Edited version of your private ruling

Authorisation Number: 1012521217783

Ruling

Subject: Goods and services tax (GST) and sale of property

Question

Is the sale of your property subject to GST?

Answer

No, the sale of your property is not subject to GST.

Relevant facts and circumstances

You are not registered for GST.

You are the owner of a certain property. You acquired this property many years ago and legal title was held by you and another related individual as joint tenants. You now hold the legal title following the death of the related individual a few years ago.

On acquisition, the property was primarily rural land with fencing and a small old residential house located on it. You do not reside on the land. Your intention when acquiring the property was to use it for agricultural purposes.

The small residential house has been leased and continues to be leased.

The land has been used for an income producing activity of farming by you and another related individual in partnership up until a few years ago, and is now being used by another entity for farming.

In return for the grant of the use of this land by you to this other entity, where that entity is paying the council rates and water rates but this will not amount to more than $75000 per year.

Apart from repairs to the small old residential house which were carried out more than 10 years ago, no other improvements have been made on the property.

The land has not been developed or subdivided by you.

The land has now been rezoned low density residential. A purchaser has approached you to sell your property and has made an offer. This offer has been accepted by you and contracts exchanged to sell the property. You are selling to maximise the realisation of your property.

The property is being sold as is.

You will not be selling the land as farmland or as a sale of a going concern.

You advised that the small residential house will continue to be leased up until the day of settlement and in addition, the land will continue to be farmed by the other entity, up until the day of settlement.

You also own a nearby property. Part of the property is used for residential purposes. You acquired this property many years ago. You are residing on this land. On acquisition, the land had fencing and a small old residential house and was primarily rural land. Your intention when acquiring the property was to use it as your residence and for agricultural purposes. You have built a residence on this land to live in. In addition, machinery sheds and growing sheds have been built and used for agricultural purposes. No other improvements have been made. The land has been used for agricultural purposes by you. Another entity is currently using the land on this nearby property for agricultural purposes as part of their business.

You do not have a history of buying and selling land or buildings.

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 188-10 and

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

Reasons for decision

GST is payable on taxable supplies. The sale of your property is a supply and will be subject to GST if it is a taxable supply.

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 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.

Based on the information that you have provided, the sale of your property 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.

We now need to consider whether the sale of your property will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and if so, whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Whether the sale of your property is made in the course or furtherance of an enterprise that you carried on

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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

· 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 (available on our website at www.ato.gov.au) provides guidance 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 guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' for GST purposes.

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.

The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 234 of MT 2006/1 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 also considers 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.

Paragraph 244 of MT 2006/1 provides further guidance on adventures and concerns in the nature of trade. It states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraph 265 of MT 2006/1 provides that from the cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 and Casimaty v. FC of T 97 ATC 5135 a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present it may be an indication that 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.

In your case, whilst there is a change of purpose for which the property is held, no other factors above are present. You acquired your property for the purpose of generating primary production income not for the purpose of resale for commercial gain. This is demonstrated by the length of time you have held your property which was acquired many years ago. Apart from repairs to the small old residential house which were carried out more than 10 years ago, no other improvements have been made to the property. The property has not been developed or subdivided by you. The small house is currently being leased. You have used the remainder of the land for generating income from farming and have currently granted use of this land to another entity.

You also own a nearby property which was acquired many years ago. Your intention when acquiring this nearby property was to use it as your residence and for agricultural purposes. You are residing on the land on this nearby property have used it for agricultural purposes. Another entity is currently using the land on this nearby property for agricultural purposes as part of their business.

As the land has now been rezoned low density residential, a purchaser has approached you to sell your property and has made an offer. This offer has been accepted by you and contracts have been exchanged to sell the property. The property has been sold to maximise its realisation value. The property is being sold as is. You are not in the business of acquiring, developing and selling land.

Although your property has been used for an income producing purpose the character of the land has not changed from a capital to a trading asset. In this instance, your activity in selling the property is a one-off activity and is not part of a series of property development and/or property trading business activities.

Therefore, we consider that the sale of your property is a mere realisation of a capital asset which does not amount to the carrying of an enterprise in the form of a business.

Furthermore, the sale does not have a commercial aspect and is not an adventure or concern in the nature of trade.

We will now consider whether you are carrying on an enterprise under any other type of enterprise in the definition in section 9-20 of the GST Act. And if so, whether the sale of the property is therefore considered to be part of this enterprise for the purpose of the GST Act, and is also considered to be made in the course or furtherance of that enterprise.

At the time that your property was sold, the small residential house on the property was being leased and will continue to be leased up until the time of settlement. Furthermore, you have granted use of the land to another entity for farming. In return for the use this land, the other entity is paying the council rates and water rates but this will not amount to more than $75000 per year. This may constitute an enterprise as section 9-20 of the GST Act considers the definition of an enterprise to include- an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. As the whole property is leased or used by another entity in their farming business, then your activity of leasing the property is an enterprise.

For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances.

Goods and Services Tax Ruling GSTR 2004/8 (accessible from our website at www.ato.gov.au) discusses 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:

· at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

· at the time of sale it was applied in carrying on your enterprise to at least some extent; and

· it is sold as a transaction of your enterprise.

As your property has been used in order to carry on a leasing enterprise, it is considered that the disposal of this capital asset has a connection with your enterprise. Accordingly, the supply of the property is considered to be made in the course or furtherance of the leasing enterprise that you carry on. As such, the supply of the property satisfies paragraph 9-5(b) of the GST Act.

Whether you are required to be registered for GST

You are not registered for GST. Therefore, we will now consider whether you are required to be registered for GST with regards to the sale of the property under paragraph 9-5(d) of the GST Act.

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 (currently $75,000).

Having applied the principles discussed above to your circumstances, we have concluded that the sale of the property will be regarded as a mere realisation of a capital asset that has previously been used in your leasing enterprise. We therefore need to determine whether the income from leasing and the proceeds from the sale of the property 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:

· 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.

In working out both your current and projected GST turnover, you disregard certain supplies including:

· supplies that are input taxed and

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

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:

· by way of transfer of ownership of a capital assets of yours, or

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

In your situation, the registration turnover threshold is met when your current and projected GST turnover is equal to or greater than $75,000. The current GST turnover is the sum of the value of all supplies made in a particular month plus the previous 11 months. The projected GST turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

Your current GST turnover consists only of the amounts paid by the other entity in return for the use of your land. These amounts paid are for the council rates and water rates but this will not amount to more than $75000 per year. However, when you sell the property, the proceeds from the sale of the property as well as the value of the supplies from granting use of your land to another entity, in the previous 11 months will also be included in your current GST turnover, which may result in you exceeding the registration turnover threshold of $75,000.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will be required to be registered.

Paragraph 188-25(a) of the GST Act provides that in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 provides that a capital asset is generally 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'. This is different from a revenue or trading asset, which is described in paragraph 34 of the ruling as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business.'

The property that you are selling is a capital asset that has previously been used in your leasing enterprise and the proceeds of the sale will not be included in your projected GST turnover

Although the sale proceeds will be included in your current GST turnover, the proceeds of the sale will not be included in your projected GST turnover. Consequently your GST turnover will 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.

Conclusion

As all the requirements of section 9-5 of the GST Act are not met, the sale of your property will not be a taxable supply and therefore not be subject to GST.