Edited version of private advice

Authorisation Number: 1012628174936

Ruling

Subject: GST and carrying on an enterprise of property development

Question

Will you be carrying on an enterprise and required to be registered for goods and services tax (GST) in relation to the proposed property development?

Answer

Yes. You will be carrying on an enterprise and required to be registered for GST in relation to the proposed property development.

Relevant facts and circumstances

• You are not registered for goods and services tax (GST).

• You are retired and receive income from the superannuation fund and rental income from residential and commercial properties.

• You never lived in the residential property and continue to lease since you acquired it.

• You are considering demolishing the residential property and constructing two residential units or dual occupancy duplex properties on the land.

• You never engaged in any property development activities in the past and the proposed development would be one-off activity.

• If you proceed with the proposed development, you intend to sell the new residential property to your child and retain the other new residential property for rental purposes.

• The new residential property will be sold to your child at cost to recoup the total cost of construction. However, for the stamp duty purposes and potential capital gains tax purposes, a deemed market value will apply to the sale to your child.

• The construction costs of both new residential properties are $YYY each and the expected market value will be $ZZZ.

• You will not have a business organisation such as manager, office and letterheads in relation to the proposed property development.

• You will consider borrowing the majority of the required capital to fund the property development and intend that the interest will be capitalised and added to the cost base of the property being sold to your child and the interest on the property held for rent will be claimed as a rental deduction against the rental income.

• Initial discussion with the council indicates that the actual subdivision will not take place until part way through the construction of new 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 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 - Division 72

A New Tax System (Goods and Services Tax) Act 1999 - section 72-5

A New Tax System (Goods and Services Tax) Act 1999 - section 72-70

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

Income Tax Assessment Act 1936 - section 318

Income Tax Assessment Act 1936 - subsection 318(1)

Reasons for decision

You are required to be registered for goods and services tax (GST) if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

To ascertain whether you are required to register for GST it must first be determined whether you are carrying on an enterprise, and if so, then whether your GST turnover meets the registration turnover threshold.

Carrying on an enterprise

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

An enterprise is 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; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

d) …

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 (MT 2006/1) provides guidance on the meaning of 'an entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

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

Based on the facts provided, you are carrying on an enterprise of leasing commercial and residential properties. Although you have not previously been engaged in property development activities, it is necessary to consider whether your activities in demolishing the existing residential property, subdividing the land and building two new residential properties for leasing purposes and to sell to your child at cost, amount to an enterprise.

Isolated transactions and sales of real property

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 -263 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' or isolated real property transactions.

263. 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 (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset...

Paragraph 264-269 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ (Statham) and Casimaty v. FC of T ¹⁰⁶ (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases 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 follow:

• 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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above. However, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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...

The following example from MT 2006/1 explains further on the ATO view in relation to isolated transactions and sales of real property. Example 31 states:

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 the sell the house.

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.

Application of the ATO view to your proposed property development activities

Based on the information provided by you,

• There will be a change of purpose for which the property was held as you have decided to demolish the residential property with the intention of subdividing and building two new residential properties.

• There will be a coherent plan for the subdivision of the property as you will have proposed development plans to demolish, subdivide and build.

• You will be borrowing funds to finance the proposed property development and you intend that the interest will be capitalised and added to the cost base of the property being sold to your child and the interest on the property held for rent will be claimed as a rental deduction against the rental income.

• You will be building two new residential units or dual occupancy duplex residential properties on the subdivided land which means you will be undertaking more than the minimum development activities required for the council approval for the subdivision.

The fact that you intend to sell one of the new residential units to your child at cost does not disregard the activities which will be undertaken by you in relation to the proposed property development for the purpose of determining whether you are carrying on an enterprise.

The above analysis indicates that your activities would amount to an enterprise of property development.

It is also necessary to consider the other activities carried on by an entity to determine whether an enterprise is being carried on.

Paragraphs 159 to 160 of MT 2006/1 state:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise.

In this case, you are currently carrying on an enterprise of leasing commercial and residential properties. Furthermore, the property in question which you propose to develop is not the residential property you live in. Rather, the property has already been used in carrying on your leasing enterprise. The proposed property development will increase your activities from leasing of commercial and residential properties to include property development.

