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Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply when you sell the Property immediately after constructing a house?

Answer

Yes.

Relevant facts

On the contract date, Mr and Mrs X (you), as joint tenants, entered into a written agreement to purchase the Property.

The contract was completed on the settlement date.

The Property was vacant land on the contract date and the settlement date.

The Property is zoned 'Residential - General' under the Local Environmental Plan.

The purchase price of the Property was $X. GST was not included in the price paid.

When you purchased the Property you intended to use it as your principal residence. However, your family circumstances changed and needed a larger block.

You built a house on the Property and are in the process of selling.

Construction of the house commenced in late 2011 and is currently nearing completion. You provided the following information:

· The residential premises built on the Property have not been previously sold.

· The residential premises were not built to replace demolished premises that were on the same land.

· The residential premises built on the Property are not the result of renovation, repair or modification (whether substantial or otherwise) of premises existing on the Property.

· The residential premises built on the Property are not part of a resort, serviced apartment or hotel type setting.

There is no oral or written agreement that determines the mutual rights and obligations of the co-owners. Each co-owner acts for the mutual benefit of the other in dealings in relation to the Property. You jointly borrowed $X to finance the purchase of the land. You jointly applied to the local council for the development of the Property and you jointly sought the approval of the local government or state government planning authority to commence the building works. The construction was done by you as owner-builders. The construction cost of $Z was financed from your joint funds. You jointly paid all liabilities in relation to the Property.

You do not have any involvement in any other business activities and you are not registered for GST.

The development of the Property is a one-off activity. You do not have a business plan in relation to the development. It is your intention to make a profit from your activities.

A few years ago you built and sold your own house.

You are currently looking for a real estate agent but may advertise the Property privately.

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 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 23-5.

A New Tax System (Goods and Services Tax) Act 1999 section 40-35.

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.

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-15.

A New Tax System (Goods and Services Tax) Act 1999 section 188-20.

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Summary

You are making a taxable supply when you sell the Property immediately after constructing a house.

Detailed reasoning

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it 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 for GST.

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

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

All of the requirements of section 9-5 of the GST Act must be satisfied for the sale of the Property to be a taxable supply.

Who is the entity making the supply of the Property?

Based on the facts provided, the title of the property is registered to two owners. Therefore, we first need to determine whether the sale of the Property will be made by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (among others) an individual and a partnership.

The term 'partnership' is defined in the GST Act by reference to the definition of 'partnership' in the Income Tax Assessment Act 1997. That definition states:

partnership means:

(a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly…

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership, which exists for tax purposes only.

At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

However, the GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes.

Goods and Services Tax Ruling GSTR 2004/6 explains how GST applies to transactions involving tax law partnerships and co-owners of property. In applying the principles contained in GSTR 2004/6 to the facts provided, we consider that a tax law partnership exists in your circumstances.

This is because there is an association (existence of a mutual or common purpose) between the co-owners who have an entitlement to receive income jointly (as one entity) from the sale of the Property.

Furthermore, paragraph 30 of GSTR 2004/6 explains that for GST purposes an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly.

Therefore, the application of section 9-5 of the GST Act will apply from the perspective of the partnership of Mr and Mrs Whipp (you), who will be the supplier of the Property.

Taxable supply

Based on the information provided, the sale of the Property will satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you will supply the Property for consideration and the supply is connected with Australia as the Property is located in Australia.

Therefore, we need to determine whether you meet the remaining requirements of section 9-5 of the GST Act. That is, whether you are making the sale in the course or furtherance of an enterprise that you carry on, whether you are required to be registered for GST and whether the sale of the Property is GST-free or input taxed.

Is the supply made in the course or furtherance of an enterprise that you carry on?

Section 9-20 of the GST Act provides that enterprise includes, 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.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

MT 2006/1 provides that ordinarily, the term business would encompass trade 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 commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

· 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

· buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

You have advised that the vacant land was acquired originally with the intention of building residential premises on it and then using it as your primary residence. However, due to changes in your circumstances, you are now considering selling the Property with the newly constructed house.

The acquisition of the land was funded from borrowed funds. You obtained council approval for the construction of the house and funded the construction from your joint funds. As owner builders, you also have had active involvement in the construction work.

These activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, considering all the facts and circumstances in your case, the sale of the Property is not the mere realization of a private asset. The activities undertaken by you in the development of the Property have the characteristics 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.

Based on the information provided, the sale of the Property is made in the course or furtherance of an enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

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.

Section 23-5 of the GST Act provides that you are required to be registered if:

· you are carrying on an enterprise, and

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

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

· 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

· 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 working out both your current and projected GST turnovers, you disregard certain supplies including supplies that are input taxed.

Under section 40-65 of the GST Act, a supply of residential premises is input taxed. However, the supply of the premises is not input taxed if the premises are new residential premises.

Under subsection 40-75 (1) of the GST Act, residential premises are new residential premises if they:

· 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.

In your case, the Property contains a newly constructed house. The house is new residential premises as it has not previously been sold as residential premises. As such, the supply is not input taxed and the value of the supply from the sale of the Property which contains the newly constructed house is not excluded from calculating both your current and projected GST turnovers.

However, section 188-25 of the GST Act provides that when calculating your projected annual turnover, you do not include any supplies made or likely to be made by you:

· by way of transfer of ownership of a capital asset, or

· solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

The GST Act does not define the term capital assets. Generally, the term 'capital assets' 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.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. That is, 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 nature even if such a disposal is an occasional or one-off transaction.

On the information provided, the Property is not intended to be held as an investment property for generating rental income. At the time of sale, the Property is not a capital asset.

Furthermore, the transfer of this Property is not a transfer solely as a consequence of ceasing to carry on an enterprise. We consider that your enterprise of property development ceases as a consequence of the disposal of this asset, rather than it is being disposed of in consequence of ceasing to carry on your enterprise. Hence, the value of the supply of the Property is included in your projected turnover.

Therefore, when you sell the Property, both your current and projected GST turnovers will be above $75,000. Hence, your GST turnover will meet the registration turnover threshold and you will be required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act will be satisfied.

Furthermore, the sale of the Property, in the circumstances you described, is neither GST-free nor input taxed. As all the requirements of section 9-5 of the GST Act are satisfied, the sale of the Property in this instance is a taxable supply.

The guide GST and property will help you work out how GST applies to GST property sales and transactions.

Additional information

Normally, the amount of GST you must pay when you sell property as part of your business is equal to one-eleventh of the total sale price. However, you may be able to use the margin scheme. The guide GST and the margin scheme will help you decide whether to use the margin scheme and calculate GST correctly if you use it.

The acquisitions relating to the development of the Property are for a creditable purpose. Hence, you are entitled to input tax credits for these acquisitions if the other requirements of section 11-5 of the GST Act are satisfied. Refer to the publication GST credits for businesses for further information.

Generally, the sale of the family home is a mere realisation of a private asset. However, the fact that an entity had used the premises as a private residence before the sale does not necessarily mean that the sale is not in the course or furtherance of an enterprise carried on by the entity. It will be a matter of fact and degree in each case. For example, if the evidence indicates that the entity had intended to build the house and sell it for a profit, but lived in it temporarily before selling it, the sale would still be considered to be in the course or furtherance of the entity's enterprise.

All publications referred to above are available at www.ato.gov.au