Edited version of private ruling

Authorisation Number: 1011713322354

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Ruling

Subject: GST and sale of real property

Questions

1. Is the sale of the vacant blocks of land by you a taxable supply?

2. Is the sale of the house(s) at completion of construction by you a taxable supply?

3. Can you apply the margin scheme to either the sale of the vacant blocks of land or newly constructed house(s)?

Answers

1. No. The sale of the vacant blocks of land by you is not a taxable supply and GST is not payable on the sale.

2. Yes. The sale of the house(s) at completion of construction by you will be a taxable supply.

However, the sale of house(s) will not be a taxable supply if the house(s) is rented out continuously for the period of at least 5 years prior to the sale.

3. No. You are not required to apply the margin scheme to the sale of the vacant blocks of land as the sale is not a taxable supply.

Yes. You can choose to apply the margin scheme for the sale of the newly constructed house(s).

Relevant facts

You are a salary and wage earner and not registered for GST. You purchased a number of adjacent blocks of land.

Your intention at the time of purchase was to build a residential house on each block and hold them as long term investment for rental purpose. The land was purchased under the margin scheme.

You engaged a builder after the settlement and the builder submitted the plans to the council and is pending for the approval. The two blocks remain vacant and no construction activities been carried out yet.

You found that you are not financially capable of holding the properties as the costs of the house and land packages have blown out plus the rising in interest rates. You wish to sell either a block of land now (with or without the contracted building plans) or the house and land at completion of construction. If there is a buyer for the properties you would consider it. You have listed the blocks for sale.

You previously purchased a commercial property for long term investment purpose. However, due to the global financial crisis at the time and you were unable to find a tenant. You were forced to sell the property. You have not carried out any other buying and selling of properties or property development activities in the last five years.

Reasons for decisions

1. Sale of vacant block(s) of land

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

This means that the GST Act imposes the liability to pay GST on the entity (supplier) that makes a taxable supply. The fact that the recipient is registered for GST is not relevant to determine whether the supplier has made a taxable supply.

Taxable supply

Section 9-5 of the GST Act provides that the supply of goods or services that you make is a taxable supply if

a) you make the 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; and

d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, you have satisfied the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act as

§ you will receive consideration for the sale of the land/house

§ the supply is connected with Australia as the property is located in Australia.

The next step to be determined is whether the sale of the vacant block of land will be in the course or furtherance of an enterprise that you carry on.

Enterprise

An enterprise is defined under subsection 9-20(1) of the GST Act and 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.

There are certain activities that are excluded from the 'enterprise' definition under subsection

9-20(2) of the GST Act. These exclusions include activities done as an employee, as a private recreational pursuit or hobby, or by individuals or partnerships without a reasonable expectation of profit or gain.

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 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.

Section 195-1 of the GST Act provides that 'carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise'.

Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. In your case, we consider the scale of activities leading up to the sale of block(s) of land by you may be insufficient to constitute a business. However, it is necessary to determine whether it is done in the form of an adventure or concern in the nature of trade.

An adventure or concern in the nature of trade

An adventure or concern in the nature of trade can be an isolated or one-off transaction and includes any commercial activity that does not amount to a business but which has the characteristics of a business deal.

Relevant characteristics of an adventure or concern in the nature of trade includes factors such as the length of period of ownership, the frequency or number of similar transactions, whether the asset has been improved beyond just preparing it for sale, motive (i.e. intention at time of acquisition) and whether the asset is an investment asset.

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

In accordance with paragraph 253 of MT 2006/1, trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale of an asset may have occurred as a result of sudden financial difficulties, rather than being for reasons of trade. Note that as an asset in such a situation would not be a trading asset, it follows that it would be an investment asset, as all assets are classified as either investment assets or trading assets.

Based on the information provided, you bought the vacant blocks of land and intended to build a residential house on each block. Due to financial difficulties, you did not proceed with your original intention of building and holding the completed house(s) as investment assets to produce long term rental income. You wish to sell the vacant block(s) of land with or without the construction plans.

In this instance the sale of the land would not be considered to be an enterprise as it is the mere realisation of a capital asset. The vacant blocks of land are not considered as trading asset and the sale of the land is not made in the course or furtherance of an enterprise that you carry on. Therefore you do not satisfy paragraph 9-5(b) of the GST Act and the sale of the vacant block of land is not a taxable supply. We do not need to discuss paragraph 9-5(d) of the GST Act.

