Edited version of private ruling

Authorisation Number: 1011875077543

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Ruling

Subject: goods and services tax and sales of new residential premises

Question

Will GST be payable on your sales of the new residential premises?

Answer

Yes.

Relevant facts and circumstances

You are not registered for GST.

You purchased a property located in Australia (the original property) in a certain year, for the purpose of building a dual occupancy building, and living in one of the dwellings and renting out or allowing your family to live in the other dwelling.

You started building on the original property in a certain year and you may not finish building for a certain period yet.

Having taken so long, your plans have changed. The original property has been subdivided into 2 separate blocks. You anticipate that the street numbers of the two new blocks will be certain numbers. You are building a house on each of these two new blocks. You may sell both new residential premises (the two houses and the land they are on) on completion of construction of the two new houses.

You would receive over $75,000 for your sale of each of the two new residential premises.

You have not carried on property development activities before apart from the property development activity in question and you do not have plans to carry on property development activities in future apart from the property development activity in question.

The last time you sold a property was over a certain number of years ago. You have no plans to sell properties in the future other than the new residential premises in question.

Reasons for decision

Summary

GST will be payable on your sales of the new residential premises, as you will satisfy all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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)

In your case, you will satisfy the requirements of paragraph 9-5(a) and 9-5(c) of the GST Act. That is, you will supply the new residential premises for consideration when you sell them and these sales will be connected with Australia as the properties are located in Australia.

Enterprise

In accordance with paragraph 9-20(1)(a) of the GST Act, enterprise includes an activity or series of activities done in the form of a business.

In accordance with paragraph 9-20(1)(b) of the GST Act, enterprise includes an adventure or concern in the nature of trade.

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 guidance for determining whether an entity is carrying on an enterprise.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraph 234 of MT 2006/1 provides guidance on the meaning of business and 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. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraphs 273 to 275 of MT 2006/1 provide an example of a property development activity involving the creation of two dwellings. They state:

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.

Tobias is considered to be carrying on an enterprise.

The level of development in your case is similar to the level of development in the Tobias example. As in the Tobias example, you are building two dwellings.

You will sell two new residential premises. In the Tobias example, one new residential premises was sold.

Your activity of selling the new residential premises is not a business or part of a business because you are not selling properties on a regular or continuous basis and have no plans to do so. However, we consider that your sales of the new residential premises have the characteristics of business deals because you are building houses and will sell new residential premises (of which these houses form part) on completion of construction of the houses. This development is an isolated activity conducted by you. Hence, you are carrying on an adventure or concern in the nature of trade. Therefore, you are carrying on a property development and trading enterprise.

Hence, your sale of the two new residential premises will be supplies you make in the course or furtherance of an enterprise you carry on. Therefore, you will satisfy the requirement of paragraph 9-5(b) of the GST Act.

GST registration

In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if:

(a) it is carrying on an enterprise; and

(b) its GST turnover meets the registration turnover threshold.

You are carrying on an enterprise. Therefore, you satisfy the requirement of paragraph 23-5(a) of the GST Act.

The registration turnover threshold that applies to you is $75,000.

In accordance with subsection 188-10(1) of the GST Act, your GST turnover 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.

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

(a) input taxed supplies;

(b) supplies that are not for consideration; or

(c) supplies that are not made in connection with an enterprise that you carry on.

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

(a) input taxed supplies;

(b) supplies that are not for consideration; or

(c) supplies that are not made in connection with an enterprise that you carry on.

Section 188-25 of the GST Act provides that the following supplies are disregarded in working out your projected GST turnover:

· sales of capital assets (paragraph 188-25(a))

· supplies made solely as a consequence of ceasing to carry on an enterprise (subparagraph 188-25(b)(i))

The exclusions at paragraphs 188-15(1)(b), 188-15(1)(c), 188-20(1)(b) and 188-20(1)(c) of the GST Act do not apply to your case.

We shall now consider whether your sales of the new residential properties will be input taxed supplies.

In accordance with subsection 40-65(1) of the GST Act, a sale of residential premises is input taxed.

However, paragraph 40-65(2)(b) of the GST Act provides that a sale of new residential premises other than those used for residential accommodation before 2 December 1998 is not an input taxed supply under subsection 40-65(1) of the GST Act.

You will sell residential premises.

Pursuant to paragraph 40-75(1)(a) of the GST Act, your sales of the new residential premises will be sales of new residential premises for the purposes of the GST Act as they will not have been previously sold as residential premises or subject to a long term lease. Additionally, these new residential premises will not have been used for residential accommodation before 2 December 1998.

Therefore, your sales of the two new residential premises will not be input taxed supplies under subsection 40-65(1) of the GST Act. There are no other provisions in the GST Act under which your sales of the two new residential premises will be input taxed supplies. Hence, the exclusions at paragraphs 188-15(1)(c) and 188-20(1)(c) of the GST Act will not apply to your case.

Paragraph 35 of Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) provides guidance on the meaning of capital asset. It states:

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

The means by which you will derive income in relation to the land in question is through the disposal of the two assets - the two new residential premises that you will create. Therefore, your sales of the two new residential premises will not be sales of capital assets. Hence, the exclusion at paragraph 188-25(a) of the GST Act will not apply to you.

Paragraph 41 of GSTR 2001/7 discusses subparagraph 188-25(b)(i) of the GST Act. It states:

41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1), or the substantial and permanent reduction in size or scale of an enterprise (see example 2).

Your enterprise will cease as a result of the disposal of the new residential premises, rather than these properties being disposed of only as a result of you ceasing your enterprise. Therefore, the exclusion at subparagraph 188-25(b)(i) of the GST Act will not apply to your case.

You will sell each of the two new residential premises for over $75,000 and none of the exclusions from current and projected GST turnover apply to your case. Therefore, your current and projected GST turnovers will each be over $75,000 when you sell the new residential premises. Hence, you will satisfy the requirement of paragraph 23-5(b) of the GST Act when you sell the new residential premises.

As you will satisfy both requirements of section 23-5 of the GST Act, you will be required to be registered for GST when you sell the new residential premises (you will be required to registered for GST as a partnership). Therefore, you will satisfy the requirement of paragraph 9-5(d) of the GST Act.

There are no provisions in the GST Act under which your sales of the new residential premises will be GST-free.

Therefore, as you will satisfy all of the requirements of section 9-5 of the GST Act, you will make taxable supplies of the new residential premises. Hence, GST will be payable by you on your sales of the new residential premises.

You may be able to use the margin scheme to calculate GST on your sales of the new residential premises. See fact sheet, GST and the margin scheme, enclosed for more information.