Edited version of your written advice

Authorisation Number: 1012782514289

Ruling

Subject: GST on sale of property

Question

Will GST be payable on the sale of the properties by the taxpayer?

Answer

No. GST will not be payable on the sale of the properties by the taxpayer.

Relevant facts and circumstances

The taxpayer owned some properties.

Some of the properties were inherited by the taxpayer and have been held since before the year 2000, and there has been no change of ownership since this time.

One of the properties was purchased by the taxpayer and their spouse as joint tenants. On the death of the spouse, this interest in property passed to the taxpayer as surviving joint tenant.

The taxpayer is not personally registered for GST.

One of the properties had a residence on it when it was purchased, which has since been demolished. Following the demolition of the original residence, another residence was constructed on the property. There have been no significant renovations in the last 5 years. The residence is used by the taxpayer as their primary residence. There are also sheds located on the property, with these sheds being used in the business being carried on by a related entity (Entity A).

The taxpayer makes all of the properties (excluding the land immediately attached to the taxpayer's residence), available to Entity A for use in its enterprise. Additionally, all other properties owned by the taxpayer (that are not the subject of sale) are also made available by the taxpayer to Entity A to carry on its enterprise.

All of these other properties were (as some of these other properties have since been sold), or remain, used primarily in Entity A's business. The taxpayer and spouse did not actively trade properties, with all being acquired for use in their farming business (capital asset/investment). The taxpayer (following the death of spouse) is the sole owner of these other property interests. These other properties are used for farming activities by the Entity A.

There is no formal lease between the taxpayer and Entity A for the use of the properties in the enterprise. While there is no formal lease payments made to the taxpayer for the use of the properties, Entity A does pay all the rates and taxes and all associated holding costs in relation to the properties. The properties have never been recorded in the books of Entity A (not considered an asset of the Entity A).

The total rates and taxes and associated holding costs in relation to the properties are less than $75,000. It is believed that the projected rates and taxes and associated holding costs for the next 12 months would be less than $75,000.

Entity A is registered for GST. There have been no formal changes to the structure of Entity A since its registration.

The taxpayer is not involved in any other enterprise and has not been involved in any property development in the past and has no intention to carry on any enterprise in the future.

The taxpayer is in the process of obtaining approval from the relevant council to re-zone the properties.

It was and remains the taxpayers' intention not to do anything more than was necessary to secure the rezoning of the land. There is and was no intention to develop the land.

Once the offer is accepted to rezone the properties, contracts for the sale of the land will be established.

The costs associated with the application to have the property rezoned from rural to urban have not been claimed as a tax deduction by the taxpayer.

The taxpayer retains the original titles, and these have not been altered as a result of the rezoning process. The taxpayer will enter into their own contract (with a buyer) for the sale of these Lots in due course. The rezoning did not result in mixing of the taxpayers land with that of any other entity.

The properties have not been altered in any way as a result of the rezoning activity or positioning /advertising the property for sale. The taxpayer continues to make these properties available to Entity A (excluding the portion of one of the lots related to the taxpayer's primary residence - which was continued to be used as the primary residence).

The application for the rezoning of the relevant lots does not refer to Entity A (the land is not Entity A's asset).

Neither the taxpayer (nor Entity A) have borrowed (or used the properties as security) to fund the rezoning application costs (or costs associated with advertising the lots for sale). Further, the properties are not used as security for any business loans.

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 Subsection 9-20(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 23-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

GST is payable on taxable supplies.

The sale of the properties will be a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act 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.

(*denotes a term defined in the GST Act)

Based on the information provided, the supply of the properties will be 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.

The remaining issue to be determined are whether the sale of the properties will be made in the course or furtherance of an enterprise that the taxpayer carried on and whether the taxpayer is required to be registered for GST  

Enterprise:

The term 'enterprise' is explained in section 9-20 of the GST Act.

According to paragraph 9-20(1)(c) of the GST Act, an 'enterprise' is 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.

Paragraph 7 of Goods and Services Tax Determination GSTD 2000/9: Goods and services tax: if you let out residential premises do you need to get an ABN for PAYG purposes or register for GST? explains: 

7. The letting of a property is an activity in the nature of a lease, licence or other grant of an interest in property. If it is done on a regular and continuous basis, the activity will meet the definition of an enterprise.

The meaning of 'regular or continuous' is considered in, Miscellaneous Tax 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. Paragraph 306 of MT 2006/1 states:

306. To be an enterprise the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

The supply (lease) of the properties to Entity A, would be considered an activity that falls within the meaning of "enterprise", for GST purposes.

As the activity of leasing the taxpayer's properties amounted to the carrying on of an enterprise, the proposed sale of these properties is therefore considered to be part of that leasing enterprise for the purposes of the GST Act, and is also considered to be made in the furtherance of that enterprise. Therefore paragraph 9-5(b) of the GST Act is satisfied.

However, the sale of the property that is part of the Taxpayer's residence is not done in the course of an enterprise.

Registration requirement:

We will now consider whether the taxpayer is required to be registered for GST with regards to the leasing of the properties.

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *annual turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

Enterprise

As mentioned earlier, the taxpayer is carrying on a leasing enterprise. Therefore, paragraph 23-5(a) of the GST Act is satisfied

Registration turnover threshold

Sub-section 23-15(1) of the GST Act states:

Your registration turnover threshold (unless you are a non-profit body) is:

(a) $75,000; or

(b) such higher amount as the regulations specify.

Therefore, provided the taxpayer has a turnover of less than $75,000, the taxpayer will not be required to register for GST.

We agree with the contention that the consideration received by the taxpayer for the "leasing enterprise" (under the informal arrangement with Entity A is less than the GST turnover threshold. However, we need to consider if the sale of the properties is to be included in the calculation of the taxpayer's annual turnover.

Section 188-25 of the GST Act states:

In working out your *projected GST turnover, disregard:

(a) any supply made or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) Ceasing to carry on a *enterprise; or

(ii) Substantially and permanently reducing the size or scale of an enterprise

The meaning of capital assets is discussed in Goods and Services Tax Ruling GSTR 2001/7: Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover. Paragraph 31 of GSTR 2001/7 provides:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up '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 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 taxpayer's activity of selling the properties is not part of a trade of buying, selling and developing land. The character of the taxpayer's property has not changed from an investment to a trading asset. As such, it is accepted that the property is a capital asset and that section 188-25 of the GST Act applies to exclude the value of the supply of the properties from the calculation of the projected annual turnover. As the projected annual turnover is less than $75,000, the taxpayer will have an annual turnover that does not meet the registration turnover threshold. Therefore paragraph 23-5(b) of the GST Act is not met and as such the taxpayer is not required to be registered for GST. Subsequently the taxpayer does not meet paragraph 9-5 (d) of the GST Act.

As the taxpayer does not meet all the requirements of section 9-5 of the GST Act, the sale of the properties are not considered taxable supplies and therefore GST will not be payable on the sale of the properties.