2. Sale of newly constructed house(s)

The situation will be different from the above scenario if you commence building the house(s) on land and sell it at the completion of construction.

You bought the vacant blocks of land and will build a house on each block. You did not proceed with your original intention of holding the house(s) as investment assets to produce long term rental income. Instead, you will sell the house(s) at the completion of construction.

In this instance, the activities would now become an enterprise as a number of activities have been undertaken which involved the application to council for development approval, engagement of builder and other associated works. These activities carried out by you go beyond the minimal activities needed of merely selling the original vacant blocks of land.

The activities you conduct will be carried on in a similar manner to property trading activities. Hence, the nature of the house(s) will change from your original intention as investment asset to trading asset. The sale of the house(s) is a commercial activity that has the characteristics of a business deal, rather than the mere disposal of an investment asset.

Therefore, your activities of purchasing, developing and selling the house are made in the course 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.

Requirement to register for GST

Under section 23-5 of the GST Act, you are required to be registered for GST if:

§ you are carrying on an enterprise, and

§ your GST turnover meets or exceeds the registration turnover threshold of $75,000 (or $150,000, if you are a non-profit body).

Accordingly, you are required to be registered for GST as the expected selling price for the completed house will exceed the registration turnover threshold of $75,000. Hence, you satisfy paragraph 9-5(d) of the GST Act.

Therefore, the sale of the house(s) will 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 house(s) to be GST-free in your circumstances. Therefore we have to determine whether the sale of the newly constructed house(s) 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 advise that the houses are not commercial residential premises and are intended to be occupied as a residence.

Subsection 40-75(1) of the GST Act provides that 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.

In your case, the newly constructed house has not previously been sold as residential premises and has not previously been subject of a long term lease. Therefore you satisfy paragraph

40-75(1)(a) of the GST Act.

However, in accordance with paragraph 40-75(2)(a) of the GST Act, the premises are not new residential premises if, for the period of at least 5 years since the date construction has been completed, the premises have only been rented out.

The exception in paragraph 40-75(2)(a) of the GST Act does not apply to you since you intend to sell the house at the completion of construction.

Accordingly, the sale of the newly constructed house(s) by you will be a taxable supply.

Additional Information

If you are registered for GST, you may be able to claim back the GST you have paid on acquisitions you have made in carrying on your enterprise (such as the construction costs and other associated costs). These amounts are called input tax credits and you will claim them on your activity statements.

However, you cannot claim input tax credits for 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.

In your case, if you decide to rent the house(s) out after the construction is completed, you cannot claim the input tax credits for construction costs as the supply of residential premises by way of lease is input taxed. However, if the house is subsequently sold within five years since it has been built, you may be entitled to a portion of the input tax credits on acquisitions made.

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.

3. Margin scheme

If an entity makes a taxable supply of real property, the GST payable under the basic rule in section 9-70 of the GST Act is 1/11^th of the price. However, under subsection 75-5(1) of the GST Act, the entity may apply the margin scheme if the entity and the recipient have agreed in writing that the margin scheme is to apply. 

The margin scheme provides some relief in relation to property transactions and allows for a reduced amount of GST to be paid. Where the GST payable is calculated using the margin scheme, the recipient of the supply will not have an entitlement to claim input tax credits.

Division 75 of the GST Act states the circumstances where margin scheme can be applied to sale of freehold interests.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that the supplier make by selling a freehold interest in land if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

However, the margin scheme cannot be used if the property was acquired through a supply that was ineligible. A supply is ineligible if an entity is selling real property which it acquired:

§ through a taxable supply on which the amount of GST was worked out without applying the margin scheme

§ by inheriting it from a person who would not have been able to apply the margin scheme

§ as a member of a GST group, from another member of the GST group who would not have been able to apply the margin scheme, or

§ as a participant in a GST joint venture, from the joint venture operator who would not have been able to apply the margin scheme.

Based on the information provided, you bought the blocks of land where the margin scheme had applied. Therefore, you can apply the margin scheme to calculate GST payable if you sell the house(s) at completion of construction. Please note the requirement for the agreement in subsection 75-5(1A) of the GST Act mentioned above.

Goods and Services Tax Ruling GSTR 2006/8 Goods and service tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 also provide further guidance on the margin scheme.

All Goods and Services Rulings mentioned in this ruling is available to view or download from the Tax Office website at www.ato.gov.au