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Ruling

Subject: GST and construction of a new property on subdivided land

Question 1

What are the goods and services tax (GST) implications in regard to the subdivision of the land of your rental property?

Answer

When you subdivide the land of the rental property, there will be no GST implication.

Question 2

Will you be liable for GST if you subdivide the land, and sell the existing front property?

Answer

No, you will not be liable for GST when you sell the existing front property after subdividing the land.

Question 3

Will you be liable for GST if you rent the new property after its construction?

Answer

No, you will not be liable for GST if you rent the new property after its construction.

Question 4

Will you be liable for GST if you live in the new property after its construction?

Answer

No, you will not be liable for GST if you live in the new property after its construction.

Relevant facts and circumstances

You purchased a property in 2010. The property is a residential property and you started leasing the property after the purchase. You did not pay GST when you purchased the property and you are the sole owner of the property.

You are considering of subdividing the land and build a second property at the rear. You may then sell the existing front property which is currently being rented out. You are still undecided about whether you will rent the rear property or live in the property once it is constructed.

You are not registered for the GST. This is your first and only investment property. You do not carry on any other business activity in addition to the rental of this property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question 1

From the information received, you are considering to subdivide the land of your rental premise in order to construct at the rear a new premise which will be used either for your own living or for rental purpose. Accordingly, we need to determine whether this one-off activity of subdividing the land constitutes carrying on an enterprise for GST purposes.

Carrying on an enterprise

An enterprise is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include an activity, or a series of activities, done in the form of a business, in the form of an adventure or concern in the nature of trade. However, an enterprise does not include an activity, or a series of activities, done as a private recreational pursuit or hobby, or by an individual without a reasonable expectation of profit or gain.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of carrying on an enterprise and is available on our website at www.ato.gov.au 

Paragraph 244 of MT 2006/1 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.

Further, paragraphs 258 to 261 in MT 2006/1 discuss the difference between trade (or revenue) assets and investment (or capital) assets and explain that 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 investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

The question of whether an entity is carrying on an enterprise often arises where there are one-off or isolated real property transactions such as subdividing land. The issue to be decided is whether the activities amount to an adventure or concern in the nature of trade and are of a revenue nature (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset (paragraphs 262 and 263 of MT 2006/1).

Paragraphs 264 to 266 of MT 2006/1 state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham ) and Casimaty v. FC of T (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.

266. 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 each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Examples 32 to 35 in paragraphs 288 to 302 of MT 2006/1 are examples of subdivisions and sales of land that are not considered to be an enterprise as the activities do not amount to an adventure or concern in the nature of trade, but are the mere realisation of a capital asset.

From the fact given, you purchased the property for rental purposes. You are not in the business of subdividing land and this subdivision is a one off transaction so as to realise the full potential of the land that is, by utilising the surplus land at the rear of your rental premise. You will subdivide the land into two lots (front and rear) and build a new premise on the rear lot. This new premise will be used either for your private purpose or rental purpose.

In this instance, we consider that the activities to be completed in your proposed subdivision of the land will not amount to the carrying on of an enterprise. The subdivided land is a mere realisation of a capital asset which does not amount to the carrying on of an enterprise as defined under section 9-20 of the GST Act.

Accordingly, when you subdivide the land of the rental premise this activity will not be subject to GST.

Question 2

You are liable to pay GST for taxable supplies that you make. Under section 9-5 of the GST Act, a supply is a taxable supply if:

a. the supply is connected with Australia; and

b. you make the supply for consideration; and

c. the supply is made in the course of an enterprise that you carry on; 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.

When you will sell the existing front residential premise you will satisfy paragraphs 9-5(a) to 9-5(c) of the GST Act as:

a. you will receive consideration for the sale of the property;

b. An enterprise is defined in subsection 9-20(1) of the GST Act and includes at or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Accordingly, when you lease the premise you are carrying on a leasing enterprise. When you will sell the premise you will be selling the capital asset of the leasing enterprise. Your sale of the premise is therefore made in the course of the leasing enterprise that you carry on;

c. the supply is connected with Australia as the premise is located in Australia.

There is no provision under the GST Act that will make the supply of the premise GST-free. The next step is to determine whether you are required to be registered for GST and whether the supply of this property is input taxed under a provision in the GST Act.

Input taxed

Under subsection 40-65(1) of the GST Act 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 (Regardless of the term of occupation).

However, under subsection 40-65(2) of the GST Act the sale is not input taxed to the extent that the residential premises are:

a. commercial residential premises; or

b. new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term residential premises, as defined in section 195-1 of the GST Act, refers to land or a building that is occupied as a residence or is intended and capable of being occupied as a residence.

