Edited version of private ruling

Authorisation Number: 1011658014391

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Ruling

Subject: GST and sale on new residential premises

Question

Is the sale of your new residential premises subject to goods and services tax (GST)?

Answer

Yes.

Relevant facts

You are the trustee of the Trust and are registered for GST.

Your carry on a business for building sites.

You have not been involved in the construction of properties in the past, however you have purchased and sold land.

In 2006 you acquired for investment purpose, land from a vendor who was registered for GST.

The margin scheme was applied and no input tax credits were claimed for the purchase of the land.

The construction of a residential premise (the Property) was completed in 2008.

No input tax credits (ITCs) were claimed for the construction of the residential premise.

Your intent from the outset was to invest and lease out the Property.

You made several enquiries at the local real estate office; however the Property was not rented or leased prior to the sale.

Due to the global financial crisis you sold the Property (for consideration) and the contract of sale (contract) had a 'no GST' clause. The contract was completed in 2008.

There was no evidence in the contract that the margin scheme was applied.

You have lodged your income tax return and treated the Property as having been subject to GST.

Interest on the loan and recurring costs such as council and water rates were claimed as tax deductions on your income tax return.

You have not received advice from the Tax Office on the income tax aspects of your Property sale.

You have provided a copy of the 'Contract for sale' for the residential premises sold.

Reasons for decision

Summary

Despite the sale of your new residential premise being a single or one-off transaction, we consider that the sale is in the course of an enterprise that you carry on. Based on the information provided all other requirements of section 9-5 of the GST Act are also satisfied and the supply is neither GST-free or input taxed. Therefore the sale of your new residential premise will be subject to GST as it is a taxable supply pursuant to section 9-5 of the GST Act.

Detailed reasoning

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

(a) you make a supply for *consideration;

(b) the supply is made in the course or furtherance of an enterprise that you *carry on;

(c) the supply is *connected with Australia;

(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.

* Asterisked terms are defined under section 195-1 of the GST Act.

The facts provided indicate that your supply of Property satisfies the requirements under paragraphs (a), (c) and (d) of section 9-5 of the GST Act as you made the supply for consideration, the Property is located in Australia and you are registered for GST.

Therefore, we need to consider whether the sale of the Property is in the course of an enterprise that you carry on (paragraph (b) of section 9-5 of the GST Act).

Enterprise

The Australian Taxation Office view on enterprise is provided in the Goods and Services Tax Determination GSTD 2006/6. This determination is read in conjunction with the Miscellaneous Taxation Ruling MT 2006/1, which is about an entity carrying on an enterprise.

The phrase 'in the course or furtherance of an enterprise' is not defined in the GST Act. The Explanatory Memoranda relating to the A New Tax System (Goods and Services Tax Administration) Bill 1998 confirms that the term is intended for a broad meaning at paragraph 3.10 which states:

In the course or furtherance is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

· in the form of a business

· 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, license or other grant of an interest in property.

You carry on a business for building sites and you became GST registered for the purpose of that enterprise. You advised that your acquisition of the property was not for the purpose of carrying on your business, nor did you claim any ITCs for GST paid on construction costs incurred.

You also advised that you are not and have never been engaged in property development activities on a regular or continuous basis and the building and selling of the Property was a one-off transaction. On the facts provided, we consider that the supply of the Property was not made in the course or furtherance of the normal business.

However, although the sale of the Property is not considered to be a business, paragraph 234 of MT 2006/1 provides that an isolated or one-off activity may fall into the category of 'an adventure or concern in the nature of trade'. This category includes a commercial activity of a trading nature that does not amount to a business but which has the characteristics of a business deal.

Property Development and leasing

In 2006 you acquired for investment purpose, land from a vendor registered for GST. You developed the property and the construction of the residential premises was completed in 2008.

You advised that you had intended to lease out the Property. Therefore you did not claim any ITCs on the construction and development costs of the Property.

Paragraph 9-20(1)(c) of the GST Act includes in the definition of enterprise 'an activity or series of activities done, on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property'. In this case, you acquired the property and built the residential dwelling for the purpose of rental investment. That is the acquisition was made by you for the purpose of carrying on a leasing enterprise with a view to make profit.

