Edited version of private ruling

Authorisation Number: 1011706578737

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Ruling

Subject: GST and sale of newly constructed units

Question

Is the sale of the newly constructed units by you a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice/Answer

Yes. The sale of the newly constructed units by you is a taxable supply under the GST Act and is therefore subject to GST.

You are also required to make increasing adjustment for acquisitions made in relation to the development, construction and other associated costs for the units. Please refer to reasons for decision for details.

Relevant facts

You were registered for goods and services tax (GST) and cancelled the registration in a later date. You elected monthly tax periods and account GST using the cash basis at the time when you applied for registration.

You purchased vacant blocks of land after 1 July 2000. Your original intention was to build units on the land and hold them as investment assets for rental purpose. No GST was paid on the purchase of the land.

The land was rezoned and a number of units were allowed to build on the land. The units constructed are residential premises with the facilities of bedrooms, bathrooms, kitchens and lounge rooms.

You thought that you had to register for GST as you had purchased the land and to construct new residential units on it. You had claimed input tax credits for acquisitions made for the development, construction and other associated costs of the units in your activity statements during construction.

You stated that due to financial pressure and uncertainties of holding on four units, you decided to sell the finished units rather than maintaining the initial intention of holding them despite getting rental income upon completion.

You placed the units on market for sale while the constructions were still in progress. You leased out all the units after the constructions have been completed. The units were being rented whilst listed for sale. All units were subsequently been sold.

The units were sold with the leases and you did not agree in writing with the purchasers that the sale of the units were supplies of going concerns.

You have not included GST in the price of the sale to the purchasers. However, a margin scheme agreement has been signed by both parties in the event that GST may be payable for the sale of the units.

You have previously purchased another vacant block of land with other entities and had dwellings placed onto the property. Substantial renovations were carried out on the dwellings and the properties were eventually sold. The transaction was declared by all parties in their income tax returns.

Reasons for decision

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

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. 

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

The sale of the newly constructed units would be taxable if you meet all the requirements in section 9-5 of the GST Act to the extent that the sales are not input taxed or GST-free.

Based on the information provided, your supply of the units satisfies paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act as:

· you receive consideration for your supply

· the supply is connected with Australia as the units are located in Australia, and

· you are registered for GST.

Therefore, we need to determine whether the sale of the units is in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act. It is also necessary to determine whether the sale of the units is input taxed or GST-free.

Enterprise

The term 'in the course or furtherance' is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, 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 term enterprise is defined in section 9-20 of the GST Act to include 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

The scope of 'enterprise' for GST purposes is wider than the scope of 'business' for income tax purposes. An enterprise can include activities that may not constitute a business but have the character of a business transaction.

However, subsection 9-20(2) of the GST Act contains some exclusion to the definition of enterprise. Paragraph 9-20(2)(c) of the GST Act provides that an activity or activities done by an individual or a partnership whose members are individuals without a reasonable expectation of profit or gain are not enterprises.

Is your supply an adventure or concern in the nature of trade?

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for the purposes of entitlement to an Australian Business Number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 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

Paragraph 234 of MT 2006/1 provides guidance on the meaning of business and adventure or concern in the nature of trade. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

In accordance with paragraphs 262 and 263 of MT 2006/1 even 'one-off' or isolated real property transactions may be enterprises. They state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. 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 (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraph 244 of MT 2006/1 provides further guidance on the meaning of adventure or concern 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.

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade.

Paragraphs 254 and 255 of MT 2006/1 discuss how motive may be a factor in determining whether an activity has the characteristics of trade. They state:

254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

255. Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment.

Paragraph 258 of MT 2006/1 distinguishes between trading assets and investment assets. It states:

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

You bought the vacant blocks of land and built units on it. You did not proceed with your original intention of holding the units as investment assets to produce long term rental income. Instead, you sold the units shortly after the constructions were completed.

The main purpose to which you applied the units was producing income from their disposals. It was evidenced from the fact that the units were placed on market while they were still under construction. Even though you leased out the units for a brief period after they had been built, you advertised the units for sale whilst they were leased. The activities you conducted were carried on in a similar manner to property trading activities. Hence, the nature of the units had changed from your original intention as investment assets to trading assets. The sale of the units was a commercial activity that had the characteristics of a business deal, rather than the mere disposal of an investment asset.

In addition, you have previously involved in this similar activity of acquiring land, construction of dwellings on it and the property was eventually sold with a profit.

Therefore, your activities of purchasing, developing and selling the units were not an isolated or one-off transaction. Further, you made a profit from the sale of the units. As such, the exclusion at paragraph 9-20(2)(c) of the GST Act does not apply. Hence, the sale of the units was a supply made in the course or furtherance of a property development and trading enterprise that you carried on. Consequently, you satisfied the condition at paragraph 9-5(b) of the GST Act.

Therefore, the sale of the units would be a taxable supply to the extent that they are not input taxed or GST-free supplies.

There are no provisions in the GST Act for the sale of the units to be GST-free in your circumstances. Therefore we have to determine whether the sale of the newly constructed units is input taxed supply.

Sales of residential premises

Section 40-65 of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises.

You advised that the units are not commercial residential premises and are intended to be occupied as a residence.

Section 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

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

· have been created through substantial renovations of a building, or

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

However, the premises are not new residential premises if, for the period of at least 5 years since the date construction was completed, the premises have only been rented out.

Based on the information provided, the units are newly constructed residential premises and you have rented out the units for less than 5 years prior to their sales. Therefore, they are new residential premises and the sale of the units would not be input taxed supply.

Accordingly, the sale of the newly constructed units is a taxable supply as it has satisfied all the requirements under section 9-5 of the GST Act to the extent that it is neither input taxed nor GST-free. The proceeds from the sale would be subject to GST.

Additional information

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. However, you do not acquire the thing for a creditable purpose to the extent that the acquisitions relates to making supplies that would be input taxed.

Section 40-35 of the GST Act provides that a supply of residential premises by way of lease, hire or licence is input taxed.

An apportionment between the different applications will be necessary to determine the extent to which the new residential premises have been applied for a creditable purpose during the period of time.

Goods and Services Tax Ruling GSTR 2009/4 'Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose' provides guidance on how to determine the extent to which an acquisition is applied for a creditable purpose where the new residential premises are leased prior to their sale.

Paragraphs 145 to183 of GSTR 2009/4 provides examples on how adjustments under Division 129 of the GST are calculated.

In your case, you have claimed the full input tax credits for acquisitions made in the development, construction and other associated costs for the units. You are required to made increasing adjustments in the tax period that you started to lease the units on your activity statement and later adjustment periods in accordance with the provisions outlined in Division 129 of the GST Act and principles in GSTR 2009/4.

As you have cancelled your GST registration, you are required to re-activating your GST registration to make the increasing adjustments in the relevant adjustment periods.

Our publication 'Correcting GST mistakes' (NAT 4700) provides guidelines on how to correct the mistakes you made on the previous activity statement.

All Goods and Services Tax Rulings and publication mentioned in this ruling are available to view or download from the Tax Office website.