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Edited version of your private ruling
Authorisation Number: 1012494140533
Ruling
Subject: GST and sale of real property
Question
Is GST payable on the sale of the vacant block of land?
Answer
No.
Relevant facts and circumstances
You own the property located in a town in Australia. The property is XXX square metres and is currently zoned 2B medium density.
The property is currently advertised for sale with a real estate agent and gives the following description of the property:
The entire property, with the X titles, is to be sold as a whole.
There are Y freehold units. Constructed of double brick, the A 2 bedroom and B 3 bedroom units all face directly to the beach and have views of the ocean. Some of the units come fully furnished. Currently all the units are permanently rented, returning in total $AAA gross per week.
Secondly there is a vacant freehold block of land. This BBB sqm parcel has over B metres of road frontage and has its own driveway access.
The advertisement also states that the units as a whole contain AA bedrooms, BB bathrooms and CC car spaces.
You acquired one of the units and the vacant lot jointly with another person. A number of the other units were acquired jointly. In 20XX, you obtained the title to the vacant lot and the Y units. In 20YY, you acquired the last unit in your own name.
When you first acquired the units they were used for holiday letting. For a certain period you used one of the units as your principal residence. In the last few years, Y units were permanently let and only in the last 6 months have the remaining units been let permanently.
The vacant lot is at the front of the property and has not been used for anything.
You do not intend to develop the vacant block of land or undertake any works before the sale.
You were registered for GST for a certain period for your other activities. This property is not used in conjunction with those activities.
You currently are not carrying on any other enterprise.
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 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 188-5.
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.
Reasons for decision
GST is payable on any taxable supply that you make.
The sale of the vacant block of land is a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act 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 defined in the GST Act)
Based on the information that you have provided, the sale of the vacant block of land is for consideration and is connected with Australia as the property is located in Australia. Therefore, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.
It remains to be determined whether the sale of the vacant block of land is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act, whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act, and whether the sale is GST-free or input taxed.
Whether the sale of the vacant block of land is in the course of an enterprise that you carry on
An 'enterprise' is defined in section 9-20 of the GST Act to include, amongst other things, an activity, or series of activities, done:
(a) in the form of a business, or
(b) in the form of an adventure or concern in the nature of trade.
(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.
We do not consider that the sale of the vacant block of land is in the course or furtherance of a business of buying and selling land nor is it in the course or furtherance of a property development enterprise.
On the information provided, you own that property that contains units that are leased to third parties for residential purposes. You are carrying on a leasing enterprise.
For the sale of a thing to be made in the course or furtherance of your leasing enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection exists between the sale of the thing and your enterprise will depend on the facts and circumstances.
Goods and Services Tax Ruling GSTR 2004/8 contains the ATO view on decreasing adjustments on supplies. It also considers the meaning of 'in the course or furtherance' in relation to an enterprise. Paragraphs 29 and 30 of GSTR 2004/8 state:
29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.
30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:
The vacant block of land formed part of the property that is leased to third parties.
As you carry on a leasing enterprise on the property, the disposal of the property including the vacant block of land, has a connection with your enterprise. Accordingly, the supply of the vacant block of land is considered to be made in the course or furtherance of the leasing enterprise that you carry on. As such, the supply of the vacant block of land satisfies paragraph 9-5(b) of the GST Act.
Whether you are required to be registered for GST
You advised that you are not registered for GST. Therefore, we need to consider whether you are required to be registered for GST.
Section 23-5 of the GST Act provides that you are required to be registered if:
(a) you are carrying on an enterprise, and
(b) your GST turnover meets the registration turnover threshold of $75,000.
On the information provided, your only enterprise is the leasing of the residential units. We need to determine whether the income from leasing and the proceeds from the sale of the units and the vacant block of land are included in working out your GST turnover.
Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:
(a) 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
(b) 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 turnover, you disregard certain supplies including supplies that are input taxed.
Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).
Subsection 40-35(2) of the GST Act further states that:
(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation) and
(b) the supply is not input taxed if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a long-term lease.
Also, subsection 40-65(1) of the GST Act provides that a sale of real property is an input taxed supply, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). Subsection 40-65(2) of the GST Act further provides that a sale of real property 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 (regardless of the term of occupation) before 2 December 1998.
The term 'residential premises' is defined in section 195-1 of the GST Act to mean land or a building occupied or intended to be occupied as a residence or for residential accommodation, regardless of the term of occupation or intended occupation and includes a floating home.
On the information provided, the units are residential premises which are leased permanently. At the time of the sale of the property, you are only making an input taxed supply of residential rent under paragraph 40-35(1)(a) of the GST Act. Therefore, the consideration received from the supplies of leasing the units are excluded when calculating both the current and projected GST turnover.
Based on the information provided, the units are neither commercial residential nor new residential premises. The units have been used for residential accommodation. Therefore, the sale of the units is input taxed under subsection 40-65(1) of the GST Act. Hence, the proceeds for the sale of the units is excluded when calculating your current and projected GST turnover.
Vacant land cannot be residential premises. This is because vacant land, of itself does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.
When you sell the vacant block of land, you are not selling residential premises. Consequently, the sale of the vacant block of land is not input taxed under subsection 40-65(1) of the GST Act.
However, section 188-25 of the GST Act excludes certain supplies made when working out your projected annual turnover.
Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:
(a) by way of transfer of ownership of a capital assets of yours, or
(b) 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 Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 32 of GSTR 2001/7 state:
31. 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'.
32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.
In your case, you derive income from leasing the units in the property. As such, the property as a whole is considered the profit yielding subject of your leasing enterprise. That is, the property is a capital asset of your leasing enterprise. As such the vacant block of land is a capital asset of your leasing enterprise. In addition, your leasing enterprise on the property will cease as a consequence of the disposal of the property. Hence, the sale of the property, including the vacant block of land, is disregarded in the calculation of your projected GST turnover.
As such, although the proceeds from the sale of the vacant block of land is included in the calculation of your current GST turnover, it is excluded in the calculation of your projected GST turnover.
Consequently, when you sell the property, which includes the vacant block of land, your current GST turnover is at or above $75,000. However, your projected GST turnover is below $75,000. Hence, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act is not satisfied.
As not all the requirements of section 9-5 of the GST Act are met, the sale of the vacant block of land is not a taxable supply. Consequently, GST is not payable on the sale.