Edited version of your written advice

Authorisation Number: 1012700607810

Ruling

Subject: GST Registration

Question

Are you required to register for GST when you sell the townhouses at your second development?

Answer

Yes. You are required to register for GST when you sell the townhouses at your second development.

Relevant facts and circumstances

You are two individuals. Currently you are not registered for GST either as a partnership or individually.

You have invested in property in order to build your retirement income.

In a certain year you purchased some neighbouring properties. You are in the process of building some townhouses on these properties (second development). You initially intended to build the townhouses for the purposes of leasing. However, as you have had a change in financial circumstances you plan to sell these townhouses upon completion.

You are required to repay a particular bank finance facility which you have entered into with your bank in order to fund the above mentioned property development.

The properties at the second development are held in joint names. You have borrowed funds jointly in order to conduct your activities and are actively working together in this enterprise.

You have not claimed any input tax credits on acquisitions that you have made in relation to the development of the property.

You also own other townhouses (first development). These townhouses were built by you and are currently leased to tenants. The income from these properties is equally distributed between you both. This income is reported in your individual tax returns.

Another entity which you are associates of has purchased a third property.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 995-1

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

Section 23-5

Section 184-1

Section 40-65 GST Act

Section 40-75 GST Act

Section 9-20 GST Act

Section 188-25 GST Act

Section 9-5 GST Act

Section 23-5 GST Act

Reasons for decision

Section 23-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) states that you are required to be registered for GST if:

• you are carrying on an enterprise; and

• your GST turnover meets the registration threshold.

Before these two requirements mentioned in section 23-5 of the GST Act are analysed in detail, it needs to be determined who the 'you' is in this case.

Section 195-1 of the GST Act states:

you: if a provision of this Act uses the expression you, it applies to entities generally, unless its application is expressly limited

You are engaging in property development activities in order to fund your retirement. Although you have not registered or set up a partnership, we need to determine whether your property development activities are carried out in the form of a partnership.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

partnership means:

(a) an association of persons (other than a company or a ^*limited partnership) carrying on business as partners or in receipt of ^*ordinary income or ^*statutory income jointly; or

(b) a limited partnership.

In addition, Miscellaneous Tax Ruling MT2006/1: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides the following in reference to the above definition:

42. This definition of partnership is wider than at common law.¹⁵ The first limb of the definition in paragraph (a) reflects the definition of partnership contained in State and Territory partnership Acts. The second limb of the definition in paragraph (a) extends 'partnership' for taxation purposes to include persons in receipt of income jointly.

43. A partnership within the extended meaning for taxation purposes exists, for example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. It is an entity in its own right as it is a partnership for the purposes of the ABN Act.

You have stated to us that the properties are held in joint names. You have borrowed funds in order to conduct your activities and are actively working together in this enterprise. Therefore we are of the view that you are conducting your investment activities as a partnership, and for the purposes of this ruling 'you' will be taken to refer to you both as a tax law partnership.

Given that you are a partnership, the requirements of section 23-5 of the GST Act need to be assessed against this partnership.

Are you carrying on an enterprise?

You have contended that what you are carrying on in regards to the development of the property is that of a leasing enterprise. However, given that you intend selling some or all of the townhouses, what needs to be determined here is whether your activities amount to a leasing enterprise or a property development enterprise. That is, it needs to be determined whether the townhouses have been built by you for sale or for an input taxed supply of leasing. In this regard goods and services tax ruling, GSTR 2009/4: Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) provides the following:

Demonstrating that new residential premises are being held for sale in an entity's enterprise

44. An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity's enterprise. Such an assessment requires a weighing up of the evidence that supports a finding that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose. There must be satisfactory evidence to support a conclusion that the premises are being held for the purpose of sale, or for some other purpose. A single piece of evidence may not be sufficient where there is other evidence which suggests a contrary purpose. In such cases all of the evidence must be considered and weighed up in reaching a decision.

