of the enterprise of renting.

In considering whether the new house has been used solely in connection with the rental enterprise, it is important to consider throughout the period of ownership by you:

· how the land has been exploited or enjoyed (for example, private use business use, or leasing to a third party)

· what you have done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

· what your purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

In your case, your only use of the land has been in connection with your rental enterprise. In other words, you always had the intention of using the premises for residential rental purposes. You do not carry out any other property development activities. Therefore, there is no evidence that you commenced the building of the house for the purpose of your property development activities. The building of the house has always been for the purpose of renting out.

Therefore, if you sell this property we are of the view that the sale was done in the course of your rental enterprise.

Are you required to be registered for GST?

Under section 23-5 of the GST Act, you are required to be registered if you carry on an enterprise, and your GST turnover meets the registration turnover threshold (which is $75,000).

We have established that you are carrying on a rental enterprise.

Therefore, the next issue to be determined is whether your turnover meets the registration turnover threshold because of the sale of this property.

There are certain supplies that an entity can disregard from being included in the calculation of both the projected and current GST turnover.

Input taxed supplies are one such supply that needs to be disregarded. However, the house on your property is new residential premises. Therefore, by way of paragraph 40-65(2)(b) of the GST Act, this will not be an input taxed supply of residential premises.

Furthermore, sale of capital assets are also disregarded from the calculation of the projected turnover. Goods and services tax ruling GSTR 2001/7 states the following in relation to capital assets.

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 stock17) 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.

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.

We are of the view that the house that you are selling is a capital asset of your rental enterprise. As such you are not required to include the sale proceeds from this house in the calculation of your GST turnover.

Accordingly, as you do not meet GST registration requirements as specified in section 23-5 of the GST Act you are not required to be registered for GST.

Consequently, the sale of your property will not be a taxable supply as one of the requirements of section 9-5 of the GST Act (namely paragraph 9-5(d)) is not satisfied.

Question 3

Detailed reasoning

As you are not required to be registered for GST we have not addressed this question.

Question 4

Summary

As the sale of your residential property is not a taxable supply you cannot apply the margin scheme to its sale.

Detailed reasoning

Subsection 75-5(1) of the GST Act states the following in relation to the margin scheme:

(1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

selling a *stratum unit; or

granting or selling a *long-term lease;

if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.

Because the sale of your property is not a taxable supply, the margin scheme cannot be applied to the sale of your property.