For the purpose of the GST Act, 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. We consider that although the Property was never actually leased, this will not prevent the supply from being made in the course or furtherance of the entity's leasing enterprise.

As the Property was built for the purpose of your leasing enterprise and it was the asset that was intended to be used for the purpose of that enterprise, its subsequent sale is in the course or furtherance of your enterprise.

Please note that where a GST registered entity carries on more than one enterprise, it will be liable for GST on all taxable supplies that it makes. This is irrespective of whether the supplies are made in the course or furtherance of an enterprise that is not its main enterprise. In your case, even though the sale of the Property was not made in the course of your main business, we consider that it is still in the course or furtherance of an enterprise.

Accordingly, the sale of the Property satisfies all the requirements in section 9-5 of the GST Act. Next, we need to consider whether the sale of the Property is GST free or input taxed.

GST-free and Input taxed supplies

Division 38 of the GST Act specifies the types of supplies that are GST-free. However, the facts of your case indicate that your supply of the residential premises would not be GST-free under the GST Act.

Division 40 of the GST Act outlines the supplies that are input taxed. Under subsection 40-65(1) of the GST Act, a sale of real property is input taxed but only to the extent that 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 is not input taxed if the premises are new residential premises (other than those used for residential accommodation before 2 December 1998).

Section 40-75 of the GST Act provides the meaning of new residential premises. Under subsection 40-75(1) of the GST Act, residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built or contain a building that has been built, to replace demolished premises on the same land.

We note that paragraphs (b) and (c) do not apply to your residential premises. You purchased land and the vendor had used the margin scheme to work out their GST liabilities. In addition the new residential premises did not display the characteristics of commercial residential premises (You may find more information on the criteria of commercial residential premises in the Goods and Services Tax Ruling GSTR 2000/20).

As your residential premises had not been previously sold prior to 2008, it was a new residential premise under paragraph 40-75(1)(a) of the GST Act. Subsection 40-75(2) of the GST Act does not apply to your new residential premise as you had not leased it out before the sale.

Hence, the sale of the new residential premises will not be input taxed under subsection 40-65(2) of the GST Act. Therefore the sale was a taxable supply under section 9-5 of the GST Act and you are liable for GST on the sale.

As there were no clauses in the contract which indicated that you had applied the margin scheme, your GST liabilities would therefore be 1/11^th of the consideration received for the sale. You have to attribute your GST liabilities for this sale to the tax period when settlement occurred.

Margin Scheme

Section 75-5 of the GST Act provides that in certain circumstances where a sale of real property is taxable, you may elect to apply the margin scheme and therefore calculate the GST at 1/11^th of the margin. In this case however, you acquired the land under the margin scheme and its sale is a taxable supply, but there is no evidence in the contract that the margin scheme was applied. Both you and the recipient (purchaser) must agree in writing to apply the margin scheme as the contract for sale was made on or after 29 June 2005.

If you did not have a written agreement by the time the sale was made you may ask for permission to extend the time to have the agreement in writing. For more information, refer to PS LA 2005/15: The Commissioner's discretion to extend the time in which the agreement in writing must be made to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999. This practice statement applies to sales of property made under contracts entered into on or after 29 June 2005.

How the margin scheme applies to your supply of the property using the margin scheme is explained in GSTR 2006/8. Both of these documents are available on our website www.ato.gov.au

GST credits

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise but not to the extent that you acquire it for making input taxed supplies or for a private or domestic purpose.

Your intention to lease the property as part of your leasing enterprise is an input taxed supply. Therefore the acquisitions relating to the construction of the property was not for a creditable purpose and you were not entitled to an input tax credit.

However, as your circumstances changed and you sold the property as a taxable supply, consideration must be given to the application of Division 129. This means that the extent to which your acquisitions were made during the construction of the property are actually applied or used for a creditable purpose will change over time.

Division 129 of the GST Act provides that after an acquisition or importation is made, the extent to which it is actually applied or used for a creditable purpose may be different from the planned use. Adjustments for such changes in the extent of creditable purpose are subject to the provisions of Division 129 of the GST Act.

How to work out an adjustment for an acquisition under Division 129 of the GST Act is detailed in GSTR 2000/24 with further guidance provided in GSTR 2006/4. (These rulings are available from our website at www.ato.gov.au).