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Ruling

Subject: GST and Property transaction

The sale of new residential premises will be subject to GST if all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Question 1

Will the development of a single residential property into two new residential townhouses and the sale of those townhouses attract goods and services tax (GST)?

Advice/Answers

Yes

Relevant facts

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.

You are two individuals and are not registered for GST.

You own an existing residential house as an investment property.

The property was purchased some time ago.

You have leased this property since for over 5 years.

You are now considering developing the property by demolishing the existing house and building two new residential townhouses on the property.

You intend to sell the townhouses upon completion.

You do not conduct any other business or enterprise in your own names.

You advise that this would be your only enterprise which will be a one off transaction. In order to analyse the possible profits you are seeking advice as to whether GST will be payable on the sales.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999

Section 9-5.

Subsection 9-20(1).

Section 9-40.

Subsection 9-20(2).

Section 23-5.

Section 38-325

Section 40-65.

Subsection 40-75(1).

Subsection 40-35(1).

Subsection 40-75(2).

Section 195-1.

Reasons for decision

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

Under section 9-5 of the GST Act, you make a taxable supply if:

o you make the supply for consideration

o the supply is made in the course or furtherance of an enterprise that you carry on

o the supply is connected with Australia, and

o 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.

There are no provisions in the GST Act that would result in the supply being GST-free if you carry out the subdivision, construction and then selling of the townhouses. However, if you were to sell the development prior to being completed it may be a GST-free supply of a going concern.

In any sale of residential premises (ie. a house) there is clearly a supply, being a supply of real property. Consideration is also present as residential premises are normally sold for an amount of money and the supply will be connected with Australia if the residential premises are located in Australia.

Therefore, the issues to be addressed in any sale of residential premises are:

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

· is the entity making the supply registered or required to be registered for GST, and

· is the supply input taxed.

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among 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, licence or other grant of an interest in property.

However, subsection 9-20(2) of the GST Act provides that the term 'enterprise' does not include, among other things, an activity or series of activities, done:

· as a private recreational pursuit or hobby, or

· by an individual or a partnership without a reasonable expectation of profit.

Based on the information provided, it is considered that the above exclusions will not apply to your circumstances.

The Commissioner in Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of the term 'enterprise' for the purposes of entitlement to an Australian business number. According to Goods and Services Tax Determination GSTD 2006/6 the discussion in MT 2006/1 applies equally to the term 'enterprise' in the GST Act.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. That is, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria for being regarded as a business or an adventure or concern in the nature of trade, do have the appearance or characteristics of these activities.

In relation to the subdivision of land, MT 2006/1 provides at paragraph 265 a list of factors that the Courts have considered in determining whether activities amount to a business or an adventure or concern in the nature of trade. It is not necessary to satisfy all of the factors but 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:

· 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.

In addition, paragraphs 271 to 287 of MT 2006/1 provide a number of examples of subdivisions of land that are enterprises. These examples express the view that the purchase of land with an intention to subdivide the land and to either sell the vacant lots at a profit or construct houses on the new lots before selling at a profit is an enterprise for GST purposes. This is because the activities are planned, carried out in a businesslike manner and there is a reasonable expectation of profit or gain.

The requirement in section 9-5 of the GST is that the supply is made in the course or furtherance of an enterprise that is being carried on. The term 'in the course or furtherance of' is not defined in the GST Act, but is broad enough to cover most supplies made in connection with an enterprise. As well, anything done in the course of commencing or terminating a business or enterprise will also be caught. Therefore, the sale of the townhouses would be a supply in the course or furtherance of the enterprise that you are carrying on.

It should be noted that once an enterprise is being carried on, most activities in relation to that enterprise will be considered to be in the course or furtherance of that enterprise unless the GST legislation specifically states otherwise.

GST Registration

As you are not registered for GST it is necessary to determine if you are required to be registered for GST.

Section 23-5 of the GST Act provides that an entity that is not a non-profit body is required to be registered for GST if:

· it is carrying on an enterprise, and

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

As stated previously, you are carrying on an enterprise and therefore, it needs to be determined if your GST turnover is over $75,000.

The term 'GST turnover' includes both current GST turnover and projected GST turnover. Current GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the previous 11 months. Projected GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the next 11 months.

However, supplies that are input taxed (for example, residential rent or sales of residential premises) are excluded from the calculation of current and projected GST turnover. As are supplies that are for no payment such as where they are private or domestic or not made in connection with an enterprise that you carry on

At this stage, you have not sold any townhouses and therefore, based on the information provided, your current GST turnover is nil. However, if you elect to sell one or both of the new townhouses, which are considered to be a trade asset, your projected GST turnover will be over $75,000 as it is expected that the proceeds from the sale will be over $75,000. Therefore, if you sell one or both of the new townhouses you will be required to be registered for GST as both requirements of section 23-5 of the GST will be satisfied.

When registering for GST if the property is held jointly you would be required to register as a partnership.

Input taxed supplies

Section 40-65 of the GST Act provides that 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. However, a sale of 'new residential premises' is not input taxed.

The term 'residential premises' is defined in section 195-1 of the GST Act as land or a building that:

· is occupied as a residence or for residential accommodation, or

· is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

The term 'new residential premises' is defined in subsection 40-75(1) of the GST Act as residential premises that:

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

· 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.

The existing house is residential premises that is not only capable of being used as a residence but is in fact being used for residential accommodation. Therefore, if you decided to sell the existing house rather than demolish, subdivide and build two new townhouses then the sale of the existing house would be an input taxed supply of residential premises. An input taxed supply is not subject to GST and no input tax credits can be claimed for anything acquired to make the supply.

Furthermore as previously mentioned input taxed supplies are not included in your GST turnover for registration.

Conclusion

The sale of one or both of the new townhouses will be subject to GST because it satisfies all of the requirements of section 9-5 of the GST Act and is not excluded from being a taxable supply. That is, the sale of the new townhouses will be for consideration, the sale is made in the course or furtherance of an enterprise that you carry on, the supply is connected to Australia because the townhouses are located in Australia, you are required to be registered for GST. In addition, the sale is not input taxed as it constitutes new residential premises nor is it GST-free.

However, if you decided to sell the existing house rather than demolish, subdivide and build two new townhouses then the sale of the existing house will not be subject to GST as it is excluded from being a taxable supply because it is an input taxed supply of residential premises.

Please note, if the new townhouses are being built to be sold as new residential premises you will be entitled to claim input tax credits in relation to the costs of building those townhouse when you purchase things that are taxable to you provided you are registered for GST. If the townhouses are constructed for rental purposes you will not be entitlement to input tax credits.

Where your intention changes from selling to renting one or both of the townhouses please refer to GSTR 2009/4 for how the GST applies. This Public Ruling can be accessed on the ATO website at www.ato.gov.au.

Margin Scheme

If the margin scheme is used 1/11^th is applied to the margin. The margin is the amount you receive when you sell the property less what you paid for acquiring the property, resulting in you paying GST on the improvements you have made.

The margin scheme may be used to calculate the GST payable on a taxable supply of real property if both parties agree in writing and all of the other requirements to use the margin scheme are satisfied.

More information on the margin scheme can be obtained on the Tax Office website at www.ato.gov.au in the publications:

GST and the margin scheme NAT 15145

Margin scheme - made easy NAT 73740

Eligibility to use the margin scheme when selling property NAT 73792

Sale of a GST-free going concern

The supply of the development prior to the construction of the townhouses may be a GST-free supply of a going concern if all of the requirements of section 38-325 are met.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325:

· the supply must be made under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

· the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST; and

· the supplier and the recipient must have agreed in writing that the supply is of a going concern.