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Ruling

Subject: GST and requirement to register

Question 1

Will the taxpayers be required to register for GST?

Advice/Answers

No, they will not be required to register for GST.

Note, that this answer is based on your current plan and circumstances. If your plans, projections or circumstances change in that you will have a reasonable expectation of making a profit or gain, the GST implications will be different.

Question 2

Will the supply of the second duplex unit be a taxable supply?

Advice/Answers

No, the sale of the second duplex unit will not be a taxable supply.

Relevant facts and circumstances

You are not registered for GST. One of you is in salaried employment and the other is retired. You do not currently carry on any enterprises.

You intend to sell your house and rent while you build another home. You are currently unable to find a suitable existing home at a price suitable to you in a location that you desire.

High local land prices due to a limited supply, make building a single house unviable given your finances. However, you have identified a suitable block of land for sale.

As a means of reducing the cost of the land, an option you are considering is to build a duplex with the intention of living in one unit and selling the other. Real estate agent valuations of the value of a duplex built on that land indicate that the proceeds from the sale of the second duplex unit are expected to be less than the cost of developing the second duplex unit and the pro-rata cost of the land and associated costs.

You have stated that the estimate of the proceeds from the sale of the second duplex unit is approximately $XXX,000 after commission and legal fees. You have also stated that the estimate of the costs of developing the land and the second duplex unit is approximately $XXX,000. This will result in an estimated loss of $XX,000 on the sale of the second duplex unit.

You state that you have no intention of making a profit from the sale of the second duplex unit and you have no intention of undertaking further building activities.

You believe that you do not have to register for GST or pay GST on the sale of the second duplex unit as you do not have a reasonable expectation of making a profit or gain on the sale. You believe that as you expect to make a loss from this activity, you will therefore not be carrying on an enterprise.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 9-20

Section 23-5

Section 40-75

Section 188-10

Section 188-15

Section 188-25

Reasons for decision

Question 1

The registration requirements for the purposes of the GST Act are provided for in Division 23 of the GST Act.

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

* Denotes a term that is defined in section 195-1 of the GST Act.

We therefore have to consider whether your planned course of action with the acquisition and eventual sale of the property in question will be a supply made in the course or furtherance of an enterprise which you carry on.

Subsection 9-20(2)(c) of the GST Act provides that an enterprise includes 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.

However, paragraph 9-20(2)(c) of the GST Act provides than an enterprise does not include any activity, or series of activities, done by an individual or a partnership of individuals without a reasonable expectation of profit or gain.

The ATO's view on the concept of enterprise for the purposes of entitlement to an Australian Business Number is considered in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number. Paragraph 234 of MT 2006/1 provides definitions of 'business' and 'adventure or concern in the nature of trade'. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Relevantly, paragraphs 273 to 276 of MT 2006 provide an example of a single property development project which would be regarded as an enterprise. They state:

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

In your case, you intend to subdivide the property, construct a duplex on the property and then sell the ensuing second duplex unit at arms' length.

Your planned development will be similar in nature and scale to the development in the hypothetical scenario outlined above. Even though it is a one-off project, your planned construction and sale of the second duplex unit will have the characteristics of a business deal and will be an adventure or concern in the nature of trade.

However, we need to consider whether you have a reasonable expectation of making a profit or gain from this planned undertaking.

Paragraph 385 of MT 2006/1 provides that the term 'profit or gain' is not defined and consequently it takes its ordinary meaning. It refers to concepts commonly used in the commercial world and can encompass a 'profit or gain' of an income or capital nature.

In accordance with paragraph 388 of MT 2006/1, there is not a reasonable expectation of profit or gain from an activity where it is conducted in such a manner that objectively the outgoings are, in all likelihood, going to be greater than the income made from the activity.

As you do not have a reasonable expectation of making a profit or gain from undertaking the planned subdivision, development, and sale of the second duplex unit, the exclusion at paragraph 9-20(2)(c) of the GST Act will apply. As such, based on the fact that you expect to make a loss from this activity, you will not be carrying on an enterprise.

Following on from the above, you will not satisfy the requirement of paragraph 23-5(a) of the GST Act, in that you will not be carrying on an enterprise and as such you will not be required to be registered.

Likewise, section 23-10 of the GST Act provides that you may be registered for GST if you are carrying on an enterprise and your turnover does not exceed the registration turnover threshold. However, as you are not carrying on an enterprise, you are not only not required to be registered but you may also choose not to be registered for GST.

Note, that this answer is based on your current plan and circumstances. If your plans, projections or circumstances change in that you will have a reasonable expectation of making a profit or gain, the GST implications will be different. We have not addressed this scenario, as it is purely speculative, and previous advice issued by the ATO has addressed this in the past.

Question 2

You are liable for GST on any taxable supplies that you make. You make a taxable supply where you satisfy all the requirements of section 9-5 of the GST Act, which states:

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.

* Denotes a term that is defined in section 195-1 of the GST Act.

From the information received, you intend to purchase land, subdivide the land, construct a duplex on that land and sell one duplex unit and reside in the other.

You will satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as your sale of the second duplex unit will be a supply made for consideration and the sale will be connected with Australia as the property is located in Australia. However, as previously discussed in Question 1, you will not satisfy paragraph 9-5(b) as you will not be making a supply in the course or furtherance of an enterprise that you carry on. You will also not satisfy paragraph 9-5(d), as you will not be registered, nor will you be required to be registered for GST.

In conclusion, as at least one of the requirements of section 9-5 of the GST Act is not met, you will not be making a taxable supply upon the sale of the second duplex unit.