Edited version of your private ruling

Authorisation Number: 1011940776440

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Ruling

Subject: GST and subdivision

Question

Are you required to register for goods and services tax (GST) when you demolish the existing rental dwelling and subdivide the land into two lots for sale?

Answer

No, you are not required to register for GST.

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.

· The entity is not registered for GST.

· The entity conducts a leasing enterprise involving residential properties.

· The entity acquired the property as a passive rental property investment.

· The property contained an older style residential building on a relatively large block.

· The residential premises has been rented since acquisition and managed by a real estate agent on the entity's behalf.

· It was the entity's intention to retain the passive rental property and derive rental income, with a view to possibly constructing anther residential premises on the property in the future to increase the rental return. As the land has two street frontages the potential to increase the rental income in the future to defray loan interest charges was anticipated

· The entity has already taken this action with another rental property that it acquired. The two residences are being rented and retained by the entity.

· Due to difficulties maintaining its current loan repayment obligations, the entity is unable to comfortably borrow to proceed with the construction of the second residential premises.

· In order to maximise the return on the sale of the property as a whole the entity proposes to demolish the existing residential premises and subdivide the block into two separate lots, each with its own street frontage.

· The entity has not borrowed further funds to carry out the subdivision or obtaining any additional land and no building will be constructed on the two lots prior to sale.

· The entity will subcontract the subdivision process to professionals qualified to submit the various demolition and subdivision applications and work orders.

· The entity received a private ruling in which the Commissioner determined that the sale of the subdivided land was assessable under the capital gains tax provisions as the sale of a capital asset.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10.

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(a)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The entity is not required to be registered for GST because the proceeds from the sale of the two lots are excluded from the calculation of its GST turnover.

Detailed Reasoning

Section 23-5 of the GST Act provides that, you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

The entity is currently carrying on a leasing enterprise and this enterprise will not cease when the house on the property is demolished as it has other rental properties. Therefore, the first requirement of section 23-5 of the GST Act is satisfied.

In respect of the second requirement section 188-10 of the GST Act provides that your GST turnover is calculated with reference to the entity's current GST turnover and the entity's projected GST turnover.

In the entity's situation, the registration turnover threshold is met when the entity's current GST turnover and projected GST turnover is equal to or greater than $75,000. The current GST turnover is the sum of the value of all supplies made in a particular month plus the previous 11 months. The projected GST turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

However, supplies that are input taxed (for example, residential rent) are specifically excluded from the calculation of both current and projected GST turnover.

Before the sale (settlement) of the entity's interest in the land, the entity's current GST turnover will consist only of income from the leasing of rental properties which is excluded from the calculation of current and projected turnover. However, at the time of settlement of the entity's interest in the land, the proceeds from the sale of the land may result in the entity exceeding the registration turnover threshold of $75,000.

Therefore, if the entity's projected GST turnover also exceeds the registration turnover threshold, it will be required to be registered for GST.

Paragraph 188-25(a) of the GST Act provides that in working out your projected GST turnover, the entity disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 provides that a capital asset is generally the profit-yielding subject of an enterprise. This is different from a revenue or trading asset, which is described in paragraph 34 of the ruling as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business.'

In this case the entity' is undertaking the demolition and subdivision in order to maximise its return on the sale of the property. The entity is not borrowing any funds or acquiring any additional land and no buildings will be constructed on the two lots before sale

In addition, the Commissioner has already determined in a private ruling that the sale of the entity's interest in the land is a mere realisation of a capital asset. Therefore, based on the information provided, it is considered that the character of the property is still in the nature of a capital asset.

Although the sale proceeds from the land will be included in the entity's current GST turnover, the proceeds of the sale will not be included in the entity's projected GST turnover as the proceeds are from the sale of a capital asset.

Consequently the entity's GST turnover will not meet the registration turnover threshold and therefore the entity will not be required to be registered for GST.

As the entity is not registered or required to be registered for GST, the sale of its interest in the land will not be subject to GST.