Edited version of private ruling

Authorisation Number: 1011766527349

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Ruling

Subject: GST and carrying on an enterprise

Question 1

Will the sale of property A be a taxable supply on which goods and services tax (GST) is payable?

Answer 1

No, on the facts provided, the sale of property A will not be a taxable supply on which GST is payable. The supply of property A will be an input taxed supply of residential premises.

Question 2

Will the sale of property AA be a taxable supply on which GST is payable?

Answer 2

Yes, on the facts provided, the sale of the property AA will be a taxable supply of new residential premises, on which GST is payable.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

For a period exceeding X years you have acquired residential properties which you have leased.

You acquired two properties which each contained residential dwellings. You subdivided each of the properties and constructed a residential unit on each of the subdivided lots. You leased both the existing residential dwellings and the newly constructed residential units. These properties are described as follows:

· property A which you purchased more than 5 years ago, comprising an existing residential dwelling. You leased that property since you bought it.

· property AA on which a residential unit was constructed following the subdivision of property A. You leased that property since its completion less than 5 years ago.

· property B which you purchased more than 5 years ago, comprising an existing residential dwelling. You leased that property since you bought it, and

· property BB on which a residential unit was constructed following the subdivision of the property B. You have leased that property since the unit was constructed.

In 2011 you acquired a property with the intention of subdividing the property, demolishing the existing residence and building new units to sell for profit.

You advised that as your intention was to generate profit from property development and sale you registered for GST, with effect during 2011.

As part of obtaining finance for this development venture your bank required you to sell some of your existing properties to reduce your overall borrowing level.

You made a decision to sell property one and property two. You advised that property two is presently under contract.

Since requesting this private ruling, you have back-dated the date of effect of your GST registration.

Reasons for decision

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act provides that you make 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 are 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.

GST-free supply

Division 38 of the GST Act includes provisions in relation to supplies which are GST-free and therefore are not taxable supplies. These GST-free supplies include the supply of a going concern which may involve the transfer of land under section 38-325 of the GST Act. On the facts provided, there are no GST-free provisions which apply to your circumstances.

Input taxed supply

Division 40 of the GST Act includes provisions in relation to supplies which are input taxed and therefore are not taxable supplies. As both the properties have dwellings constructed on them which have been leased before sale relevant provisions of Division 40 of the GST Act include:

Subsection 40-65(1) of the GST Act which 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, under subsection 40-65(2) of the GST Act, the sale is not input taxed to the extent that the residential premises are:

· commercial residential premises

· new residential premises other than those used for residential accommodation before 2 December 1998.

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

Subsection 40-35(1) of the GST Act provides, amongst other things, that a supply of premises that is by way of lease, hire, or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises.

The expression 'residential premises' is defined in section 195-1 of the GST Act to mean land or a building that:

· is occupied as a residence or for residential accommodation, or

· is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

· (regardless of the term of the occupation or intended occupation) and includes a floating home.

Carrying on an enterprise

Under section 9-20 of the GST Act an enterprise includes, 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 or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

The meaning of the term 'enterprise' is considered in Miscellaneous Tax Ruling MT 2006/1 (MT 2006/1). The discussion in that ruling is considered to apply equally to the term 'enterprise' as used in the GST Act.

Development/sale of land enterprise

In paragraph 270 of MT 2006/1 the Commissioner explains that an enterprise includes activities which involve isolated transactions, where land is sold that was purchased with the intention of resale at a profit. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

In 2011, you advised that you engaged in activities which involved acquiring property, demolishing the existing residence and constructing new residential units with the intention of selling the properties at a profit. These activities come within the definition of an enterprise pursuant to section 9-20 of the GST Act.

Leasing enterprise

Paragraph 306 of MT 2006/1 explains that to be an enterprise, the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. You have advised that, as well as the development activities you have undertaken in 2011, you have carried on activities where you have leased residential properties. These leasing activities were carried on over a number of years and come within the definition of an enterprise pursuant to paragraph 9-20(1)(c) of the GST Act.

You will note that you register only once for GST notwithstanding you operate more than one enterprise/business.

Property A

You will sell property A comprising the existing residence, for consideration, the supply will be made in the course or furtherance of an enterprise (leasing) that you carry on, the supply is connected with Australia (as the property is in Australia) and you are registered for GST. Furthermore, on the facts provided, the property is not a GST-free supply under Division 38 of the GST Act.

The issue that arises under section 9-5 of the GST Act in respect of the sale of property A is whether the supply of this property is an input taxed supply of residential premises.

In Goods and Services Tax Ruling GSTR 2000/20 (GSTR 2000/20) the concepts and application of GST to residential premises is considered. Paragraph 28 of GSTR 2000/20 states that:

28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

On the facts provided, the property comprises land and a building that is and has been occupied as a residence by a tenant. You acquired the property as residential premises over 5 years ago and, since then you have used that property for making supplies that are input taxed under paragraph 40-35(1)(a) of the GST Act.

It follows therefore, that the property does not come under the definition of new residential premises under section 40-75 of the GST Act, nor do the premises come within the definition of commercial residential premises.

On that basis, the supply of property A comprising a dwelling, will be a supply of residential premises which will be input taxed under subsection 40-65(1) of the GST Act. To the extent the supply of the property is an input taxed supply it is not a taxable supply under section 9-5 of the GST Act and no GST will apply.

Property AA

You will sell property AA comprising the residential unit constructed on the land for consideration, the supply will be made in the course or furtherance of an enterprise (leasing) that you carry on, the supply is connected with Australia (as the property is in Australia) and you are registered for GST. Furthermore, on the facts provided, the property is not a GST-free supply under Division 38 of the GST Act.

The issue that arises under section 9-5 of the GST Act in respect of the sale of property AA is whether the supply of this property comes within the definition of new residential premises under section 40-75 of the GST Act.

On the facts provided, property AA comprises land and a building (the residential unit) that is and has been occupied as a residence by a tenant for less than 5 years. The unit was constructed on land that has been subdivided from property A. The property has not previously been sold as residential premises since they were constructed on the land.

Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) considers circumstances in which residential premises are new residential premises. Paragraph 89 of GSTR 2003/3 states that residential premises are not new residential premises if the premises have only been used for making input taxed supplies of residential rental under paragraph 40-35(1)(a) for the period of at least 5 years since the premises first became residential premises.

As you have used the premises for making input taxed supplies for a period of less than 5 years since the premises first became residential premises, the property will come under the definition of new residential premises under subsection 40-75(1) of the GST Act. It follows, therefore, that to the extent that property AA constitutes new residential premises the supply will not be input taxed.

On that basis, the supply of property AA comprising a residential unit will be a taxable supply of new residential premises under section 9-5 of the GST Act and GST will apply.

Additional Information

The public rulings referred to above and other information in relation to GST and property transactions can be accessed from the Tax Office website at www.ato.gov.au.

Publications that may be of assistance to you include:

GSTR 2009/4 - Goods and Services Tax: new residential premises and adjustments for changes in extent of creditable purpose

GSTR 2006/4 Goods and Services Tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purposes.

MT 2006/1 - Miscellaneous Taxation Ruling - The New Tax System: - the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number

Nat 11645 Time limits on GST refunds

NAT 72957 - GST and Property

NAT 3014-07.2005 - GST for small business

Issue 4 and Issue 11 of the Property and Construction Industry Partnership Issues Register.

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