Edited version of private ruling

Authorisation Number: 1011760011139

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Ruling

Subject: GST and sale of new residential property

Questions

1. Will the sale of your particular unit constitute a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. If so, will you be able to claim back any GST paid on the expenses incurred on the construction of the unit?

3. What are the GST implications of selling the particular unit off the plan?

Decisions

1. Yes, the sale of your particular unit will constitute a taxable supply under section 9-5 of the GST Act.

2. You will be able to claim back the GST paid on the creditable acquisitions made for construction of the unit, if you are registered for GST.

3. If you sell the unit off the plan, the sale will be a taxable supply. You will incur a GST liability on that sale.

Relevant facts and circumstances

You purchased a house and lived in it for a number of years.

Recently you received a planning permission from the local council to build two dwellings on the property. Thereafter, you moved out of the house to stay with your relatives.

The property will be subdivided during the course of building. It is your intention to sell the particular unit, where the original house was located. You intend to retain the other unit as your principal residence.

Recently, you demolished the existing house and began building the units. The units are due for completion in the near future.

You are not incorporated as a company. You advised us that you did not undertake this development project as a business and that it is a private project. The funding for the project is provided by a bank.

You bought the original property in your joint names. All the income and expenses related to the property and the property development project go through a joint bank account. You plan to claim the interest expenses incurred on the particular unit as an income tax deduction.

You are currently not registered for the goods and services tax (GST).

You advised us that you did not enter into this land development project with the intention of making a profit from an isolated transaction. You always knew that you will be left with a mortgage once the particular unit is sold.

You had a mortgage in excess of $200,000 on your property. You intend to borrow further amounts for subdivision and property development, bringing your total mortgage on the property to an amount in excess of $600,000. After sale of the particular unit, you will be left with a mortgage of less than $100,000.

Reasons for the decisions

Decision 1

Tax law partnership

The goods and services tax ruling GSTR 2004/6 (GSTR 2004/6) refers to tax law partnerships and co-owners of property. Paragraphs 8-11 of GSTR 2004/6 state:

8. A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the ITAA 1997. That definition states:

partnership means:

(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

(b)   a limited partnership.

9. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. We refer to this type of partnership as a general law partnership.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

11. Tax law partnerships exist only for tax purposes. General law does not recognise tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of such property result in a partnership. The receipt of income jointly from investments without carrying on business is outside the definition of a partnership under general law.

Paragraph 62 of GSTR 2004/6 refers to factors that may point to an enterprise being carried on by a tax law partnership and not by each co-owner in their own right and states:

· an oral or written agreement (for example, a syndicate agreement or agreement between family members) determines the mutual rights and obligations of the parties. The agreement may set out rules by which a co-owner might be admitted to a syndicate, or may indicate an intention to act for the mutual benefit of all family members. This agreement may be made before the acquisition of property or it may be made later;

· the income producing property is jointly acquired by the co-owners under a single contract;

· property is held by the co-owners as joint tenants;

· the co-owners fund their acquisition of the income producing property out of joint borrowings or funds;

· the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners;

· the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise;

· income from the income producing property is paid into a joint bank account of the co-owners;

· expenses relating to the income producing property are paid from a joint bank account of the co-owners; and

· the co-owners jointly pay all liabilities in relation to the income producing property.

In this case, there is no income producing property per se. However, you jointly purchased the property, lived in the property and demolished the property to construct two new units on the land. You plan to sell the particular unit and pay off a very large portion of the outstanding mortgage out of the proceeds. Thereafter, you will continue to reside in the back unit. Considering the above facts, we consider that you carry on the property development activities as a tax law partnership.

Taxable supplies

GST is payable on taxable supplies. Section 9-5 of the GST Act provides that you make a taxable supply if

· you make the supply for consideration; and

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

· the supply is connected with Australia; and

· 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.

You will make the supply of your particular unit (supply) for consideration. The supply will be connected with Australia, as the property is located in Australia. You are not registered for GST. The supply will not be an input taxed or a GST-free supply under any provision of the GST Act.

Therefore, in order to determine whether your supply will be a taxable supply, it is necessary to ascertain whether the supply will be made in the course or furtherance of an enterprise that you carry on and whether you will be required to be registered.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act defines an enterprise to include, amongst other things, an activity or series of activities done:

· in the form of a business; or

· in the form of an adventure or concern in the nature of trade; or

· on a regular on continuous basis in the form of a lease, licence or other grant of an interest in property.

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

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the guidelines in MT 2006/1 equally apply to the meaning of an entity carrying on an enterprise for GST purposes.

