Edited version of private ruling

Authorisation Number: 1011870637585

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Ruling

Subject: GST and sale of newly constructed house

Question

Was the sale of the newly constructed residential property by you a taxable supply?

Advice/Answer

Yes. The sale of the newly constructed residential property by you was a taxable supply.

Relevant facts

You are an individual and are not registered for goods and services tax (GST). You are working as an employee and receiving salary and wages.

You purchased a block of land about two and a half years ago with the intention of building a residential house for use as a rental property.

You commenced the construction of a residential house about seven months after the purchase and the works were completed in the following six months.

The new property and construction costs were fully financed and you have not claimed any deductions on construction and development costs.

Shortly before the construction was completed you suffered from a medical condition so you decided it was for your best interest to sell the new property in order to reduce the debts. This was to ensure that your family would be relieved from future financial burden should you suffer from another medical condition.

The sale of the new property was settled shortly after the construction was completed. The new property had never been leased prior to settlement of the sale contract.

You have not carried out any property development activities in the last 5 years. You do not currently hold any other investment property.

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

Taxable supply

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.

(* denotes a term defined in section 195-1 of the GST Act)

For the sale of the new property to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied.

Based on the information provided, you have satisfied the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act as:

· you received consideration for the sale of the new property, and

· the supply was connected with Australia as the new property is located in Australia.

Therefore, we need to determine whether the sale of the new property was in the course or furtherance of an enterprise that you carried on (paragraph 9-5(b) of the GST Act) and whether you were required to be registered for GST (paragraph 9-5(d) of the GST Act). It is also necessary to determine whether the sale of the new property was input taxed or GST-free.

Carrying on an enterprise

An enterprise is defined under subsection 9-20(1) of the GST Act and 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.

The scope of 'enterprise' for GST purposes is wider than the scope of 'business' for income tax purposes. An enterprise can include activities that may not constitute a business but have the character of a business transaction.

'Carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise.

Therefore it is necessary to determine whether the development and construction activities leading up to the sale of the property by you were done in the form of a business or in the form of an adventure or concern in the nature of trade.

In the form of a business

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

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes

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. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis…

You do not engage in property development activities on a regular or continuous basis. Therefore, the construction activities undertaken by you were not in the form of a business.

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

Paragraph 234 of MT 2006/1 also provides that 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.

Paragraph 244 of MT 2006/1 provides further guidance on the meaning of adventure or concern in the nature of trade. It states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

You intended to use the new property to derive rental income and therefore it was not a private asset. An adventure or concern in the nature of trade are of a commercial flavour and does not extend to the mere realisation of an investment asset.

Paragraph 247 of MT 2006/1 discusses the subject matter of realisation:

The subject matter of realisation

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset…

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

· assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

· examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. MT 2006/1 explains that while an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Where property that was acquired as capital asset for investment purpose later becomes the subject of resale for a profit within a relatively short period of time, it is necessary to consider if the nature of the asset (property) changes to one of trade.

You advised that you intended to hold the new property as an investment/capital asset to derive rental income for a considerable period of time. The relevant issue in your case is whether the nature of the asset, that is, the new property has changed at the time of sale.

It is considered the new property once constructed was never held to produce income or for personal enjoyment for it to be an investment/capital asset. The new property was not held for a reasonable length of time, which is one characteristics of a trading asset. Therefore, the sale of the new property was not a mere realisation of an investment/ capital asset.

You advised that you are not engaged in the property development activities. It is acknowledged that personal circumstances led to the sale of the new property instead of leasing it. This however does not change the fact that you always had the intentions and plan to obtain profit or gain from the activities of developing and constructing the new property, whether this was from rent or sale of the new property.

Therefore, the development and construction activities undertaken by had a commercial flavour and of a revenue nature in relation to the subsequent sale of the new property.

Accordingly, the sale of the new property was made in the course or furtherance of a property development enterprise that you carried on. As such, the requirement in paragraph 9-5(b) of the GST Act has been met.

GST registration

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

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

The current registration turnover threshold is $75,000 ($150,000 for non-profit entity). As you were carrying on an enterprise of property development, you would be required to be registered for GST if your GST turnover meets the registration turnover threshold of $75,000.

Under section 188-10 of the GST Act, your GST turnover meets the registration turnover threshold if:

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

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

Current GST turnover at any time during a particular month is the sum of the values of all the supplies that the entity made, or is likely to make, during the 12 months ending at the end of the month.

Projected GST turnover at any time during a particular month is the sum of the values of all the supplies that the entity made, or is likely to make, during that month and the next 11 months.

The following supplies are excluded from the calculation of current GST turnover and projected GST turnover:

· supplies which are input taxed

· supplies which are not made for consideration, and

· supplies which are not made in connection with your enterprise.

We have to determine whether the sale of the new property was input taxed.

Sale of residential premises

Section 40-65 of the GST Act 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, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises.

Based on the information provided, the new property is not commercial residential premises and is intended to be occupied as a residence.

Section 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

· have not previously been sold as residential premises and have not previously been the subject of a long-term lease

· have been created through substantial renovations of a building, or

· have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, the premises are not new residential premises if, for the period of at least 5 years since the date construction was completed, the premises have only been rented out.

The new property is residential premises that have not previously been sold as residential premises. You have not rented it out prior to the sale. Therefore, you have made a supply of new residential premises and the sale was not input taxed.

Transfer of capital asset

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

· by way of transfer of ownership of a capital asset, or

· solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

As discussed, the new property was your trading asset and the sale of the new property would not be the transfer of a capital asset.

The sale of the new property was inherent in carrying on your enterprise. Therefore, the sale was not made solely as a consequence of ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of your enterprise. As such, the sale of the new property would not be disregarded when calculating your projected GST turnover.

There are no provisions in the GST Act for the sale of the new property to be GST-free in your circumstances.

You sold the new property for more than $75,000. As you need to include the proceeds from the sale in the calculating your GST turnover, your GST turnover exceeded the registration turnover threshold. As such, you were required to be registered for GST at the time you sold the property. Therefore, the requirement in paragraph 9-5(d) of the GST Act has been met.

Accordingly, you made a taxable supply when you sold the new property and the proceeds from the sale would be subject to GST.

Additional information

Please note that you are entitled to backdate your GST registration prior to the date your projected annual turnover meets the $75,000 registration turnover threshold provided you have commenced carrying on your enterprise at this time.

You are entitled to claim GST credits (input tax credits) on the GST included in the acquisitions made in building the new property. You must ensure, however, that you backdate your GST registration date prior to the date of making the acquisitions as you are only entitled to claim GST credits if you are registered or required to be registered for GST at the time you make the acquisitions.