Edited version of your written advice

Authorisation Number: 1012708491952

Ruling

Subject: Enterprise of property development

Questions:

1 Do the construction activities undertaken by you amount to an enterprise?

2 Are you required to be registered for the goods and services tax (GST)?

3 Are you liable to pay GST on the sale of the unit you are constructing?

4 Can you apply the margin scheme to the sale of this unit?

5 Will the sale of the other units be subjected to GST if they are leased for residential occupancy five years before they are sold?

Answers:

1 Yes, your construction activities amount to a carrying on of an enterprise for the purposes of the GST Act.

2 Yes, you will be required to be registered for GST.

3 Yes, the sale of the unit will satisfy all the requirements of a taxable supply under section 9-5 of the GST Act and, therefore, you will be liable to pay GST on the sale.

4 Yes, you can apply the margin scheme in working out the amount of GST on the sale of the unit (see below for details).

5 No, sale of residential premises that are leased for five years previous to their sale are not taxable supplies and therefore not subject to GST.

Relevant facts and circumstances

• You are a company engaged in property development.

• You have an Australian Business Number (ABN).

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

• You purchased residential premises, before 1 July 2000, for the purpose of leasing as residential premises.

• You demolished the existing residential premises and subdivided the property to build three residential units.

• One unit is currently under construction.

• You intend to sell this residential unit and fund the construction of the other two units.

• Once these two units are completed you intend to lease them for residential purposes for at least five years.

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 9-40

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 - section 75-5

Reasons for decision

Do the construction activities undertaken amount to an enterprise?

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the '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.

The Tax Office view of what is an enterprise is contained in Miscellaneous Taxation Ruling MT 2006/1 (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.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree, having regard to all the circumstances of the case. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. These are the transactions of a commercial nature which are entered into for profit making, but are not part of the activities of an ongoing business. The term 'profit making undertaking' concerns transactions of a commercial nature which are entered into for profit making but are not part of the activities of an on-going business.

Further, 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, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

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

Paragraphs 262 to 302 of MT 2006/1 explain the Tax Office's view on isolated transactions and sales of real property.

Paragraph 265 of MT 2006/1 provides a list of factors that provide assistance in determining whether an activity amounts to an adventure or concern in the nature of trade.

Those factors are:

• 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.

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. Paragraph 266 of MT 2006/1 explains that it is necessary to examine the facts and circumstances of each particular case. In addition to the aforementioned factors there may also be other relevant factors that need to be considered as part of a process of reaching an overall conclusion.

Moreover, no single factor will be determinative; it will be a combination of factors that will lead to a conclusion as to the character of the activities. Whilst each case is affected by its own particular facts, the determination of whether an enterprise exists for GST purposes is generally the result of a process of weighing all the relevant indicators.

In your case

• the property was acquired for the purpose of leasing.

• the property was purchased as a business asset of the company.

• the original purpose for which it was initially purchased subsequently changed.

• there is a coherent plan for the development - you are constructing one unit and have plans to construct two more units.

• you have your own business organisation in place.

• You have obtained subdivision approvals from the council and have commenced construction work on the land following the demolition of the single dwelling.

• you intend to sell the first unit and finance the construction of the other two.

The above indicators are to be considered as a whole. On balance, the facts lead to the conclusion that the development activities you carry on, on the relevant property amounts to an enterprise.

In your case, the activities undertaken on the property amounts to a property development, which exhibits a significant commercial nature. Therefore, we consider that the activity of constructing the units for sale is not the mere realisation of a private/capital asset but an adventure or concern in the nature of trade.

Having given consideration to the facts of your case, we are of the view that there are sufficient indicators to determine that your activities amount to a carrying on of an enterprise of property development for the purposes of section 9-20 of the GST Act.

Are you required to be registered for the goods and services tax (GST)?

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act.

Section 23-5 of the GST Act provides that you are required to be registered for GST if:

• you are carrying on an enterprise, and

• your GST turnover meets the registration turnover threshold.

You are carrying on an enterprise of property development. Hence, you satisfy the condition at paragraph 23-5(a) of the GST Act.

In accordance with paragraph 23-15(1)(a) of the GST Act, the applicable registration turnover threshold is currently $75,000.

