Edited version of private ruling

Authorisation Number: 1011748259039

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Sale of new residential premises

Question

Is the partnership liable for goods and services tax (GST) on the sale of new residential premises (property)?

Answer:

Yes

Relevant facts:

You are a partner to a partnership.

The partnership does not have a Tax File Number (TFN) and is not registered for an Australian Business Number (ABN) or GST.

The partnership purchased a block of land (Land) and the margin scheme was applied.

The partnership's initial intention was to construct residential premises to lease out.

The partnership financed the purchase from a bank account jointly owned by the partners.

The partnership received a tax invoice for their acquisition.

The partnership engaged a contractor to build new residential premises.

The partners changed their initial intention when they received advice that their new residential premises were not suitable for rental.

When the construction of the new residential premises was completed, the partnership sold the property for an amount greater than $75,000.

There was no written agreement between the partnership and the purchaser to apply the margin scheme to the sale.

This was the first time that the partnership bought and sold real property.

The partnership has another rental property which has been leased out.

The partnership advised that they may or may not continue to build and sell real property in the future

Reasons for decision

Partnership entity

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles in that Ruling apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraph 5 of GSTD 2006/6 states:

'Entity' is defined in section 184-1; … It is intended that the term entity has a common meaning across the ABN, GST and income tax Acts. However, the particular definition of 'entity' still needs to be considered in the context of the Act in which it is found. Also note for ABN and GST purposes a defined part of an entity may be taken to be an entity in itself.

Section 184-1 of the GST Act defines the meaning of 'entity' for GST purposes and it includes partnership.

The meaning of the term 'partnership' is explained in section 195-1 of the GST Act to have the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which states:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or…

In addition paragraph 43 of MT 2006/1 states:

A partnership within the extended meaning for taxation purposes exists, for example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. It is an entity in its own right as it is a partnership for the purposes of the ABN Act.

In this case we consider the partners in the partnership have acquired, developed and sold the property jointly and the income from the sale was received jointly by the partners in partnership. They financed the purchase of the Land and development of the property from a bank account jointly held by the partners. The partnership received a tax invoice for their acquisition. Therefore, we consider that the entity that had acquired the Land and developed the new residential premises was the partnership

This ruling is provided to each partner because the partnership does not have a TFN or an ABN.

Taxable supplies

Under section 9-5 of the GST Act you make a taxable supply if

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia and

· 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 circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 of the GST Act respectively. In this case there is no section in Division 38 of the GST Act which operates to make the supply of the Property GST-free.

Residential Premises

Under section 40-65 of the GST Act, the sale of residential premises is input taxed unless the premises are commercial residential premises or new residential premises.

The meaning of the term commercial residential premises is explained in section 195-1 of the GST Act. Paragraph 82 of Goods and Services Tax Ruling GSTR 2000/20 provides a list of indicators for commercial residential premises. Based on the definition and these indicators we do not consider the property to be commercial residential premises.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if amongst other things they have not previously been sold as residential premises and have not previously been the subject of a long term lease. However the premises are not new residential premises if for the period of at least 5 years since the premises first became residential premises the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a) of the GST Act.

The property satisfies the definition of new residential premises under subsection 40-75(1) of the GST Act. The property was newly built and had never been leased or sold prior to the sale. Therefore the sale was a supply of new residential premises and not an input taxed supply under paragraph 40-65(1)(a) of the GST Act.

The next issue for us to consider is whether the sale of the property satisfied the criteria in section 9-5 of the GST Act to be a taxable supply. The partnership sold the property for consideration and the sale was connected with Australia as it is located in Australia. However, the partnership does not have an ABN and is not registered for GST. Therefore the remaining issues to consider are whether the partnership sold the property in the course carrying on an enterprise and if so; whether the partnership was required to register for GST when it sold the property.

