Edited version of private ruling

Authorisation Number: 1011633997248

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Ruling

Subject: GST and sale of property held jointly

Question

Is the sale of your interest in the property subject to goods and services tax (GST)?

Answer

No, the sale of your interest in the property will not be subject to GST.

Relevant facts and circumstances

You are carrying on a business as a sole trader on a part-time basis.

You are currently not registered for GST as your turnover from the business is well below the threshold required to be registered. You were previously registered for GST but you deregistered upon receiving a full time job.

You are the co-owner of the property. You own the property as joint tenants.

The property was purchased many years ago. On acquisition, the property was a vacant block of land with a dilapidated structure on it, which was uninhabitable. It was your joint decision to purchase this property with the intention to build your residential home on it with acreage to keep horses as a hobby.

You jointly acquired a building permit as owner builders to build your residential house and first shed. You moved into your residential house soon afterwards with building works not entirely complete but were granted an extension to your building permit. You obtained a certificate of occupancy thereafter.

Since this date you have only made one capital improvement to the property in the form of a second freestanding shed. The costs of the total building works were approximately $15,000.

There have been no other major capital improvements made to your property since this time, apart from only minor cosmetic improvements and maintenance.

You advised that your property was identified as being included in a new boundary and new zoning in the area.

As a result, you then made the decision jointly to put your property on the market and move on to find another property that was suitable for your family and lifestyle.

Your property will be sold "as is".

You will engage a real estate agent to sell your property.

You explained that your business has a van that is parked on the property and there are some tools, printer and facsimile kept in the home that is used in the business.

The co-owners of the property have not charged any rent to your business for the use of the property. Your business has not paid for the rates and taxes of the property in exchange for the use of the property. You have not claimed any income tax deductions in relation to the house or property for the business. You have not claimed for any home office expenses attached to the business such as electricity. You have only claimed stationery supplies for your printer and facsimile machine.

The property has been used for your family home only and has not been put to an income producing use. You have not farmed the property or run a business jointly using the property. No income is received jointly by the co-owners.

You do not hold rental properties either individually or jointly. You advised that prior to buying this property you had bought a property many years ago to use as your residence but ended up selling that and bought this property instead. Apart from this you have not bought and sold any property before and do not own any other properties.

Reasons for decision

GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

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 Australia; 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.

All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply.

The sale of your property is a supply and will be subject to GST if it is a taxable supply.

We need to determine firstly whether you as an individual are making a supply when the property is sold or whether you and the other co-owner are making a supply of the property jointly as a partnership.

A partnership is defined in section 195-1 of the GST Act as:

(a) an association of persons (other than a company or a limited partnership)

carrying on business as partners or in receipt of ordinary income or statutory

income jointly; or

(b) a limited partnership.

The first limb of paragraph (a) reflects the general law definition of a partnership, whereas the second limb of paragraph (a) generally reflects tax law partnerships.

Paragraph (b) does not apply in your case as you are not a limited partnership.

A general law partnership is an association of persons carrying on business in common with a view of profit. In your case you are not currently carrying on any business together with a view to making a profit nor will be when the property is sold (to be discussed later) and accordingly are not considered to be in a general law partnership.

Tax law partnerships exist only for tax purposes. They generally arise because property is acquired or used to derive income jointly. Goods and Services Tax Ruling GSTR 2004/6 which is available on our website at www.ato.gov.au considers the issue of tax law partnerships and co-owners of property.

Paragraph 25 of GSTR 2004/6 provides:

25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income.

Further, GSTR 2004/6 at paragraph 27 also states:

27. The expression 'in receipt of ordinary income jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

Paragraph 49 of GSTR 2004/6 states that:

49. If co-owners jointly apply or convert the property for an income producing purpose, the tax law partnership is formed when the co-owners agree to undertake the conversion of the property...

In this case, the property was not used by the co-owners for any joint income producing purposes. The property has merely been used as the family residence by all the co-owners. You have not farmed the property or run a business jointly using property.

No income is received jointly by the co-owners from the use of the property. You advised that you are operating a small business as a sole trader. Although the co-owners of the property have granted you use of the property for your business, the co-owners have not charged you rent or any kind of consideration for the use of this property. This may constitute an enterprise by the co-owners as section 9-20 of the GST Act considers the definition of an enterprise to include- an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. However, it does not include anything done by an individual or partnership where all or most of the members are individuals without a reasonable expectation of profit or gain. In this case, the co-owners are receiving no consideration for granting the use of the property to you, and a reasonable expectation of profit or gain is unlikely. So it is considered that there is no leasing enterprise being undertaken by all the co-owners.

