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Edited version of private ruling
Authorisation Number: 1011878488188
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Ruling
Subject: GST and sale of real property
Question
Is GST payable on the sale of the property?
Answer
Yes, GST is payable on the sale of the property.
Facts
You are carrying on a business.
You are registered for GST.
In 2005 you purchased the property. At the time of purchase, the property was zoned residential and contained a house which was tenanted.
You bought the property for investment purposes with the intention of continuing to rent the house.
The acquisition of the property was financed via a bank loan arranged by a local finance broker.
The property was recorded in the balance sheet of the business.
Around 2008, the property was rezoned commercial. You then decided to construct commercial premises upon the property to expand your business. You submitted different versions of the plans to the Council.
In 2010, you received permission to demolish the house. The house was demolished shortly after.
Also in 2010, the Council approved the design for a number of commercial premises on the property.
Due to complications and expenses with the Council and changes to legislation, you decided to sell the property.
In 2011, you entered into a contract for sale of the property.
The property was rented for a number of years until the house was demolished. Since the demolition the house, the property has simply been a vacant block of land.
You did not apply the margin scheme at the time the property was sold.
As the property was a rental property you declared the rental income received and the claimed the expenses associated with the derivation of this income until the time of demolition. After demolition you have only claimed the interest on the loan associated with the purchase of the property as you were intending to construct an income producing asset.
Reasons for decision
GST is payable on any taxable supply that you make.
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it 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 for GST.
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.)
The sale of the property is a taxable supply if all the requirements of section 9-5 of the GST Act are met.
Based on the information provided, you satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act because:
· you supply the property for consideration
· the supply of the property is connected with Australia, and
· you are registered for GST.
Furthermore, the supply of the property, in the circumstances described, is neither input taxed nor GST-free. It remains to be determined whether the supply of the property satisfies the requirement of paragraph 9-5(b) of the GST Act.
Goods and Services Tax Ruling GSTR 2004/8 considers the requirement in paragraph 9-5(b) of the GST Act that the supply be made in the course or furtherance of an enterprise that you carry on. Paragraphs 28 and 29 state:
28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:
'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.
29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent
Paragraph 30 of GSTR 2004/8 lists the following characteristics which strongly indicate that a sale of a thing has a connection with an enterprise:
· at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);
· at the time of sale it was applied in carrying on your enterprise to at least some extent; and
· it is sold as a transaction of your enterprise.
Each of these points will indicate a connection, and not all of the points need to be satisfied.
The property is an asset of the entity. You used the property in your enterprise. As such, the sale of the property is made in the course or furtherance of the enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.
As all the requirements of section 9-5 of the GST Act are satisfied, the sale of the property is a taxable supply under section 9-5 of the GST Act.
As you have made a taxable supply of real property, the GST payable under the basic rule is 1/11th of the price.