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Ruling

Subject: GST and property development

Questions

Are Mr and Mrs Y carrying on an enterprise for goods and services tax (GST) purposes in regard to the construction of new units on the property they jointly owned?

Are Mr and Mrs Y required to be registered for GST when they carry on the property development?

What is the GST status of the sale of the new residential units?

Answers

Yes, Mr and Mrs Y in a partnership are carrying on an enterprise of property development for GST purposes in regard to the construction of new units on the property they jointly owned.

The partnership (Mr and Mrs Y) is required to be registered for GST when they carry on the enterprise of property development.

The sale of the new units after the construction and where they have not been used for making input taxed supplies for a period of at least five years since they were built, will be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). GST will be payable on the sale.

However, where the new units have been leased for a period of at least five years since they were built, the sale of the units will be input taxed under subsection 40-65(1) of the GST Act as these new units will no longer be new residential premises under subsection 40-75(2) of the GST Act. GST will not be applicable on the sale.

Relevant facts

Mr and Mrs Y jointly owned a property which has been their principal place of residence for many years. They have received approval from Council to develop the property. Property development has now started.

The existing home is to be demolished and replaced with five new residential units. After construction of the units, Mr and Mrs Y as a partnership will keep one unit as their main residence and sell two units. They will lease the two remaining units which will eventually be sold.

The sale price of each new residential unit is expected to be over $75,000.

The project is to be funded by a bank loan with the balance of fund to come from Mr and Mrs Y's personal monies.

Mr and Mrs Y have no prior experience in developing property and are engaging professionals in all aspects of the development. They neither have an Australian business number (ABN) individually or as a partnership with the Australian Taxation Office (ATO) nor are they registered for GST.

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 Paragraph 40-35(1)(a)

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-65(2)(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Section188-25

Reasons for decisions

Question 1

Mr and Mrs Y will be in receipt of income jointly from the sale of the two new units and from the lease of the other two units that are being constructed on the property that they owned jointly. As a result, Mr and Mrs Y are considered to be in a partnership for GST purposes in regard to the construction of the new residential units on their property.

The next step is to determine for GST purposes whether the partnership is carrying on an enterprise when they are constructing the new units which they intend to partly sell and partly lease after the constructions.

Is the partnership carrying an enterprise?

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include among other things an activity or 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

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

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Paragraph 234 of MT2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, it goes on to say that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business deal but have the characteristics of a business deal.

The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether 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.

From the facts given the partnership has not previously been engaged in property development and they will have minimal involvement in the construction, rental and sales processes as they are engaging other parties for these purposes. Based on these facts, we are satisfied that the partnership is not in the business of property development.

However, though it is an isolated transaction that the partnership is carrying on, their activity is similar to the type a property developer would conduct since they are developing the land in an organised and professional manner relying on subcontractors to do the development work. Further, there is clear evidence of commercial approach in these activities and there is a clear intention of profit making. A substantial amount of money is borrowed to fund the development project. The purpose of holding the land has partly changed as well as only one unit will be for the private use of the partnership and the others will be for sale or lease. Accordingly, this isolated or one-off property development activity carried on by the partnership is in the form of an adventure or concern in the nature of trade and therefore an enterprise under subsection 9-20(1) of the GST Act.

Summary

The partnership is carrying on a property development enterprise for GST purposes when they have the new units constructed on the land they own jointly.

Question 2

The partnership is not registered for GST. Therefore we need to consider whether the partnership is required to be registered for GST when they carry on their enterprise of property development.

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 ($150,000 for a non-profit organisation).

Whether the partnership's GST turnover meets the GST registration turnover threshold is determined in accordance with subsection 188-10(1) of the GST Act which states:

You have a GST turnover that meets a particular *turnover threshold if:

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

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

(* denotes a defined term in section 195-1 of the GST Act)

Current GST turnover is defined in subsection 188-15(1) of the GST Act. It provides that 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:

· supplies that are input taxed;

· supplies that are not made for consideration;

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

Projected GST turnover is defined in subsection 188-20(1) of the GST Act. It provides that 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;

· supplies that are not made for consideration;

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

Under paragraph 188-25(a) of the GST Act sales of capital assets are excluded from the calculation of projected GST turnover.

In this case, the partnership is carrying on a property development enterprise through which two units will be sold and they will carry on a property leasing enterprise when they start leasing the other two units. We will now consider whether the partnership will be required to be registered for GST upon receipt of the sale and lease income.