Although you intend to sell one of the new residential units to your child at cost, you will be continuing your leasing enterprise after the completion of the property development by leasing the other new residential property. This will indicate that you are not terminating your enterprise of leasing commercial and residential properties.

Therefore, based on the above analysis and having regard to all of your circumstances, the proposed development activity would be considered to be the carrying on of an enterprise of property development.

Annual Turnover Threshold

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000.

If you are not registered for GST at the time you sell the new residential property, you will be liable for GST on the sale if you are required to be registered for GST. You will only be required to be registered for GST if your annual turnover exceeds $75,000.

To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 months period covers the period of the current month and the preceding 11 months, known as your current annual turnover, and the current month and the following 11 months, known as your projected annual turnover.

However, under sections 188-15 and 188-20 of the GST Act input taxed supplies are excluded from calculation of both your current GST turnover and your projected GST turnover respectively. Under section 188-25 of the GST Act supplies made by way of transfer of ownership of a capital asset and supplies made in relation to ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise are also disregarded in the calculation of your projected GST turnover.

Section 40-65 of the GST Act provides that supplies of residential premises are input taxed supplies. However, the supply of new residential premises is excluded from being an input taxed supply.

According to section 40-75 of the GST Act the proposed two residential units will be regarded as new residential premises because they have not previously been sold as residential premises; been built to replace demolished premises on the same land; and not been lived in for a period of five years since they first became residential premises.

Thus you will supply new residential premises when you sell one of the newly built residential units to your child in the course of carrying on your enterprise.

Although you were not engaged in property development activities in the past, the nature of your activities in developing the property, in selling one of the new residential units to your child and leasing the other new residential unit, clearly indicate that it will be an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

As the sale of this new residential unit will not be an input taxed supply, any consideration received for it will be included in the calculation of both your current GST turnover and your projected GST turnover for your enterprise. You estimate that the consideration which you will receive for this new residential unit will be in excess of $75,000. Therefore your GST turnover will meet the registration turnover threshold.

As a consequence you will be required to register for GST for your enterprise.

Sale to an associate

Division 72 of the GST Act ensures that supplies to, and acquisitions from, your associates without consideration are brought into the GST system, and that supplies to your associates for inadequate consideration are properly valued for GST purposes. Under the GST legislation consideration is any payment, or any act or forbearance, in connection with a supply of anything.

GST is payable on all taxable supplies. Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with Australia; and you are registered or required to be registered.

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

You intend to supply the new residential unit to your child at cost. You will be making this supply in the course of carrying on your enterprise of property development as explained above. The supply of will be connected to Australia and you will be required to be registered for GST as the consideration you will receive for this supply will be included in the calculation of GST turnover threshold, as explained above.

The supply of new residential premises will not be GST-free or input taxed.

Therefore the supply of new residential units to your child will be a taxable supply as it will satisfy all of the requirements under section 9-5 of the GST Act. Thus GST will be payable on the supply of the new residential unit to your child.

Section 72-70 of the GST Act relates to the value of taxable supplies for inadequate consideration. The section states:

(1)  If a supply to your associate for consideration that is less than the GST inclusive market value is a taxable supply, its value is the GST exclusive market value of the supply.

(2) Subsection (1) does not apply if:

(a)   your associate is registered or required to be registered; and

(b)   your associate acquires the thing supplied solely for a creditable purpose.

(3)  This section has effect despite section 9-75 (which is about the value of taxable supplies).

You will be making a taxable supply when you sell the new residential unit to your child as explained above. You also intend to sell this property to your child at cost rather than the market value of the property. However, for GST purposes the value of this property will be the GST exclusive market value.

This means you will be liable to remit GST on the sale of this property on the market value rather than the construction cost of the property.

An associate has the meaning prescribed by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(1) of ITAA 1936 states (in part):

318(1) [Associates of a natural person]  

For the purposes of this Part, the following are associates of an entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee).

(a) a relative of the primary entity:

(b) a partner of the primary entity or a partnership in which the primary entity is a partner;

(c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee the spouse or child of that partner...

Your child is an associate of the primary entity which is you, and the taxable supply of the new residential unit will be covered by section 72-70 of the GST Act.