45. Although any one factor may not be sufficient on its own, the following are some examples of objective facts and circumstances that the Commissioner would expect to be present to conclude that premises are being held for the purposes of sale. The following is not an exhaustive list and there may be other facts and circumstances in individual cases that will also be relevant to determining if the particular premises are being held for the purposes of sale. In any particular case, the Commissioner would expect there to be a preponderance of relevant factors to support a conclusion that premises are being held for the purposes of sale. Some of the factors that may be relevant include:

• marketing of the premises for sale, such as, listing the premises for sale with a real estate agent or agents, advertising the premises for sale in relevant publications or via Internet advertising websites for real property, arranging 'open for inspection' times, and showing prospective buyers through the premises;

• income tax treatment of the development as trading stock rather than as a capital asset (since treatment as a capital asset would imply that the premises are being held for investment or leasing purposes);

• finance documents including loan applications and documentation provided as part of the loan application process supporting the planned sale of the premises;

• business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale;

• accounting reports and financial statements supporting the holding of the premises for sale;

• past activities of the entity in carrying on the enterprise of selling new residential premises (however, it is noted that, in some cases, special purpose vehicle entities may be established for the express purpose of undertaking a single residential property development for the purpose of sale); and

• in the case of a building or complex made up of multiple stratum units, actual arm's length sales of some of the listed units (although, in some cases this may be countered by evidence that the entity only intended to sell some of the premises while intending to lease others).

46. Similarly, evidence that the premises has been applied, to some extent, in relation to making input taxed supplies includes, for instance:

• business plans, feasibility studies or minutes of meetings demonstrating that the entity has determined to use the premises for lease;

• finance documents including loan applications and documentation provided as part of the loan application process supporting the intention to lease the premises;

• periods of actual leasing of the premises; and

• marketing of the premises for lease.

The documents you have provided to us are not substantial enough to support your contention that what you are conducting in relation to the second development is a leasing enterprise. Whilst you may have had an intention to lease the townhouses after they were built, it is apparent that there has been a change of purpose in your development strategy prior to completing building of the townhouses. You have provided to us details of a particular bank facility from your bank. None of the documents that you have supplied support your contention that the second development is a leasing enterprise.

We understand that your strategy is to invest in property in order to fund your retirement. We accept that the first development is carried on for the purpose of leasing. But we do not consider that the second development is a part of this leasing enterprise. Currently all the information available to us indicates that the second development is being developed for sale. Therefore when viewed objectively, we consider that, currently, the enterprise that is being conducted by you in regards to the second development is that of a property development enterprise.

Turnover

According to section 23-15 of the GST Act, you meet the registration turnover threshold if your GST turnover is $75,000 or above.

Both the current and projected GST turnover needs to be determined in working out whether an entity meets a particular turnover threshold. Pursuant to paragraph 188-25 (a) of the GST Act, sale proceeds from sale of capital assets are not included in the calculation of the projected annual turnover.

Therefore, in this case, what needs to be determined is whether the sale of the townhouses of the second development amount to a sale of a capital asset which should be disregarded from the calculation of the projected annual turnover.

GSTR 2001/7: Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) provides the following:

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

As you can see from this ruling, for the purposes of section 188-25 the character of an asset is determined at the time of expected supply. Therefore, given that the property will be developed for resale we do not consider the sale of the townhouses to be that of a capital asset. Accordingly the sale proceeds from the townhouses should be included in the calculation of the projected annual turnover.

Therefore, you will exceed the registration turnover threshold of $75,000 when you sell the townhouses.

Conclusion

The sale of the townhouses of the second development meets both requirements of section 23-5 of the GST Act and therefore you are required to register for GST.

Additional information

Taxable supplies

• Sale of properties upon completion

Whilst the sale of residential premises is generally an input taxed supply, this exception does not apply to sale of new residential premises.

New residential premises as defined in section 40-75 of the GST Act includes a building which has been built to replace demolished premises. Therefore, the sale of the townhouses will be the sale of new residential premises that is a taxable supply under section 9-5 of the GST Act, as you will be making a supply for consideration; the supply is made in the furtherance of an enterprise that you carry on; the supply is connected with Australia; and you are required to be registered for GST.

Therefore GST is payable on the sale of these townhouses.

• Other supplies

An entity can conduct several enterprises. Therefore, as you are required to register for GST, other supplies that you make that meet the requirements of section 9-5 of the GST Act will be taxable supplies on which GST is payable.

Input tax credits

As you are required to register for GST, you are also entitled to claim Input Tax Credits on creditable acquisitions that you make. GSTR 2009/4 provides the Commissioners views on change in creditable purpose and paragraphs 26-28 give an example of residential premises with dual purposes. We have enclosed a copy of GSTR 2009/4 for your perusal.

Margin Scheme

Certain taxable supplies of real property are entitled for the Margin Scheme. Please refer to the documents enclosed for further information on the Margin Scheme.