Edited version of private ruling

Authorisation Number: 1011864200258

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Ruling

Subject: Enterprise and required to be registered for GST

Question

Are you required to be registered for the goods and services tax (GST) under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

As you are carrying on an enterprise, you will be required to be registered for GST under section 23-5 of the GST Act because your GST turnover meets the registration turnover threshold.

Relevant facts and circumstances

1. You currently do not have an Australian Business Number (ABN) and are not registered for GST.

2. You have advised that you are not required to be registered for GST.

3. You own a property (Property) which is zoned residential. You previously owned several properties which were leased and sold after holding them for rental purposes for some time. Some of the properties were renovated before their sale.

4. You acquired the Property from a third party in 200X and paid no GST on the basis that the supply to you was a supply of existing residential premises.

5. The Property is currently on one Torrens title land title. It is proposed that the Property be strata titled into X separate titles for each unit.

6. The Property constitutes a X storey block of units built in the 1940s with a brick garage located at the rear of the property separate from the block of units. The garage provides parking for a number of vehicles.

7. At the time of purchasing the Property you were an employee.

8. You purchased the Property in September 200X with the intention of holding it for long term rental purposes provided that it was commercially viable.

9. After you completed the purchase of the Property, you have been renting the units to third parties for rental income. You bought the Property with existing leases and new leases have been entered into in respect of a number of units due to the passage of time and tenants moving on.

10. The garages have been separately leased. One is leased to a unit tenant forming part of the overall lease of the unit. Two of the garages are leased to neighbours.

11. Given the location of the Property and its run down nature (which meant that rental income from the units is less than the area average), you entered into predevelopment approval discussions with an architect and Council. Based on the positive feedback from Council you commenced seeking development approval for alterations to the Property.

12. You will have alterations done to the Property and you will cease renting out the property to third parties at the commencement of such alterations. Instead you will receive a monthly rental payment from a related company (Development Company) with whom you will have a Development Agreement in regard to the renovation and development of the Property.

13. For asset protection purposes, the Development Company will carry out the alterations to the Property and organise the marketing and sale of Units ("Sale Units") pursuant to a written Development Agreement which will be entered into between you and the Development Company. A copy of a draft Development Agreement was provided with the earlier ruling request.

14. You, as the proprietor under the draft Development Agreement, will not personally undertake any of the alterations to the Property or the marketing of the sale of the Sale Units.

15. A GST private ruling which was issued to you which confirms that the sales of these units will be supplies of new residential premises.

16. You plan to sell all the units except one which will be kept as a long term rental investment.

17. The Development Agreement provides under recitals that:

a. you are the legal and beneficial owner of the property, and

b. you do not wish to undertake the renovation and development of the property either alone or with the developer, and accordingly, have granted to the developer on the commencement date a licence over the property to allow the developer to improve the property.

18. The draft Development Agreement contains the following provisions:

a. the Client and the Development Company are neither a partnership nor a joint venture in respect of the development project. The intention is that the Client and the Development Company are acting as independent parties under a contractual arrangement;

b. the Client grants to the Development Company a non-exclusive licence to enter the Property so as to renovate and develop it in return for payment of $ x plus nominal $ x monthly rental payments during the term of the Development Agreement;

c. the Development Company is solely liable for all renovation and development expenses;

d. the Development Company is liable for all risks related to the proposed alterations and sale of the Sale Units;

e. liability for any property holding costs during the term of the Development Agreement is apportioned between the Development Company and the Client. The Client is responsible for the holding costs referable to Unit x whilst the Development Company will be responsible for the holding costs related to the Sale Units;

f. the Development Company owns all the interests in the improvements made by the Development Company to the Property. The clause also provides that the Client is not the bailee of the improvements and all risk related to the improvements on a unit remains with the Development Company until the sale of a Sale Unit or the full payment of the Unit x Developer's Fee;

g. the Client agrees to enter into any sales agreements related to the sale of a Sale Unit at such times as required by the Development Company. The Development Company has also been granted a power of attorney to enter into sales agreements should the Client fail to do so;

h. subject to the Client paying the Unit x Developer's Fee in full, he is entitled to the Proprietor's Entitlement on the sale of a Sale Unit. The Client is not entitled to any proceeds received on the sale of a developed lot above the Proprietor's Entitlement. The excess belongs to the Development Company and represents consideration for the Developer's ownership interests in the improvements the Developer has made to the Sale Unit;

i. the Proprietor's Entitlement will be equal to that part of the market value of the Property reflecting the Sale Units plus a commercial uplift to reflect the delay in receiving the Proprietor's Entitlement and the commercial risk for the Client in entering into the Development Agreement;

j. the Development Company will take over the development approval process from the Client and arrange for the implementation of the proposed alterations by engaging relevant builders and subcontractors in return for receiving:

k. a share of the sale proceeds received from the sale of the Sale Units, and

i. the Unit x Developer's Fee since Unit x will be retained by the Client.

