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Ruling

Subject: GST and sale of residential property

Question

Will your supply of the property located in Australia be a taxable supply?

Answer

No

Relevant facts and circumstances

You are not registered for GST.

The property consists of Lots 3-4 and Lot 1.

You purchased the property on ddmmyyyy as a single property transaction.

Lot 4 was purchased as a tenanted residential property. It consists of a single-storey multi unit dwelling (3 units, of which one is uninhabitable and is used for storage).

Lot 3 is an adjoining vacant block of land.

Lot 1 is an adjoining vacant block of land used as an easement to gain two (2) street access to the property.

When the property was purchased, it had existing plans for a multi-storey dwelling, with the site covering the 3 property lots.

Over the period of ownership, you have undertaken feasibility studies and subsequently a new Development Approval (DA) was made to preserve the value of the property under the planning rules existing at the time.

The new DA was put in place to maximise the value of the development while the planning rules still allowed, as planning rules in the Draft Plan proposed in yyyy would have limited the scope of the development to a height restriction of X storeys. With the new DA, the value of the property is maintained as it still allows construction of Y storeys (Z storeys with relaxation).

You have not acted on the DA and only minor improvements and repairs have been done to the property since it was acquired.

The multi unit dwelling situated on the property is currently tenanted, however the tenants are on month to month agreements and it is proposed to sell the property with vacant possession.

You have entered into a contract to sell the property with settlement due on ddmmyyyy.

You are not registered for GST.

Since you were established in yyyy, you have owned one other residential property. This property was purchased in yyyy and sold in yyyy. It was tenanted throughout the period of ownership and only minor renovations were undertaken throughout the period of ownership.

You do not have any other enterprise activities.

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 9-25

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section23-5

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

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

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.

As defined in section 9-5 of the GST Act, a supply is taxable if it is:

· made for consideration

· made in the course of furtherance of an enterprise carried on by the entity making the supply

· connected with Australia, and

· made by an entity registered or required to be registered.

However, the supply is not a taxable supply to the extent that the supply is GST-free or input taxed.

You are selling property, located in Australia, for consideration. This property comprises vacant land which will be a taxable supply if the requirements of section 9-5 of the GST Act are met, and residential premises which are an input taxed supply of real property as per section 40-65 of the GST Act. There is no provision of the GST Act that would make the supply of the property GST free in your factual situation. However, the conditions for making a taxable supply include that you are carrying on an enterprise and are either registered or required to be registered for GST.

As defined in subsection 9-20(1) of the GST Act an enterprise includes an activity, or a series of activities, done:

· in the form of a business, or

· in the form of an adventure or concern in the nature of trade, or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or…

The multi unit dwelling situated on the property is currently tenanted, with the tenants being on month to month agreements.

This constitutes a leasing enterprise in accordance with the above definition.

You are not registered for GST. Therefore it needs to be determined whether you are required to be registered.

As provided in section 23-5 of the GST Act, 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).

Under section 188-10 of the GST Act your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

As provided in subsection 188-10(2) of the GST Act, your GST turnover does not exceed a particular threshold if:

· 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

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

In calculating your current GST turnover and your projected GST turnover, you exclude supplies that are input taxed. Before the sale (settlement) of the property, your current GST turnover was nil, as residential rental income is input taxed in accordance with section 40-35 of the GST Act. However, at the time of settlement of your property, the sale proceeds of the property, (excluding the input taxed supplies of the residential property), will also be included in your current GST turnover..

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold.

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

The meaning of capital assets is not defined by the GST Act. However Goods and Services Tax Ruling GSTR 2001/7 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act.  Paragraph 31 of GSTR 2001/7 states the term 'capital assets generally refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits.' Paragraph 32 of GSTR 2001/7 also states 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, that are retained by you to produce income.

Paragraph 33 of GSTR 2001/7 further states that capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations' and 'an asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.'

When the property was purchased, it had existing plans for a multi-storey dwelling, with the site covering the 3 property lots.

Over the period of ownership, the Trust has used the property to make input taxed supplies. In addition, it has undertaken feasibility studies and subsequently a new Development Approval (DA) was made to preserve the value of the property under the planning rules existing at the time. The new DA was put in place to maximise the value of the development while the planning rules still allowed, as planning rules in the Draft Plan proposed in 2005 would have limited the scope of the development to a height restriction of X storeys. With the new DA, the value of the property is maintained as it still allows construction of Y storeys (Z storeys with relaxation).

The Trust has not acted on the DA and only minor improvements and repairs have been done to the property since it was acquired. Therefore, we consider that the property being sold is a capital asset and the proceeds of the sale will not be included in your projected GST turnover.

It follows that your GST turnover will not meet the registration turnover threshold and you are not required to be registered for GST.

As you are not registered, nor required to be registered for GST, the sale of your will not be a taxable supply.