Subsection 40-75(1) of the GST Act defines residential premises as new residential premises if they:

· have not previously been sold as residential premises (other than commercial residential premises) and have not previously been subject to a long-term lease; or

· 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.

Subsection 40-75(2) of the GST Act goes on to explain that premises are not new residential premises if, for the period of at least 5 years since:

· the premises first became residential premises; or

· the premises were last substantially renovated; or

· the premises were last built;

· the premises have only been used for making input taxed supplies of residential rent.

From the facts given, you will be selling a residential premise. Accordingly, if you do not carry on substantial renovation to the house before selling it, your supply of the residential premise will be input taxed under subsection 40-65(1) of the GST Act.

Required to be registered for GST

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

· you are carrying on an enterprise; and

· your GST turnover meets the GST registration turnover threshold of $75,000.

Under subsection 188-10(2) of the GST Act you have a GST turnover that does not exceed a particular turnover threshold if: 

a. your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold; or

b. your projected GST turnover is at or below the turnover threshold.

Current GST turnover

Under subsection 188-15(1) of the GST Act, your current GST turnover at a time during a particular month is the sum of the values 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. supplies that are input taxed; or

b. supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

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

Projected GST turnover

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

· supplies that are input taxed; or

· supplies that are not for consideration (and are not taxable supplies under section 72-5); or

· supplies that are not made in connection with an enterprise that you carry on.

Section 188-25 of the GST Act modifies the effect of section 188-20 of the GST Act by excluding certain supplies made when working our your projected GST turnover. Section 188-25 of the GST Act requires you to disregard the following when calculating your projected GST turnover:

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

· 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 discussed above, the sale of the front existing premise will be input taxed under subsection 40-65(1) of the GST Act where you do not carry on substantial renovation to the premise. Accordingly, you will exclude the income from the sale of the front premise when calculating your current and projected turnover.

Further if you decide to lease the new existing premise at the rear, you will not have to include the income when calculating your current and projected turnover as a lease of residential premise is input taxed (please refer to our response to question 3 for more detail on lease of residential premise).

Accordingly, you will not be required to be registered for GST as your GST turnover will be nil. As the supply is not taxable, GST is not applicable to the sale of the front premise.

For more information on GST turnover please refer to the Goods and Services Tax Ruling GSTR 2001/7 which is available at www.ato.gov.au

Additional information

If you carry on substantial renovation to the existing front premise, it will be a new residential premise under subsection 40-75(1) of the GST Act.

Current GST turnover

The sale of this new residential premise will occur when settlement takes place. Accordingly, your current GST turnover at the time of the settlement of this new residential premise (that is the month in which the settlement is to take place), will be the income from the sale of this premise. Since the total amount will be above $75,000, your current GST turnover at the time of the settlement of this premise will be above the GST registration turnover threshold.

Projected GST turnover

However, from the information received, you will satisfy paragraphs 188-25(a) and 188-25(b) of the GST Act when the settlement of the front premise takes place as:

a. the purpose of owning the front premise is to derive rental income. Accordingly, the front premise is considered to be a capital asset of your leasing enterprise and when you will sell the front premise you will be making a transfer of ownership of a capital asset of yours; and

b. the sale of the front premise will substantially and permanently reduce the size or scale of your leasing enterprise since you will only have one capital asset if you decide to rent the new premise at the rear to derive rental income; or

where you decide to live in the new premise at the rear, your leasing enterprise will cease as a result of you selling the capital asset of your leasing enterprise.

Accordingly, you will exclude the income from the sale of the front premise when calculating your GST projected turnover at the time of the settlement of the premise. Please note this income is excluded once only when calculating your GST projected turnover though you satisfy both paragraphs in section 188-25 of the GST Act.

Accordingly, you will not be required to register for GST as your projected GST turnover will be nil. GST will not be applicable to the sale of the front premise.

For more information on substantial renovation please refer to the Goods and Services Tax Ruling GSTR 2003/3 which is available at www.ato.gov.au

Question 3

If you decide to rent the new residential premise located at the rear of the land, you will be carrying on a leasing enterprise under section 9-20 of the GST Act.

A supply of residential premise by way of lease is an input taxed supply under subsection 40-35(1) of the GST Act. Accordingly, the rental income will not be included when calculating your GST current and projected turnover.

Since this will be the only enterprise you will be carrying on, you will not be required to be registered for GST. Hence, the rental of the new premise located at the rear of the land will not be subject to GST.

Question 4

If you decide to live in the new residential premise located at the rear of the land, you will not be carrying on an enterprise as the premise is for private use. Accordingly, GST is not applicable.