Edited version of your written advice

Authorisation Number: 1012695766239

Ruling

Subject: GST and sale of new residential premises

Question 1

Was the supply of your leased units exempt from goods and services tax (GST), as the supply occurred under special circumstances and not in the course or furtherance of an enterprise?

Question 2

If the supply of the units was subject to GST, will you be allowed to claim input tax credits on the acquisitions made for the construction of the units by way of amending past or future activity statements?

Question 3

If the supply of the units was subject to GST, can you apply the margin scheme to the supply of the units and what requirements should you meet?

Decision 1

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the supply of your units was subject to GST. There is no provision in the GST Act to exempt any taxable supply from GST under special circumstances.

Decision 2

Yes, as there was a change in the creditable purpose of the acquisitions made for the construction of the units, under Division 129 of the GST Act, you are entitled to claim a part of the relevant input tax credits. You could claim it in the current or a future activity statement or revise the original activity statement.

Decision 3

Yes, as you acquired the original property as an input taxed supply, you are entitled to use the margin scheme to the supply of the units. As you and each purchaser did not agree in writing to apply the margin scheme to the sale of the relevant unit prior to settlement, you should apply for the Commissioner's discretion to allow for an extension of time to enter into a margin scheme agreement with each purchaser.

Relevant facts and circumstances

• You are registered for goods and services tax (GST). You have a history of acquiring residential properties for long term renting.

• In 20XX, you bought a residential property, demolished the house and built several new residential units. You spent about $X to build these units.

• Construction of the units was completed and the certificate of occupancy was issued in 20YY.

• As you intended to keep these units for long term lease, you did not claim any input tax credits on any acquisitions related to construction of the units. The units were leased from 20YY.

• You subsequently encountered severe financial hardships and was forced to sell these units. They were sold in 20ZZ, which was less than 5 years from the issue of the certificate of occupancy. You contend that the sale of the units was not in the course or furtherance of an enterprise.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

Section 9-5

Section 9-20

Section 40-65

Section 40-75

Section 75-5

Section 129-1

Reasons for the decisions

Decision 1

Section 9-5 of the GST Act provides that 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.

In this case, the supply of the units was made for consideration. The supply was connected with Australia as the units are located in Australia. You were registered for GST. The supply of residential premises is not a GST-free supply under any provision of the GST Act. Therefore, the supply satisfied paragraph 9-5(a), (c) and (d) of the GST Act. It is necessary to determine whether the supply was made in the course or furtherance of an enterprise you carried on and the supply was input taxed.

In the course or furtherance of an enterprise

Paragraph 9-20(1)(c) of the GST Act provides that an enterprise includes 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 per the facts, you were leasing these units prior to selling them. Therefore, you were carrying on an enterprise of leasing the units.

Goods and Services Tax Ruling GSTR 2004/8 (GSTR 2004/8) refers to when does an entity have a decreasing adjustment under Division 132 of the GST Act and considers the meaning of 'in the course or furtherance of an enterprise'. Paragraphs 28-29 of the ruling state:

28. 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. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

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.

Accordingly, we consider that as the units were used for your leasing enterprise, the sale of the units was made in the course or furtherance of that enterprise. Therefore, paragraph 9-5(b) of the GST Act was satisfied.

Sale of residential premises

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation.

Paragraph 40-65(2)(b) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are new residential premises.

Section 40-75 of the GST Act refers to the meaning of new residential premises. Paragraph 40-75(1)(c) of the GST Act provides that residential premises are new residential premises if they have been built or contain a building that has been built to replace demolished premises on the same land.

Paragraph 40-75(2)(c) of the GST Act provides that residential premises are not new residential premises if for a period of at least 5 years since they have been built to replace demolished premises on the same land, they have only been used for making input taxed supplies of leasing.

In this case, the units were leased since 20YY. Prior to sale each unit was leased for less than 5 years. Consequently, at the time of sale, they were considered as new residential premises. Accordingly, the sale of each unit satisfied section 9-5 of the GST Act as a taxable supply.

Decision 2

Adjustments under Division 129

In this case each residential unit was leased for a period of less than 5 years since obtaining the certificate of occupancy. During this period, each unit was used for input taxed purposes. Thereafter, each unit was sold as a taxable supply of new residential premises. Accordingly, the units were held for input taxed and creditable purposes. Therefore, the acquisitions made for construction of the units were for dual purposes.

Division 129 of the GST Act refers to changes in the extent of creditable purpose. Section 129-1 of the GST Act provides that the extent to which an acquisition or importation is for a creditable purpose affects the amount of the resulting input tax credit. When the extent of the creditable purpose is changed by later events, adjustments for the purpose of working out net amounts under Part 2-4 of the GST Act may need to be made.

Goods and Services Tax Ruling GSTR 2009/4 (GSTR 2009/4) refers to new residential premises and adjustments for changes in extent of creditable purpose. We have enclosed a copy of that ruling for your reference. It explains how to make adjustments to the input tax credits claimable in your situation.

Correcting mistakes

The ATO webpage 'Correct a mistake or dispute a decision' refers to unclaimed GST refunds or credits. It states unclaimed GST refunds and credits are not considered mistakes and therefore, claiming them later is not considered a correction. If you meet the conditions, you could do it on your current or a later activity statement or revise the original activity statement.

Decision 3

Section 75-5 of the GST Act refers to applying the margin scheme and states:

(1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a *stratum unit; or

(c) granting or selling a *long term lease;

if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.

(1A) The agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

Subsection 75-5(3) of the GST Act states:

A supply is ineligible for the margin scheme if:

(a) it is a *taxable supply on which the GST was worked out without applying the *margin scheme; or

(b) ……

Asterisked terms are defined in the dictionary at section 195-1 of the GST Act.

In your case, in 20XX, you acquired the original property as a residential property. As the sale of that property to you was an input taxed supply, your sale of the units built on that land is eligible for the margin scheme.

However, you and each purchaser of a unit did not agree in writing that the margin scheme should be applied to the sale of the unit on or before the settlement of the unit. Therefore, before the margin scheme can be applied to the sale of each unit, you should apply for the Commissioner's discretion under subsection 75-5(1A) of the GST Act to obtain a further period, within which you and each purchaser could enter into a written agreement to apply the margin scheme to the sale of the relevant unit