Edited version of your written advice

Authorisation Number: 1012887781451

Date of advice: 1 October 2015

Ruling

Subject: GST and the sale of new property

Question

Is the sale of a new property located in Australia (the property) by A, as co-owner of the property, subject to goods and services tax (GST)?

Answer

Yes, the sale of the new property is subject to GST.

Relevant facts and circumstances

A (you) is not registered for GST. You and B are co-owners of a property located in Australia (the property).

You advise us of the following arrangements in relation to the property. Initially, you planned to buy the property (which had an old house), and was going to substantially renovate it for your parents to retire and live in. However, as the renovations costs were more than you initially expected, you decided to demolish the old house and build a new house on the property for your parents.

You state that as you were short of cash flow due to starting another business, you asked B to finance X% of this project in exchange for X% of the ownership of the property. Your intention was to borrow to buy out (pay back) B when the new house was completed and you had cash flow from your other business.

Accordingly, you and B purchased the property in 201X for $XXXX under the names of both 'A' and 'B' as co-owners (as tenants in common). The transfer of land document confirms that you have a X% share, and B has a X% share.

A letter indicates that any transactions on the accounts in the combined names of both you and B, must be approved by both parties. The savings account consists of a deposit of $XX from B and $XX from you (B's amount is more than A). There also appears to be a mortgage loan taken out in both names.

You advise that B is your close friend. There is no relationship between your parents and B.

The facts above indicate that your decision to purchase the property and build a new house (the development of the property) occurred before the actual purchase of the property by you and B, as B became a co-owner when it was first acquired.

You state the project completion period was between 201X and ended between two to three years later.

A letter dated (dated several months after the acquisition) to you and B from a real estate agent for 'marketing expenses' of $X for advertising on 201X was provided, indicating that the property may have been made available for sale prior to developing the new property.

In relation to the property being made available for sale in 201X, you explain that as the property required more funding, and at this stage you owned a business which required further capital injections in order to expand, you did not see how you would be able to finance both.

The development of the property continued.

A new home contract with a contract price for $XX is given which is signed by the builder dated 201X (approximately two years after acquisition). You advise that the plans and permits would have been done prior to building and construction commencing.

You informed that you were fully responsible for the development of the property, and that B was to provide the portion of the funding requirements.

You advise that due to family circumstances (that is, your parent passed away soon after the project completion date) you decided to sell the new property soon after completion. You provided a copy of a death certificate.

Once development of the property was completed at the end of 201X (approximately three to four years after acquisition), the newly developed property was never fully transferred to you. The new property was also not made available for rent after it was completed.

The new property was advertised and then sold at an auction within three months after the new house was completed for a profit.

B also sold the property as one of the co-owners. Profits were accounted for (shared) on the sale of the new property between the two co-owners based on the ownership percentage.

A tax invoice for the commission on the sale of the new property was issued to the co-owners with expected settlement on 201X. The statement of adjustments indicates that the property was sold by both co-owners.

Details and photos of the new property are shown in an advertisement on XX.com for the sale of the property, which states:

"Brand new X bedroom[s] plus …"

You stated that you intended to purchase the property and develop a 'new property' instead of renovating the existing house due to higher modification costs to include special access and features due to your parents' age/health. Some of the features which you considered were: rails in the bathrooms, separate entrance to the back yard, extra points in the bedroom and other areas of the property, modifications to sinks, other safety features, and a wider front door.

Photos (including floor plan) of the new property (that was eventually built and sold) as shown on the advertisement do not appear to display many of these special features.

You requested a ruling on the sale of the new property and have provided the information for this ruling. B is not an applicant of this ruling. You informed that B is unavailable to provide information, and documentation to support your arrangement with him cannot be provided at this time. However, you informed that if B had incorrectly made any income tax claims in relation to the purchase, development and sale of the property, that they can make the amendments to their returns.

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, Section 188-25

Reasons for decision

A supply is taxable where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. 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 the indirect tax zone; 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 defined term under section 195-1 of the GST Act)

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership.

You (either as an individual or in your capacity as a partner of the partnership with B) will be liable for GST if all the requirements of section 9-5 of the GST Act are satisfied.

The facts indicate that you have satisfied the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act because the sale of the property is made for consideration and the property is located in Australia.

What remains to be determined is whether the sale of the new residential property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act); and whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an 'enterprise' in section 9-20 of the GST Act includes (amongst other things) 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.

