Edited version of private ruling

Authorisation Number: 1011678512383

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Ruling

Subject: GST and sales of new residential properties

Question

Are the sales of new residential properties taxable supplies?

Answer: Yes.

You are making taxable supplies in relation to the sale of new residential properties that are available for sale.

Relevant facts and circumstances

You are two individuals who jointly purchased two blocks of land as joint tenants with the intention of building a single residential home as your principle place of residence.

You are not registered for goods and services tax (GST) as individuals or as a partnership.

You did not pay GST on the acquisitions of the two blocks of land.

You borrowed funds jointly to finance your acquisitions of the two blocks of land.

You had plans to amalgamate both blocks into one title to enable you to build a single home. However, the amalgamation of the blocks was never registered, and therefore the two titles remained separate.

You found another block of land in another suburb and had decided not to proceed with the construction of your primary residence on the two blocks of land.

You did not have to subdivide the lots officially as the amalgamation had never been executed.

You have erected a new building on each of the two blocks of land, with the intention of selling them.

All the planning, development and construction work was carried out by professionals and trade contractors.

The construction of the new properties was decided on to maximise the capital return as a significant amount of money was spent on the planned amalgamation and subdivision of the land again.

The estimated cost of the land and construction of the new properties is more than the sale prices due to current market conditions.

You have never been involved in property development before. These activities represent a one off transaction on two adjacent blocks of land that you purchased.

You advised that you had no business plan or organisation setup, and did not claim any deductions.

You funded the construction of two new residential properties through your own private fund.

The construction of the new residential premises is completed.

The new residential premises are on the market for sale.

Reasons for decision

GST is payable on a taxable supply. 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 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.

Based on the facts provided, the property is owned as joint tenants by two individuals, thus we first need to examine whether the properties will be provided by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership.

Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership.

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the property.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the properties are located in Australia respectively.

Therefore, we need to consider:

· whether your sales of two new residential properties are in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

· whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you 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: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in these rulings have been applied in your circumstances.

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.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in property development before and that your activities represent a one off transaction on the land that you have purchased. In the absence of other facts, it is considered that your activities are not carried out in the form of a business if these activities are part of a one off transaction on the land and not the beginning of an ongoing land development business.

As your activities of development and sales of properties is an isolated transaction, it is necessary to determine whether the development and sales of the properties will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

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. 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.

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.

From the facts provided, you purchased two adjacent blocks of land with the intention to build your principle residence. However, you changed your plans and used the two adjacent blocks of land to erect two buildings for resale. All planning and construction and finishing work were completed by professionals and trade contractors. The new residential properties are on the market for sale. The new residential properties for sale are new and unoccupied.

We consider that your development and sales of the two new residential properties are in the course of an enterprise and more than the mere realisation of capital assets because:

· There is a change of purpose for which the land is held. You used two blocks of land to develop the new residential properties for resale.

· You had a coherent plan for the development and sales of the new properties.

· The development of the land for the new residential properties is beyond that necessary for council approval of the land, and the development costs of the two properties are substantial.

· You erected buildings on the two blocks of land.

Based on the facts provided, these activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new properties have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sales of the two new residential properties will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sales of two new residential properties that you have constructed.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

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.

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: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of developing and selling the new properties constitute the carrying on of an enterprise. At the time of the sales, the nature of your assets (the two blocks) has changed from capital to revenue (trading) assets. The sales of the new properties do not constitute the transfers of capital assets and section 188-25 of the GST Act does not apply. You are deriving income from disposals of revenue (trading) assets even if the disposals are part of a one-off transaction.

Therefore, the sales of the two newly developed properties are not excluded from the calculation of your projected GST turnover. Hence, the value of these sales must be included in the calculation of your current and projected GST turnovers.

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 states at paragraph 47:

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

Accordingly, prior to the first sale of the newly developed properties, you should be registered for GST because your projected GST turnover would be above the GST registration threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

GST-free and input tax supply

The sales of the new residential properties 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 our 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) 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 properties are residential premises to be used predominantly for residential accommodation. These properties are on the market for sale and would be new and unoccupied when sold. These new properties are neither used before 2 December 1998, nor rented for five years. On the basis of these facts, the new properties are new residential premises as defined under subsection 40-75(1) of the GST Act, and the sales of these two new residential properties will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

In summary, the development and sales of the two new residential properties satisfy all the requirements of section 9-5 of the GST Act, and are taxable supplies.

Additional Information

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 rulings/publications which are available on our website at www.ato.gov.au.