Whether an activity or series of activities constitute an enterprise is a question of fact and degree having regard to all of the circumstances of each case. In your case, it is necessary to determine whether you are carrying on an enterprise and whether the supply of the particulatr unit will be made in the course of that enterprise.

Isolated transactions and sales of real property

Paragraphs 262-269 of MT 2006/1 refer to when an entity could be carrying on an enterprise in the form of isolated property transactions. The following paragraphs explain when isolated property transactions could amount to carrying on an enterprise.

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….

264. …..

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. 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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

268.…

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience. If an entity is experiencing practical difficulty reaching a decision they can seek guidance from the Tax Office.

Example 29 quoted in MT 2006/1 provides an example of a property development, which is some what similar to the property development undertaken by you.

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain as his plan has enabled him to be able to keep and live in one of the units.

In your case, after living in the property for several years, you changed the purpose for which the land was being held. You devised a coherent plan to develop the property into two new units, one for yourself and one for sale. You obtained the council approval for the property development, demolished the existing house and engaged a builder to build two new units on the land. The construction work has already commenced and you hope to complete construction work in the near future.

You have obtained a new loan for subdivision and property development. You plan to claim the interest expenses incurred on the particular unit as an income tax deduction.

Before the development work, you owed over $200,000 to a bank on you property. After completion of the construction work and sale of the particular unit, you will owe less than $100,000 to the bank. That means you will reduce your debt by over $100,000. In addition, you will end up with a brand new unit as your principal residence.

Having regard to all the circumstances of your case, we can conclude that your property development project, although an isolated transaction, constitutes carrying on an enterprise.

Required to be registered

You are not registered for GST. Therefore, it is necessary to determine whether you will be required to be registered for GST on the settlement date of your proposed sale of the particular unit.

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 of $75,000.

Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets a particular turnover threshold if:

· your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

· your projected GST turnover is at or above the turnover threshold.

Under subsection 188-15(1) of the GST Act, your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or likely to make, during the 12 months ending at the end of that month other than:

· supplies that are input taxed; or

· supplies that are not for consideration; or

· supplies that are not made in connection with an enterprise that you carry on.

Under subsection 188-20(1) of the GST Act, your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than:

· supplies that are input taxed; or

· supplies that are not for consideration; or

· supplies that are not made in connection with an enterprise that you carry on.

In this case, you will make a supply of your particular unit to the potential purchaser at a future settlement date. The value of your supply on the settlement date will exceed $75,000. The supply will be made in connection with your enterprise of property development. On the settlement date your current GST turnover will exceed the registration turnover threshold of $75,000 and therefore, you will be required to be registered for GST.

In addition, if you plan to sell your particular unit within 12 months from the present time, your projected GST turnover will exceed the GST registration turnover threshold. In that case, you are required to be registered at the present time.

Accordingly, on the settlement date, in respect of the sale of your particular unit, all the requirements of section 9-5 of the GST Act will be satisfied. Therefore, the sale of the particular unit will be a taxable supply under section 9-5 of the GST Act. You will incur a GST liability equal to 1/11^th of the consideration received for the supply.

Decision 2

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose; and

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

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

· you are registered or required to be registered.

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

You are acquiring goods and services necessary for the construction of your particular unit. As the sale of the particular unit will be a taxable supply, these acquisitions are for a creditable purpose. It is assumed that the suppliers of these goods and services are entities registered for GST and they supply the goods and services in the course of their enterprise. Therefore, the supply of these goods and services to you are taxable supplies. You are liable to provide consideration for these supplies and you are required to be registered.

Therefore, the goods and services acquired by you for the construction of your particular unit will be creditable acquisitions and you may be entitled to claim the relevant input tax credits. However, in order to actually claim the relevant input tax credits, you have to register yourself for GST and lodge the relevant business activity statements. You could register for GST as a tax law partnership.

Decision 3

Subsection 9-10(1) of the GST Act provides that a supply is any form of supply whatsoever. If you sell your particular unit off the plan, it will still be a supply. As mentioned above, it will satisfy all the requirements of section 9-5 of the GST Act as a taxable supply. The total consideration received will be the consideration for a taxable supply. You will incur a GST liability equal to 1/11^th of the consideration received for the supply.

As mentioned above, the goods and services acquired by you for the construction of your particular unit will be creditable acquisitions and you may be entitled to claim the relevant input tax credits. However, in order to actually claim the relevant input tax credits, you have to register yourself for GST and lodge the relevant business activity statements. You could register for GST as a tax law partnership.