GST turnover when leasing the units

Income from leasing a residential premise is input taxed under paragraph 40-35(1)(a) of the GST Act. Therefore it is excluded from the calculation of the current and projected GST turnovers.

When the partnership starts their leasing enterprise after the construction of the new units they will exclude the leasing income received when calculating their current and projected GST turnovers.

Further, if they sell the leased units later, the income from the sale of the units will be excluded form the calculation of the partnership's projected GST turnover as the sales will be a sale of capital assets.

If the units are to be leased for a period of at least five years since they were built, the units will no longer be new residential premise under subsection 40-75(2) of the GST Act. In this instance, their sales will be input taxed under section 40-65 of the GST Act and the income received from these sales will be excluded from the calculation of the partnership's current and projected GST turnovers.

GST turnover when selling the units after construction

Sales of residential premises

Section 40-65 of the GST Act provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale is not input taxed where the property is commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

Subsection 40-75(1) of the GST Act defines new residential premises to include those premises that have been built, or contain a building that has been built, to replace demolished premises on the same land and they have not been used solely as a supply of residential premises for five years since they were last built.

However, a premise will cease to be a new residential premise if it is leased for a period of at least five years since it was built under subsection 40-75(2) of the GST Act.

Accordingly, the new units that the partnership are building will be new residential premises under section 40-75 of the GST Act as they have been built to replace a demolished premise on the same land and if they are not to be leased for a period of at least five years since they were built.

Sale of capital assets and revenue assets

Goods and Services Tax Ruling GSTR 2001/7 (available at www.ato.gov.au) provides guidance on GST turnover and discusses the meaning of capital assets at paragraphs 31 to 36.

Paragraph 32 of GSTR 2001/7 provides that capital asset can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fitting, plant, furniture, machinery and motor vehicles that are retained by you to produce income.

Paragraphs 34 to 35 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 the disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is an occasional or one-off transaction.

When the partnership sells the units after their construction they will derive income from the disposal of these assets through the property enterprise they carry on. Therefore the income from these sales will not be excluded from the calculation of the partnership's current or projected GST turnover.

From the facts given the sale of the two units will be above the GST registration turnover threshold of $75,000. Accordingly, the partnership will be required to be registered for GST as the supply of the two units will be made through their enterprise of property development and the projected GST turnover at a time prior to the settlement will be above the GST registration turnover threshold.

Please note that the partnership is entitled to backdate their GST registration prior to the date their projected annual turnover meets the $75,000 registration turnover threshold provided they have commenced carrying on their enterprise at this time. Consequently, the earliest date they can register for GST would be from the time they decided to do the property development.

Summary

The partnership is required to be registered for GST when they carry on their property development enterprise as their projected GST turnover will be above the GST registration threshold.

Question 3

GST is payable on a taxable supply.

A supply is a taxable supply under section 9-5 of the GST Act if:

· you make the supply for consideration;

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

· the supply is connected with Australia; and

· 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.

All the requirements in section 9-5 of the GST Act need to be satisfied for the supply to be a taxable supply.

When the partnership sells the new units they will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· they will receive consideration for the sale of the units;

· the supply of the units is made in the course of the property development enterprise that they are carrying on;

· the supply is connected with Australia as the units are located in Australia; and

· as discussed in question (2) the partnership is required to be registered for GST.

However, the supply of the new units is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision in the GST Act that will make a sale of residential premises GST-free.

Input taxed supply

Under subsection 40-65(1) of the GST Act the sale of residential premises is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. If a supply is input taxed you do not charge GST on the supply, but neither are you entitled to claim input tax credits for anything acquired or imported to make the supply.

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

· commercial residential premises; or

· new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in section 40-75 of the GST Act to include new residential premises that have not been solely used for making input taxed supplies for a period of at least five years since the premises were built.

Accordingly, the sale of the new units after the construction and where they have not been used for making input taxed supplies for a period of at least five years since they were built, will be a taxable supply under section 9-5 of the GST Act. GST will be payable on the sale.

However, where the new units are to be leased for a period of at least five years since they were built, the sale of the new units will be input taxed under subsection 40-65(1) of the GST Act as these new units will no longer be new residential premises under subsection 40-75(2) of the GST Act. GST will not be payable on the sale.