In the course of carrying on an enterprise

Section 9-20 of the GST Act defines the term 'enterprise' in broad term. Subsection 9-20(1) of the GST Act states:

An enterprise is an activity or series of activities, done:

(a)     in the form of a *business; or

(b)     in the form of an adventure or concern in the nature of trade; or…

* is a defined term in the GST Act

However paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby. Paragraph 9-20(2)(c) of the GST Act outlines that an enterprise does not include an activity, or series of activities done by an individual or partnership without a reasonable expectation of profit or gain.

We consider that the activities that the partnership carried out to acquire, develop and sell the property were not done as private recreational pursuit or hobby activities. The partnership had reasonable expectations of profit making when they conducted these activities. The partnership had intended to build residential premises to lease but changed their intention when they received advice that the new residential premises were not suitable for rental. Therefore paragraphs 9-20(2)(b) and (c) of the GST Act do not apply.

Business

Business is defined in section 195-1 of the GST Act which states:

business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee.

The meaning of business is also defined in ITAA 1997 and is considered in Taxation Ruling TR 97/11. Although that ruling deals with the carrying on of a primary production business, the principles discussed in that ruling apply to any business.

Paragraph 18 of TR 97/11 provides a list of indicators that a business maybe conducted but no one factor determines whether a business is being carried on. Whether a business is being carried on is a question of fact based on objective considerations of the activities.

Based on the information provided, we consider that the partnership was not carrying on a business of developing properties for sale. The sale was a one-off transaction and the partnership does not have any business plans to develop other properties for sale.

Next we need to consider whether these activities could be activities done in the form of an adventure or concern in the nature of trade (isolated transaction).

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

Enterprise as defined in paragraph 9-20(1)(b) of the GST Act includes an isolated or a one-off transaction which does not amount to a business but which has the characteristics of a business nature. However, it does not extend to a mere realisation of investments or private assets such as the family home and private cars. Paragraphs 233 to 261 of MT 2006/1 outline the Australian Taxation Office (ATO) view on activities in the form of an adventure or concern in the nature of trade. Paragraphs 262 to 302 of MT 2006/1 provide further explanations in relation to a one-off transaction of the sale of a real property where an enterprise is being conducted and the explanations distinguish activities relating to an enterprise from a mere realisation of a capital asset.

Assets which are purchased with the intention of holding them for period of time or held as income producing assets (e.g. rental property) would probably be capital assets and not likely to be purchased for trading purposes. The sale of these assets would probably be a mere realisation of capital assets. However, assets can change their character from being a capital asset to a trading asset.

Examples 28 to 31 of MT 2006/1 outline the circumstances where an enterprise is being conducted. The supplier acquires the real property for a specific purpose and the supplier engages in activities similar to conducting a business. For example the supplier has profit making intention and they make business plans and heavy investments to achieve their objectives.

However, we need to compare the circumstance to cases where the sale of property could be a mere realisation of capital asset which is highlighted in examples 32 to 35 of MT 2006/1. In these cases the supplier normally would have ownership of the property for some time. Their intention is to maximise their profit by making minimal investment while preparing the property for sale.

Whether the activities are part of an enterprise or a mere realisation of capital assets is a question of facts and degree. In the partnership case, the partners purchased the Land as part of their profit making activities and their initial intention was to build new residential premises for lease. The partnership changed their intention when they were advised that the new residential premises was not suitable for leasing. The partnership sold the property when it was completed. The change of intention from leasing to sale leads to the conclusion that the acquisition of land and building has changed from being an investment asset to a trading asset. They sold the property when it was completed and they held the property for a short period of time.

Therefore we consider that the partnership's activities in relation to the sale of the property were not a mere realisation of a capital asset. The property was not a capital asset as it was sold when the construction was completed. Their activities in relation to the sale display the characteristics of a business deal and therefore they were carrying an enterprise in the form of adventure or concern in the nature of trade under paragraph 9-20(1)(b) of the GST Act.