In addition, the property has merely been held as your private asset. The property has not been used for any agricultural purposes and has not been otherwise leased. No development work or land subdivision has or will be undertaken. Apart from some improvement to the property a few years ago mainly for your use as your family home there have been no other major improvements made to the property. The property will be sold without any further substantial improvements. The sale of the property will not result in receipt of income of a revenue nature.

There has been no joint commencement of an activity by you and the other co-owner for an income producing purpose which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. Accordingly, there is no existence of a tax law partnership.

Therefore, the sale of the property will be a sale by you and the other co-owner in your capacity as individuals and not as a partnership. As joint tenants, you and the other co-owner each have an interest in the property.

We now need to consider if you will satisfy the requirements in section 9-5 of the GST Act.

In this case, the sale of your interest in the property will be for consideration and the supply will be connected with Australia as the property is in Australia. As such, the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act will be satisfied.

The issues that remain to be considered are whether the sale of your interest in the property will be in the course or furtherance of an enterprise that you carry on, whether you are required to be registered for GST and whether the sale will be GST-free or input taxed.

Whether the sale of your interest in the property is made in the course or furtherance of an enterprise that you carried on

Section 9-20 of the GST Act defines 'enterprise' 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 (available on our website) provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number. Goods and Services Tax Determination GSTD 2006/6 (also accessible from our website) provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, it also considers that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

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 as opposed to the mere realisation of a capital asset.

Based on the information provided, the sale of your interest in the property will be a one-off activity, and is not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities. Therefore, we shall consider whether your sale of the property is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 244 of MT 2006/1 provides further guidance on adventures and concerns in the nature of trade. It states:

244. 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. Such transactions are of a revenue nature. However, 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 265 of MT 2006/1 provides that from the cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 and Casimaty v FC of T 97 ATC 5135 a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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 the subdivision; and

· buildings have been erected on the land.

In your case, whilst there is a change of purpose for which the property is held and buildings have been erected on the property (however these buildings have been erected prior to your decision to sell the property), no other factors above are present.

You acquired your interest in the property with the intention of building your residential home on it with acreage to keep horses as a hobby and not for the purpose of resale for commercial gain. You acquired the property many years ago and shortly afterwards built your family home as an owner builder. You moved into your residential house and occupied this property as your family home. Other than the residence, you have constructed a shed the total cost being $15,000. Other than this, no further improvements have been made on the property. No development or subdivision activity has or will be undertaken by you and the other co-owner. You do not hold any other land or buildings and will be selling your interest in the property in order to move on and do what is best for your family. You are not in the business of acquiring, developing and selling property.

The property has not been used for an income producing purpose. The character of the property is that of a private/investment asset as opposed to a trading asset. In this instance, selling the property is not part of a trade of buying, selling and developing property.

Therefore, we consider that the property is a mere realisation of a capital/private asset which does not amount to the carrying of an enterprise as defined under section 9-20 of the GST Act. The sale does not have a commercial nature and is not an adventure or concern in the nature of trade.

You are currently carrying on a business. However, you have not claimed any income tax deductions for the use of the property and as such it is considered that the property is not a business asset of your sole trading business. The property is your private asset and is not connected to your enterprise. Therefore, the sale of the property is not in the course or furtherance of your sole trading business.

The sale does not also fall under any other type of enterprise in the definition in section 9-20 of the GST Act.

As you are not carrying on an enterprise in relation to the sale of your interest in the property, paragraph 9-5(b) of the GST Act is not satisfied.

Required to be registered

Section 23-5 of the GST Act provides that you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

In this case, you are carrying on a small business but you are not registered for GST as you are not required to be registered for GST as your GST turnover (current and projected) for that business is less than $75,000.

As established above, the sale of your interest in the property does not amount to an enterprise for GST purposes as it is considered to be a mere realisation of a capital/private asset. Furthermore, the sale of the property is not in the course or furtherance of your business. Accordingly, the sale of your interest in the property will not lead to the requirement to be registered for GST; therefore the requirement in paragraph 9-5(d) of the GST Act is not met.

Conclusion

As all the requirements of section 9-5 of the GST Act are not met, it is therefore not necessary to consider whether the sale will be GST-free or input taxed.

Therefore, the sale of your interest in the property will not be a taxable supply and will not be subject to GST.