Edited version of your private ruling

Authorisation Number: 1012448258033

Ruling

Subject: The construction and sale of courtyard homes

Question 1

Will you make taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the sale of courtyard homes built on land acquired in 200X?

Answer

Yes, you will be making taxable supplies of new residential premises.

Question 2

Will the sale of the courtyard homes qualify for the application of the margin scheme?

Answer

Yes, provided the requirements of Division 75 of the GST Act are met.

Relevant facts and circumstances

The applicant (you) is not registered for GST.

You acquired an old residential rental property under a contract that was settled in 200X

The acquisition from the former owner was not a taxable supply.

The property was subsequently destroyed by fire.

In the relevant year you decided not to repair the property.

You decided to clear and subdivide the land and build courtyard homes for sale at a profit.

You have obtained Council approval for the subdivision and proposed construction.

You have contracted a builder to construct the dwellings on the land.

You intend to sell the homes as soon as construction is complete.

You estimate that the sales of each dwelling will exceed $75,000.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 7

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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 Division 23

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 23-10

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

A New Tax System (Goods and Services Tax) Act 1999 Division 75

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

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

Reasons for decision

Question 1

Detailed reasoning

Subsection 7-1(1) provides that GST is payable on taxable supplies. As such, you are liable to pay the GST payable on any taxable supply you make.

Section 9-5 states:

You make a taxable supply if:

(a) you make the supply for *consideration;

(b) the supply is made in the course or furtherance of an *enterprise that you carry on;

(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.

(* Asterisked terms are defined in the Dictionary in section 195-1)

Goods and services tax ruling GSTR 2003/3, Goods and services tax: when is a sale of real property a sale of new residential premises?, provides guidance on when a sale of real property is taxable

GSTR 2003/3 provides, at paragraph 22, that a supply of residential premises by way of sale is a taxable supply where all the following conditions are met:

· the residential premises are new residential premises as defined in section 40-75;

· the new residential premises were not used for residential accommodation before 2 December 1998;

· the supply is made for consideration;

· the supply is made in the course or furtherance of an enterprise that the vendor carries on;

· the residential premises are in Australia; and

· the vendor is registered, or required to be registered.

The issues in this case are whether the dwellings you construct are new residential premises, whether you are carrying on an enterprise and whether you are required to be registered.

New residential premises

Paragraph 40-75(1)(c) of the GST Act states that the term 'new residential premises' includes residential premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.

GSTR 2003/3 provides the following, at paragraph 85:

85. The word 'demolish' is not defined in the GST Act, and therefore takes its ordinary meaning. The general meaning of the word is 'to throw or pull down (a building etc); reduce to ruins; to put an end to; destroy; ruin utterly'. In the context of the GST legislation, demolish means the pulling down or removal of a building.

You propose to demolish the destroyed original premises and clear the land in the expectation of building courtyard homes. These new homes will satisfy the definition of 'new residential premises'.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act defines an enterprise as 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.

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity or series of activities done as a private recreational pursuit or hobby.

Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Miscellaneous Tax Ruling MT 2006/1 - provides assistance to entities in determining their entitlement to an Australian Business Number and considers the meaning of certain key words and phrases used to define an enterprise.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraph 265 of MT 2006/1 recognises that the question of whether an entity is carrying on an enterprise arises where there are 'one-offs' or isolated real property transactions. Factors that provide an indication that an adventure or concern in the nature of trade is being carried on include:

· there is a change of purpose for which the land is held;

· there is a coherent plan for the subdivision of the land;

· 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.

MT 2006/1 provides the following example of circumstances, similar to yours, where an enterprise of property development was considered to have arisen:

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for :

· their house to be demolished ;

· the land to be subdivided ;

· a builder to be engaged ;

· two houses to be built ;

· water meters, telephone and electricity to be supplied to the new houses ; and

· a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

You have identified the following circumstances apply:

· your fire damaged house will be demolished;

· the land will be subdivided;

· a builder will be engaged to build courtyard homes; and

· the premises will be sold at a profit.

In these circumstances you are undertaking an enterprise of property development, albeit on a once only basis, following the destruction by fire of the original premises.

Required to be registered for GST

You are required to be registered for GST if you are carrying on an enterprise; and your GST turnover meets the registration turnover threshold (see section 23-5 of the GST Act). Entities who are carrying on an enterprise in Australia and whose GST turnover is less than $75,000 (less than $150,000 for non-profit organisations) can choose to register for GST (see section 23-10 of the GST Act).

Because you are undertaking an enterprise of property development and the consideration you expect from the sales of the courtyard homes exceeds the registration turnover threshold of $75,000, you are required to be registered.

Conclusion

Your supplies of the courtyard homes will be taxable supplies because the following conditions will be met:

· the residential premises are new residential premises as defined in section 40-75;

· the new residential premises have not been used previously for residential accommodation;

· the supplies will be made for consideration;

· the supplies will be made in the course or furtherance of an enterprise that you (the vendor) carry on;

· the residential premises are in Australia; and

· you are required to be registered.

You are making taxable supplies of new residential premises because you satisfy the positive requirements of section 9-5 of the GST Act and your supplies are not GST-free nor input taxed.

Question 2

Application of the margin scheme

If you make a taxable supply of real property, the GST payable under the basic rules of the GST Act is 1/11th of the price. However, under Division 75 of the GST Act, if you make a taxable supply of real property by selling a freehold interest in land, you may apply the margin scheme if you and the recipient have agreed in writing that the margin scheme is to apply (see section 75-5 of the GST Act).

However, the margin scheme does not apply if you acquired the freehold interest through a supply that was ineligible for the margin scheme. Subsection 75-5(3) of the GST Act details the circumstances under which a supply would be ineligible for the margin scheme. None of these circumstances apply to you.

Under the margin scheme (see section 75-10 of the GST Act), the GST payable on a supply of real property is 1/11th of the margin for the supply. the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

Consideration for the supply and acquisition

Goods and services tax ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides guidance on how the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to a supply of a freehold interest, stratum unit, or long term-lease (referred to collectively as 'real property') you acquired on or after 1 July 2000. Paragraphs 47 and 49 of GSTR 2006/8 state:

47. The consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or both. The consideration for the supply or acquisition should take into account adjustments on settlement that are commonly made for rates, land tax and other outgoings. Goods and Services Tax Determination GSTD 2006/3 contains a detailed discussion on this topic.

49. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition.

In your circumstances the consideration for the acquisition of the real property in 200X will need to be apportioned to the courtyard homes on a reasonable basis.

Conclusion

Your supplies of the courtyard homes will qualify for the application of the margin scheme if the requirements of Division 75 of the GST Act are met. This includes having a written agreement with the purchaser that the margin scheme should apply to the supply.