The meaning of 'enterprise' is considered in Miscellaneous Taxation Ruling MT 2006/1 and Goods and Services Tax Determination GSTD 2006/6. The principles outlined in these ruling and determination are applied to your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

In the form of an adventure or concern in the nature of trade

An adventure or concern in the nature of trade includes isolated transactions with a commercial flavour. Such transactions are of a revenue nature (paragraph 13 of GSTD 2006/6).

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. The issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade (paragraph 265 of MT 2006/1). These factors include whether:

• 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 for council approval for the subdivision, and

• buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 also provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade.

However, paragraph 270 of MT 2006/1 states:

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade

Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision (or development), it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

When applying the principles above with the facts provided, there are several events which occurred for which we consider that the development and sale of the new property is in the course of an enterprise and more than the mere realisation of a capital asset. Significant factors that are relevant which lead to this conclusion are as follows:

• There is a change of purpose for which the property is held - although you indicated that you initially intended to purchase the property to build for your parents (with B contributing finance towards your purpose, and is an unrelated party), the character of this asset changed from private to one of trade. B became involved with the development project in 201X (and has a XX% share in the property), the property was made available for sale several months after it was purchased (but was not sold). The co-owners proceeded with the development of the new house, until it was finished at the end of 201X, and soon after that the co-owners sold the brand new property in 201X. The activities have a commercial flavour, and the character of the property at time of expected supply is not of a capital asset.

• B is a co-owner of the property and is unrelated to you or your parents. Profits were accounted for (shared) on the sale of the new property between both co-owners based on the ownership percentage. Where land is sold that was purchased with the intention to resell at a profit, we consider that these activities to be an enterprise, whether or not the land was sold as it was when it was purchased or subdivided (developed) before sale.

• Substantial funds were borrowed for the acquisition of the property and to finance the development of the new property - a letter dated 201X indicates that the initial savings account consists of a deposit of $XX from B, and $XX from you (amount is less than B). A 'mortgage loan' was also taken out in both names in relation to this property.

• You are unable to confirm that both co-owners (in particular B) did not treat the property as a business asset, or that the co-owners did not claim interests on borrowings or other development costs. You state that if B made an error, that he can make amendments to their returns.

• There was a coherent plan for the purchase, development and sale of the property by both co-owners.

• The level of development on the land is beyond that necessary for council approval - the old house was demolished, and a new house was built on the land, which is beyond what is necessary for development and sale of land.

• Buildings have been erected on the land - a new house was built on the land.

On the basis of these facts and taking into consideration all the factors, we consider that there is a significant commercial component in your property development activities, and the extent of the activities is not merely the realisation of a capital asset. These activities indicate a commercial approach taken by the co-owners and there is a clear intention of profit making. Accordingly, the activities undertaken by you in relation to the property development have the appearance and characteristics of activities that would constitute an adventure or concern in the nature of trade. It has the characteristics of a business deal.

Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act. Accordingly, the sale of the new property is in the course of a property development enterprise, and paragraph 9-5(b) of the GST Act is satisfied.

Are you required to be registered for GST?

As you (as an individual or partner in a partnership) are not registered for GST, it needs to be established whether you are required to be registered for GST in relation to the sale of the new property.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b) supplies that are not for consideration.

c) supplies that are not made in connection with an enterprise that you carry on.

d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your property development activities constitute the carrying on of an enterprise. At the time of the sale of the new property, the nature of your asset had changed to a revenue asset. The sale of the new property does not constitute a disposal of a capital asset. You are deriving income from the disposal of a revenue asset even if the disposal is part of a one-off transaction.

Therefore, section 188-25 of the GST Act is not applicable. The sale of the new property is not a transfer of a capital asset and is not excluded from the calculation of your projected GST turnover. Hence, the value of this sale should be included in the calculation of the current and projected GST turnovers.

You also stated that you are carrying on another business, you will need to assess whether the income from this business is included in the calculation of your (or the partnership's) GST turnover.

Accordingly, you should be registered for GST because your projected GST turnover from the sale of the new property would be above the GST registration threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

Sale of new residential premises

The sale of the new residential property is not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

'New residential premises' are defined in subsection 40-75(1) of the GST Act to mean premises that:

a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

b) have been created through substantial renovation of a building, or

c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the new property is residential premises to be used predominantly for residential accommodation. The new property was new and unoccupied when sold. The new property is neither used before 2 December 1998, nor rented for five years. Therefore, the property is new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of this new property does not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

In summary, the development and sale of the new property satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply.