Edited version of private ruling

Authorisation Number: 1011674238182

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Ruling

Subject: GST and the sale of a residential investment property

Question

Will you (the vendor) be making a taxable supply when you sell the residential investment property (the property)?

Answer

No, you do not make a taxable supply when you sell the property.

Relevant facts and circumstances

You were registered for goods and services tax (GST) until 2002 for your supply of services. At the moment, you are an employee of a company providing services to clients.

Before 2000, you purchased a residential property (the property) for investment purposes. You did not pay GST on the purchase price of this property.

The property was leased for residential purposes at the time of purchase and remained leased until the time of the contract for sale of the property. You have never charged or collected GST for the residential rent.

Previously you put the property on sale, but you were unsuccessful. In order to add value to the property, you applied to the Council for a Development Application (DA) to build a boarding house. This DA was approved; however, you did not intend to build this project. You entered into a contract for sale of the property as a house with vacant possession. The Special condition of the contract states that the sale is not a taxable supply.

You have not been involved in similar investment activities before.

Reasons for decision

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the 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

From the information received, your supply of the property satisfies paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as:

You make a supply of a residential property for consideration;

a) You make the supply in the course or furtherance of your enterprise. Your enterprise satisfies the definition in section 9-20 of the GST Act which defines 'enterprise' to include an activity done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Therefore you have a leasing enterprise where you lease your residential property for rent; and

b) You make the supply through an enterprise that you carry on in Australia and therefore the supply is connected with Australia.

c) However, you are not registered for GST. Now it is necessary to determine whether you are required to be registered for GST (paragraph (d) of section 9-5 of the GST Act).

Are you required to be registered for GST?

It is not the enterprise which makes the taxable supply but the entity 'you'. The term entity is defined in section 184-1 of the GST Act. Entity includes an individual.

From the facts, the title of the property on sale is registered to you. You are required to be registered for GST if you meet the registration turnover threshold.

You are required to be registered under section 23-5 of the GST Act if:

(a) you are carrying on an enterprise; and

(b) your annual turnover meets the registration turnover threshold.  

Unless you are a non profit body, your registration turnover threshold as specified by GST regulations is currently $75,000.

Annual turnover is defined to be the sum of the values of all supplies an entity has made or is likely to make during a 12 month period, either ending at that month (current turnover) or starting with that month (projected turnover). This sum should exclude the value of supplies that are input taxed supplies, made for no consideration or not connected with an enterprise that you carry on (subsection 188-15(1) of the GST Act).  

Input taxed supply

Residential rent is an example of an input taxed supply.  

Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or….

However subsection 40-35(2) of the GST Act states:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease

('long-term lease' is defined in section 195-1 of the GST Act to be for a period of at least 50 years)

You stated that you have only been leasing your investment properties to individuals or families for accommodation on short term leases. Up to the time of the sale of the property, you were only making input taxed supply of residential rent; therefore your annual turnover did not meet the registration turnover threshold of $75,000.

However, you sold the property recently. We need to determine if the sale of the property is an input taxed supply.

Subsection 40-65(1) of the GST Act provides that a sale of real property is an input taxed supply, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). Subsection 40-65(2) of the GST Act further provides that a sale of real property is not input taxed to the extent that the residential premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

New residential premises are defined in section 40-75 of the GST Act. Subsection 40-75(1) of the GST Act states:

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as 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.

From the facts, the property does not have the characteristics of 'commercial residential premises' as defined in section 195-1 of the GST Act and explained in Goods and Services Tax Ruling GSTR 2000/20, such as hotels, motels, inns, hostels or boarding houses. Therefore paragraph (a) of subsection 40-65(2) of the GST Act is not satisfied.

In addition, none of the paragraphs in subsection 40-75(1) of the GST Act is satisfied. The property has previously been sold as residential premises to you in 1999, it has not previously been the subject of a long term lease, it has not been renovated, and you have not built it to replace demolished premises on the same land. Therefore the property is not new residential premises. We do not need to discuss the exceptions in subsections 40-75(2), (2A) and (3) of the GST Act. Hence paragraph (b) of subsection 40-65(2) of the GST Act is not satisfied either.

Therefore when you sell the property, the supply is an input taxed supply according to section 40-65 of the GST Act, and the proceeds of sale of the property is not included in your annual turnover. Please take note that if a supply is input taxed, then no GST is payable on the supply but there is no entitlement to an input tax credit for anything acquired or imported to make the supply.

Consequently, you do not meet the registration turnover threshold, and you are not required to register for GST.

All of the requirements of section 9-5 of the GST Act must be met for a supply to be taxable. Since you do not meet the requirement in paragraph (d) of section 9-5 of the GST Act, you do not make a taxable supply when you sell the property.