Edited version of private ruling

Authorisation Number: 1011739393335

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Ruling

Subject: sale of residential premises

Question

Is the sale of the new property a taxable supply?

Answer

No, the sale of the new property is not a taxable supply.

Relevant facts and circumstances

You and your spouse bought a property with an existing house (the property) and the property is your principal place of residence.

Two years later, you moved to another place due to employment and the property was rented out.

You decided to demolish the existing home, subdivide the property into two smaller blocks and construct two residential buildings on the property.

You planned to use one of them as your principal place of residence. The other property was intended to be used as an investment property (the new property) and was going to be rented out.

You returned to live at the property again for 6 months. Finance was approved for the construction of two properties and you signed a construction contract for each new building on the property. You borrowed to finance the construction.

You vacated the property and costs for demolition and subdivision were incurred. Further costs were incurred for council approval and interest for the construction project to go ahead. Construction is planned to finish soon.

Due to drastic change in your personal and financial circumstances, you have now decided to sell the new property upon completion of construction. The changes to your financial circumstances are private.

You have not been involved in similar investment activities before. You did not claim interest on money borrowed as a business expense.

Reasons for decision

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 new property satisfies paragraph 9-5(a) of the GST Act as you make a supply of the new property for consideration. In addition, your supply of the new property satisfies paragraph 9-5(c) of the GST Act because you make a supply of real property in Australia therefore the supply is connected with Australia (subsection 9-25(4) of the GST Act).

Paragraph 9-5(b) of the GST Act: Carrying on an enterprise

The next step is to decide if you have an enterprise and if you make the supply in the course or furtherance of your enterprise. The supply of the new property could be an activity that constitutes an enterprise in its own right.

Your enterprise may satisfy the definition in section 9-20 of the GST Act which defines "enterprise" to include an activity done in the form of a business; or in the form of an adventure or concern in the nature of trade.

Paragraphs 9-20(1) (a) and 9-20(1) (b) of the GST Act provide that an enterprise is an activity, or series or activities, done:

• in the form of a business, or

• in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) contains the Tax Office view on what constitutes an enterprise for the purpose of eligibility for an Australian business number. Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraphs 170 to 232 of MT 2006/1 provide an explanation on when an activity or a series of activities is done in the form of a business and paragraphs 233 to 302 of MT 2006/1 on when an activity, or a series of activities is done in the form of an adventure or concern in the nature of trade.  

Paragraph 159 of MT 2006/1 provides that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case. 

In the form of a business 

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. 

You state you have never been involved in similar activities before. We consider that the intended sale of the new property is not a series of activities done in the form of a business. You acquired the property and lived there for a few years until the subdivision and construction of the new property. You built the new property with the intention to use it as your investment property and you would have kept your intention if your financial circumstances did not change drastically. You have not received any income and have not claimed any deductions for tax purposes in relation to the new property. The reasons for selling the new property are private.  

You are not carrying on a business of property development as this is a one-off activity, not repetitive. However, the sale of the new property can be considered to be an enterprise under the GST Act where activities, even one-off, are done 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 262 of MT 2006/1 provides that the question of whether an entity is carrying on an enterprise often arises where there are 'one offs' or isolated real property transactions.

In order to determine whether a sale of property constitutes an adventure or concern in the nature of trade, paragraph 263 of MT 2006/1 provides that 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 as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 lists a number of factors which, if present, may be an indication that activities are a business or an adventure or concern in the nature of trade. These factors are as follows: 

· 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 money borrowed to defray subdivisional costs was claimed as a business expense

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

· buildings have been erected on the land. 

In your case, there is a coherent plan for the subdivision of the land and there is a level of development of the land beyond that necessary to secure council approval for the subdivision, and buildings have been erected on the land.

However, the other factors in paragraph 265 of MT 2006/1 are not present to a sufficient degree. The subdivision in your case is being done to facilitate the erection of the new property intended for investment purposes. 

You advise that:

· You have owned the property for a few years and have used the property as your principal place of residence.

· You demolished the original residential premises to build two residential premises, the residence property to be used for principal place of residence, and the new property for residential rental purposes. At the time of signing the construction contract, you intended to carry on an enterprise of leasing residential premises with the leasing of the new property.

· You funded your cost of subdivision and construction work from your own funds and borrowings

· Subsequently, your circumstances changed drastically, and you will sell the new property on completion of construction.

· The purpose of the sale is to reorganise your finances.

It may be concluded that the new property was built for investment purposes rather than trading purposes. Due to the changes in your circumstances, your activity does not have the flavour of an enterprise as the original intention was one of investment.

We therefore consider that the activities that you have undertaken are not in the form of an adventure or concern in the nature of trade, but a mere realisation of an investment asset. Accordingly, the subdivision and building activities you have undertaken is not considered as 'carrying on an enterprise' and your supply of the new property does not satisfy paragraph 9-5(b) of the GST Act. We do not need to discuss paragraph 9-5(d) of the GST Act.

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 (b) of section 9-5 of the GST Act, you do not make a taxable supply when you sell the new property.