l. if the Client commits an act of default in relation to the Development Agreement then the Development Company may use the irrevocable power of attorney granted to it by the Client to take possession of the developed lots and to sell them provided that the Client is always entitled to receive payment of the Proprietor's Entitlement;

m. if the Development Company commits an act of default the Client may take control of the Property subject to the Development Company receiving payment from the Client to reflect the improvements it has made to the Property.

19. The Development Company is registered for GST and our record shows that you are the director of the company.

Assumptions

20. The Unit x Developer's Fee payable by you to the Development Company will be an arm's length amount;

21. The Proprietor's Entitlement which you are entitled to receive under the Development Agreement will be an arm's length amount

22. The strata units will be sold for an amount in excess of $70,000 per annum during the periods the property is sold.

Reasons for decision

Summary

As you are carrying on an enterprise, you will be required to be registered for GST under section 23-5 of the GST Act based on our assumption that your GST turnover will meet and exceed the registration turnover threshold.

Detailed reasoning

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(a) your *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

(*Asterisked terms are defined in section 195-1 of the GST Act).

Are you carrying on an enterprise?

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides assistance to entities in determining their entitlement to an Australian Business Number (ABN). In doing this, the Ruling considers the meaning of certain key words and phrases used to define an 'entity' and an 'enterprise'.

The resolution of the question of whether you are required to register for GST will depend on whether your activity amounts to the carrying on of an enterprise of property development. The issue arises where there are 'one-offs' or isolated real property transactions that may be viewed as the mere realisation of capital assets.

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 the activities.

Paragraphs 263 to 265 of MT 2006/1 state:

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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; 37 ATR 358 (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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.

In the circumstances of the Property several of the factors are present. There was a change of purpose for which the land was held from leasing to development and sale. The land was leased until the enterprise of property development commenced.

Despite a clause in the proposed development agreement, you as the legal and beneficial owner of the land are developing the Property as the proprietor.

When you decided to renovate and sell the Property, you committed to a business of property development. As a consequence, the sales of the units are sales of trading stock and not the mere realisation of capital. The works to be undertaken by the Development Company should be viewed as building services that this company provides to you.

There was a coherent plan for the development of the residential premises and subdivision of the land to strata units.

The level of development of the land went beyond that necessary to secure council approval for the subdivision. The development was a substantial redevelopment of the land involving considerable building works.

The sales of the all but one of the units were the completion of an enterprise of property development rather than a reduction in the size and scale of the leasing enterprise.

In our view, you are carrying on an enterprise of property development.

Does your GST turnover meet the registration turnover threshold?

The registration turnover threshold for entities other than non-profit bodies is $75,000 per annum pursuant to section 23-15 of the GST Act and regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999.

Division 188 of the GST Act provides the meaning of GST turnover and an explanation of the turnover thresholds. Section 188-10 of the GST Act determines whether your GST turnover meets, or does not exceed, a turnover threshold.

Subsection 188-10(1) states:

(1) You have a GST turnover that meets a particular *turnover threshold if:

(a) 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

(b) your projected GST turnover is at or above the turnover threshold.

In determining the value of your current GST turnover over twelve months, you may disregard input taxed supplies, supplies for no consideration that are not taxable supplies, and supplies that are not made in connection with your enterprise.

In determining the value of your projected GST turnover for the current and next eleven months, you may also disregard these supplies. You may also disregard supplies of capital assets and supplies made in ceasing an enterprise in accordance with section 188-25 of the GST Act which states:

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b )any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

As noted in our previous private ruling you have made substantial renovations to your property and the supplies by way of sale will be taxable supplies of new residential premises.

In working out your projected GST turnover the value of the sales of the new residential premises must be taken into consideration. These supplies cannot be disregarded.

In our view, your projected GST turnover will exceed the registration turnover threshold for entities other than non-profit bodies of $75,000 per annum.

Conclusion

You will be required to be registered for GST under section 23-5 of the GST Act because you are carrying on an enterprise of property development and leasing and your GST turnover meets and exceeds the registration turnover threshold.