Edited version of private ruling

Authorisation Number: 1011677403910

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Ruling

Subject: GST registration and sales of properties

Questions:

1. Is an Australian entity (you) required to be registered for goods and services tax (GST)?

2. Are the sales of the two newly constructed apartments subject to GST?

Advice/Answers:

1. Yes, you are required to be registered for GST where the consideration for the sales of the new apartments is $75,000 or more.

2. Yes, the sales of the two new apartments are subject to GST.

Relevant facts:

An Australian entity (you) has an Australian business number (ABN), but is currently not registered for GST.

About two years ago you purchased two investment properties in Australia with the intention of holding the properties as long term investments.

Both properties have been operating as rental properties since being acquired. The properties are residential premises and have been treated as input taxed supplies.

You have never operated nor conducted a business of development, nor any other business for that matter.

An opportunity has arisen to develop several apartments on one of the properties (subject to plans and permits). The project is likely to cost $XXm.

The other will remain as a rental property and is likely to do so indefinitely.

Your intention is to hold the newly developed apartments as long term investments subject to debt levels permitting.

Two of the total number of newly developed apartments may be sold shortly after completion date to reduce debt levels.

The development is expected to take a few years.

Reasons for decisions

Issue 1

You are not registered for GST. It needs to be determined whether you are required to be registered for GST.

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

(* denotes a defined term in section 195-1 of the GST Act)

Carrying on an 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.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1, and Goods and Services Tax Determination GSTD 2006/6. The principles outlined in these public rulings have been applied to your circumstances.

The activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

From the facts provided, you acquired the original two properties for which have been used as rental properties since acquisition. These properties are used for carrying on an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of interest in property. Accordingly, you are carrying on an enterprise, and satisfy the requirement of paragraph 23-5(a) of the GST Act.

Furthermore, in relation to the development and sales of the new apartments at one of the properties, we consider that these activities are in the course of an enterprise and more than the mere realisation of a capital asset. This is discussed in detail later.

GST turnover

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises)

b) supplies that are not for consideration

c) supplies that are not made in connection with an enterprise that you carry on

d) supplies that are not connected with Australia.

We note that the consideration received for renting residential premises for which are input taxed supplies, will be excluded from the calculation of your GST turnover.

Sale of a capital asset

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 covers GST turnover, and discusses the meaning of capital assets.

Paragraphs 31 and 32 of GSTR 2001/7 provides that, 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'. The term 'capital assets' can include assets such as your factory, shop or office, and your land on which they stand, that are retained by you to produce income.

Further paragraphs 35 and 36 of GSTR 2001/7 state:

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. ...

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.

From the facts provided, although you had originally held the property to be developed to produce rental income, the property will be developed into several apartments, and will not be in the same state as when you purchased it. You intend to initially sell two of the total number of apartments, and the original purpose for which the property was held has changed.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

In your circumstance, you advised that you have never operated or conducted a business of property development, nor any other business for that matter. In the absence of other additional facts, it may be considered that your activities are not carried out in the form of a business if these activities are part of a 'once off' transaction on the land and not the beginning of an on-going land development business.

Where your activity of development and sales of properties is an isolated transaction, it is necessary to consider whether the subdivision and sales is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

Paragraph 13 of GSTD 2006/6 explains that 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. Further paragraph 244 of MT 2006/1 provides that isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

§ 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 borrowed to defray subdivisional costs was claimed as a business expense,

§ there is a level of development of the land beyond that necessary for council approval for the subdivision, and

§ buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities (paragraph 266 of MT 2006/1).

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade.

Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

We consider that your development and sales of the new apartments are in the course of an enterprise and more than the mere realisation of capital assets at the time of expected sale because:

§ there is a change in purpose for which the property is held. You plan to develop several new apartments, two of which are initially available for sale.

§ you have a coherent plan for development of the new apartments and the sales of at least two new apartments.

§ the project is estimated to cost $XXm. You borrowed funds to finance the development of the new apartments, and plan to use the sales proceeds to reduce debt levels.

§ the development of the land for the new apartments is beyond that necessary for council approval of the land, and the development costs of the apartments are substantial.

§ you erected new buildings (apartments) on the property.

On the basis of these facts and taking into consideration all the factors, it is considered that your subdivision and sales of the newly developed apartments are more than the mere realisation of a capital asset and at the time of expected sale is a revenue asset(s).

Your sales of the two newly developed apartments will not be a transfer of ownership of capital assets, and the considerations received from the sales of the new apartments are included in the calculation of your projected GST turnover.

Ceasing or reducing the size or scale of an enterprise

Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

Paragraphs 46 and 57 of GSTR 2001/7 discuss isolated transactions, and state at paragraphs 46 and 47:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Therefore, your sales of the two newly developed apartments will not satisfy paragraph 188-25(b) of the GST Act, and the considerations received from the sales of the new apartments are included in the calculation of your projected GST turnover.

Summary - Issue 1

Accordingly, prior to the first sale of the newly developed apartments, you must be registered for GST where the consideration for the sales of the new apartments is $75,000 or more. In such circumstance, paragraph 9-5(d) of the GST Act is satisfied.

Issue 2

GST is payable on a taxable supply. Under section 9-5 of the GST Act, 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.

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) to (d) of the GST Act as:

§ the sales are for consideration (such as by way of payments).

§ the sales of the newly developed apartments are made in the course of an enterprise that you carry on (as discussed above).

§ the properties are located in Australia and therefore connected with Australia.

§ you will be required to register for GST (as discussed above).

GST-free and input tax supply

The sales of the newly developed apartments are not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from the Tax Office website at www.ato.gov.au.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that:

a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

b) have been created through substantial renovation of a building, or

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

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the newly developed apartments are residential premises to be used predominantly for residential accommodation. You plan to sell two of the apartment as soon as practical to reduce debt levels, and it is likely that these apartments would be new and unoccupied when sold. Alternatively, these new apartments are neither used before 2 December 1998, nor rented for five years. On the basis of these facts, the new apartments are new residential premises as defined under subsection 40-75(1) of the GST Act, and the sales of these two new apartments will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

We note for your information that since you will retain and lease the other newly developed apartments, which are residential premises used for residential accommodation, the leasing of these other apartments will be input taxed, and therefore not a taxable supply. The sales of these leased apartments at a later stage will be a new residential premise if it is not rented for a period of at least 5 years, and will be a taxable supply. If it is rented for 5 years or more, the sales will be input taxed supplies. You will need to determine the GST status at the time of sale.

Summary - Issue 2

The development and sales of the two newly developed apartments satisfy all the requirements of section 9-5 of the GST Act, and are taxable supplies.

Further issues for you to consider

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public ruling/publications on page 17 of that guide.

All public rulings and publications referred to in this private ruling are available at the Tax Office website at www.ato.go.au.