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Ruling

Subject: GST and developing and selling new residential premises

Question 1

Is the sale of a newly constructed residential property by the Australian entity (you) to a related party a taxable supply?

Question 2

Are you entitled to claim an input tax credit (ITC) when you acquire goods and services in relation to the construction of a new residential property for resale?

Advice/Answers:

Answer 1

Yes, the sale of a newly constructed residential property by you to a related party is a taxable supply.

Answer 2

Yes, you are entitled to claim an ITC on any creditable acquisition of goods and services in relation to the construction of a new residential property for resale.

Relevant facts:

You are a discretionary trust with a corporate trustee.

You do not have an Australian business number (ABN), nor are you currently registered for goods and services tax (GST).

You purchased the property in 2005 for $xxx. The property was leased to residential tenants when it was first purchased. The property is no longer being leased.

Your intention at the time of purchasing the property was to:

§ lease the property to residential tenants, then

§ demolish the existing house on the property and build new residential premises; then

§ lease the property with the new residential premises to the related party.

Your intention now is to:

§ demolish the existing house on the property and build new residential premises, then

§ sell the newly constructed residential premises to the related party for the market value when the new premises are completed.

You expect that the development activities will take between 12 months to 16 months to complete. You will apply for the necessary development approvals. You expect to spend approximately $xxx plus GST in development and construction costs.

The current land value of the property is approximately $xxx.

In addition, you intend to use the funds held on trust to purchase new investments, in form of either:

(a) residential and/or commercial property to lease to unrelated parties; and/or

(b) residential land or property to develop and sell to unrelated parties.

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 Paragraph 9-5(b)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

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)

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

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

Reasons for decisions

Issue 1

GST is payable on a taxable supply. You make a taxable supply where the transaction satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Under section 9-5 of the GST Act, 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.

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration and the property is located in Australia.

Therefore, we need to consider:

§ whether your sale of newly developed property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

§ whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

§ in the form of a business

§ 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, license or other grant of an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in these rulings have been applied in this case.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

Based on the facts provided, you plan to use your property to construct the new residential premises for resale. The development activities will take between 12 months to 16 months to complete. You will apply for the necessary development approvals. The estimated costs of development and construction of the residential premises is approximately $xxx plus GST.

We consider that your development and sale of the new residential premises in the course of an enterprise are more than the mere realisation of capital assets because:

§ There is a change of purpose for which the property is held. You plan to use the property to develop the new residential premises for resale to a related party for market value.

§ You will have a coherent plan for development and sale of the new residential premises.

§ The development of the property for the new residential premises will be beyond that necessary for council approval, and the development costs of the residential premises are substantial.

These factors taken in combination indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new residential premises have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sales of the newly developed residential premises will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to your construction and sale of property.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

(a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

(b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

(b) supplies that are not for consideration.

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

(d) supplies that are not connected with Australia.

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

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of developing and selling the new residential premises constitute the carrying on of an enterprise. At the time of the sale, the nature of your asset (the property) has changed from capital to revenue (trading) assets. The sale of the new residential premises does not constitute the transfers of capital assets and section 188-25 of the GST Act does not apply. You are deriving income from disposals of revenue (trading) assets even if the disposals are part of a one-off transaction.

Therefore, the sale of the newly developed residential premises is not excluded from the calculation of your projected GST turnover. Hence, the value of the sale must be included in the calculation of your current and projected GST turnovers.

Accordingly, prior to the sale of the new developed premises you should be registered for GST because your projected GST turnover would be above the GST registration threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

GST-free and input taxed supply

The sale of the newly developed premises is not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

(a) commercial residential premises, or

(b) new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in subsection 40-75(1) to mean premises that:

(a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

(b) have been created through substantial renovation of a building, or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the newly developed premises are residential premises to be used predominantly for residential accommodation. You plan to sell the new residential premises to an associated entity for the market value once it is completed. The property would be new and unoccupied when sold. The new property will neither be used before 1998, nor will it be rented for five years. On the basis of these facts, the new dwelling is the new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of new residential premises will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

Summary

The development and sale of the newly developed residential premises by you to the related party satisfy all the requirements of section 9-5 of the GST Act, and is taxable supply.

Additional Information

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications on page 17 of that guide.

Issue 2

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for the GST included in the price of your creditable acquisitions.

Creditable acquisition

Section 11-5 of the GST Act defines the term 'creditable acquisition' and states that you make a creditable acquisition if:

a)      you acquire anything solely or partly for a creditable purpose; and

b)      the supply of the thing to you is a taxable supply; and

c)      you provide, or are liable to provide, consideration for the supply; and

d)      you are registered, or required to be registered.

Based on the facts provided, you satisfy paragraphs 11-5(c) and 11-5(d) of the GST Act as

§ you will pay consideration for the supplies made to you, and

§ you are required to register for GST (as discussed in reasons for decisions issue 1).

One of the requirements for a creditable acquisition under paragraph 11-5(a) of the GST Act is that you acquire the thing(s) for a creditable purpose.

Under section 11-15 of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (for example, a business). You do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed (such as, financial supplies and the sale and rental of residential properties), or the acquisition is of a private or domestic nature.

Based on the facts provided, you will incur the expenses (such as development and construction) in carrying on the business of developing and selling the new residential premises. These expenses will not be incurred in making input taxed supplies or for private purposes. Accordingly, the requirement of paragraph 11-5(a) of the GST Act is satisfied.

Another requirement for a creditable acquisition under paragraph 11-5(b) of the GST Act is that the supply of the thing to you is a taxable supply. That is, GST is included in the price of a supply made to you. Whether or not a supply is a taxable supply to you is determined by the supplier's circumstances. A supplier will make a taxable supply if all the requirements of section 9-5 of the GST Act are satisfied.

As such, where the supply of the goods and services (such as development and construction) to you is a taxable supply (that is, the supplier has charged you GST on your acquisitions), you will satisfy all the requirements under section 11-5 of the GST Act and will be entitled to claim ITCs on your creditable acquisitions.

To be able to claim the input tax credits on your creditable acquisitions, you must be registered for GST at the time of making the acquisition. You must also have valid tax invoices for the creditable acquisitions when you lodge your activity statements in order to claim the ITC.