The second issue is whether the partnership was required to register for GST when they sold the property

GST registration

Under section 23-5 of the GST Act, an entity is required to register for GST if the entity carries on an enterprise and the entity's GST turnover meets the registration turnover threshold, which is currently $75,000. The ATO view on GST turnover is outlined in Goods and Service Tax Ruling GSTR 2001/7.

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

(a) the entity's current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the turnover threshold; or

(b) the entity's projected GST turnover is at or above the turnover threshold.

Current GST turnover is defined in section 188-15 of the GST Act and projected GST turnover is defined in section 188-20 of the GST Act.

In this case, the partnership sold the new residential premises for consideration in excess of registration threshold as part of their enterprise under paragraph 9-20(1)(b) of the GST Act. We have confirmed that the sale is not an input taxed supply under section 40-65 of the GST Act.

Therefore the partnership's supply satisfied paragraph 9-5(d) of the GST Act as the partnership's GST turnover exceeded the registration turnover threshold when the partnership sold the property. The partnership was therefore required to register for GST in relation to the sale of the property.

The sale of the property satisfies all of the criteria in section 9-5 of the GST Act to be a taxable supply.

GST liability

Under section 9-40 of the GST Act an entity has GST liability for their taxable supply.

From the above, we have concluded that the sale of the property is a taxable supply under section 9-5 of the GST Act.

The partnership had acquired the Land using the margin scheme. Therefore we need to consider whether the partnership could supply the property using the margin scheme.

Goods and Services Tax Ruling GSTR 2006/8 explains further how the margin scheme applies. Paragraphs 12 and 13 of GSTR 2006/8 state:

12.If you make a taxable supply of real property, the GST payable under the basic rule in section 9-70 is 1/11th of the price. However, under subsection 75-5(1), if you make a taxable supply of real property by:

(a) selling a freehold interest in land;

(b) selling a stratum unit; or

(c) granting or selling a long-term lease,

you may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply

 13.Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3)…

Paragraph 18 of GSTR 2006/8 adds:

Subsection 75-5(1) provides that you may use the margin scheme if the supplier and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) provides that the agreement must be made on or before making the supply, or within such further period as the Commissioner allows

In summary, a supplier of real property can choose to apply the margin scheme to calculate their GST liabilities if their supply satisfies the criteria in subsections 75-5(1) and 75-5(1A) of the GST Act.

The partnership was not registered for an ABN or GST and there was no information to confirm a written agreement to apply the margin scheme between the partnership and the purchaser was in place on or before the settlement date. Based on the above information, we conclude that the partnership cannot apply the margin scheme to calculate their GST liability. The partnership has to apply basic rules to calculate their GST liabilities which would be 1/11^th of the sale price of the property.

Input tax credits (ITC)

Under section 11-20 of the GST Act, an entity is entitled to an ITC for their creditable acquisitions. Creditable acquisition is defined in section 11-5 of the GST Act. You make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply; and

· you are registered, or required to be registered.

However section 75-20 of the GST Act overrides section 11-5 of the GST Act for real property acquired under the margin scheme. The acquisition of real property under the margin scheme by the recipient of supply is not a creditable acquisition. This is outlined in paragraph 176 of GSTR 2006/8 which states:

If the GST payable on a supply of real property has been worked out under the margin scheme, the acquisition of the property by the recipient of the supply is not a creditable acquisition. This means that the recipient is not entitled to an input tax credit for the acquisition of the real property.

The partnership acquired the Land under the margin scheme and the supplier provided a tax invoice. Although the partnership may hold a tax invoice for the acquisition of the Land, the partnership is not entitled to claim an ITC under section 11-20 of the GST Act because the acquisition is not a creditable acquisition under subsection 75-20(1) of the GST Act.

The partnership may however claim an ITC on the development and building costs associated with the new residential premises if they hold tax invoices. These acquisitions are creditable acquisitions under section 11-5 of the GST Act.