In accordance with subsection 188-10(1) of the GST Act, your GST turnover will meet the registration turnover threshold if:

• your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

• your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the value of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month (in accordance with subsection 188-15(1) of the GST Act).

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months (in accordance with subsection 188-20(1) of the GST Act.

In your case, with the sale of unit your GST turnover (projected GST turnover) will meet the GST turnover threshold. Hence, you will be satisfying the requirement of paragraph 23-5(b) of the GST Act.

Accordingly, you will meet both the requirements of section 23-5 of the GST Act; therefore you will be required to be registered for GST.

Are you liable to pay GST on the sale of the unit you are constructing?

Under section 9-40 of the GST Act, you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act states that you make a taxable supply if:

• you make the supply for consideration

• the supply is made in the course or furtherance of an enterprise

• the supply is connected with Australia

• you are registered or required to be registered for GST

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

For a supply to be a taxable supply all of the requirements of section 9-5 of the GST Act must be satisfied.

Based on the facts of your case, the supply of the unit will be for consideration and it will be connected with Australia as the property is in Australia. We have determined that your activities amount to a carrying on of an enterprise and that you are required to be registered for GST. As such, all the above elements of section 9-5 of the GST Act will be satisfied.

As the sale of the unit will satisfy the above mentioned requirements, next we need to consider whether the supply is GST-free or input taxed.

In your case, there are no provisions in the GST Act that would make the supply of your unit GST-free. What remained to be considered is whether the supply is input taxed.

Whether GST is payable on the sale of real property will depend on many circumstances. Subject to two exceptions (being commercial residential premises and new residential premises) the sale by registered entities of residential premises such as houses and units is input taxed. Under subsection 40-65(1) of the GST Act, the supply of residential premises is input taxed only to the extent that the premises are to be used predominantly for residential accommodation.

However, under paragraph 40-65(2)(b) of the GST Act the sale of residential premises are not input taxed to the extent that such residential premises are new residential premises. The sale of new residential premises (whether it is a house or a unit) by a registered entity in the course of an enterprise is a taxable supply.

The meaning of new residential premises is provided in section 40-75 of the GST Act. Under paragraph 40-75(1)(c) of the GST Act, 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. In these cases the premises are considered to be new residential premises for a period of at least 5 years since the premises were last built, replacing the demolished premises.

Goods and Services Tax Ruling GSTR 200/3 (GSTR 2003/3) discusses 'when is a sale of real property a sale of new residential premises? At paragraphs 84 to 87, GSTR 2003/3 discusses the GST implications of new residential premises that have been built to replace demolished premises on the same land.

As explained above, the sale of your new residential unit cannot be an input taxed supply for the purposes of the GST Act.

As the sale of unit will satisfy all the requirements of section 9-5 of the GST Act it will be a taxable supply for the purposes of the GST Act.

Accordingly, you will be liable to pay GST on the sale of the unit.

Can you apply the margin scheme to the sale of this unit?

Under section 75-5 of the GST Act, you can apply the margin scheme to the property you sell where you and the recipient agree in writing, on or before the supply, that the sale is made under the margin scheme. Further the supply should not be ineligible for the margin scheme under any of the circumstances given in subsection 75-5(3) of the GST Act.

In this case, you are selling a subdivided part of a property you acquired before 1 July 2000 with improvements made after the acquisition. Provided you enter into a written agreement with the purchaser, at or before the supply of the property that the sale is made under the margin scheme, you may apply the margin scheme to calculate your GST liability on that sale.

Will the sale of the other two units be subjected to GST if they are leased for residential occupancy five years before they are sold?

Under paragraph 40-75(1)(c) of the GST Act, new residential premises include residential premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraph 89 of GSTR 2003/3 states:

Residential premises are not new residential premises if the premises have only been used for making input taxed supplies of residential rental under paragraph 40-35(1)(a) for the period of at least 5 years since:

• ……;

• …..; or

• the premises were last built, where the premises have been built, or contain a building that has been built, to replace demolished premises on the same land.

If you lease the two units for five years or more after they are built, then, under the GST Act, they cease to be "new residential" premises. The sale of residential premises which are not new, and are used predominantly for residential accommodation, are input taxed under subsection 40-65(1) of the GST Act.

Therefore, if you sell the two new units as residential premises after leasing them for five years or more, the sale will not attract GST.