Edited version of your written advice

Authorisation Number: 1012921723348

Date of advice: 15 December 2015

Ruling

Subject: GST and enterprise: supply of new residential premises.

Question

Is the sale of the newly constructed residential units (new units) by you to third parties a taxable supply?

Answer

Yes, you will make a taxable supply when you supply the new residential premises.

Relevant facts and circumstances

You do not have an ABN. You have never been involved in property development.

Some years ago, you bought the property (the Land). You have been carrying on an enterprise of leasing residential accommodation. The Land contains a house and a bungalow, which have both been rented out until the present. Due to a change in zoning, the Land can be developed further into X units.

You propose to enter into a contract/agreement with an architect firm (Architect) to engage engineers and building surveyors; and to supervise a professional builder to undertake the Building project. You will demolish the existing buildings, subdivide the Land and build X units for residential accommodation. The Architect will commission a builder and superv the builder on site.

The financing, development and construction costs to complete the Project are arranged by you through the Financier. The project may take Y months for construction. The Financier requires you to sell off-the-plan Z units (new units) to reduce the loan. You intend to lease the remainder units for residential accommodation.

You will sell the new units through a real estate agent. The sale price per new unit is expected to be about $A.

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 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(d)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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 subsection 23-15

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(a)

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

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

Reasons for decision

Summary

You plan to enter into contracts/agreements with the Architect and the Financier for the purpose of carrying on property development activities for your benefit. The gain received by you is to have the Architect and the Financier carrying out the development of the Land and financing the development costs. The gains represent the acquisitions costs which would be incurred by you when you acquire the remainder units for your purpose of carrying on your leasing enterprise. Hence, we consider that your property development activity would constitute an adventure or concern in the nature of trade.

Your supplies of the new units to third parties are made in the course of carrying on an enterprise of property development for GST purposes.

You make taxable supplies of new residential premises and are required to remit 1/11th of the sale prices of the new units to the Australian Taxation Office (ATO)

Detailed reasoning

A supply will be a taxable supply 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 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 defined term under section 195-1 of the GST Act)

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the new units are located in Australia respectively.

Therefore, we need to consider:

• whether your sale of the new units 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 of property building development?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

• in the form of a business

• in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

You have been carrying on an enterprise of leasing. We need to discuss whether your proposed activities on the Land will constitute an enterprise of property development.

Paragraph 9-20(1)(b) of the GST Act was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

…But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making:

Edwards (Inspector of Taxes) v Barnstow [1956] AC 14;

Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199;

Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344-345 per Mason CJ, Brennan and Gaudron JJ; at 351-351 per Dawson J; and at 360 per McHugh J.

In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

21. The word "enterprise" is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerproperty, was considered by the High Court in Thiel v Federal Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344:

"... an activity, as well as a framework within which such activities are engaged in, may constitute an 'enterprise' for the purposes of the agreement."

22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade:
Edwards v Bairstow (1956) AC 1;
Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135; Thiel at 352 per Dawson J; at 360 per McHugh

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

The principles outlined in the ruling and the determination, have been applied in 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.

You advised that you have never been involved in property development before and that your activities represent a one-off transaction on the Land. In the absence of other facts, it is considered that your activities are not carried out in the form of a business if these activities are part of a one-off transaction on the Land and not the beginning of an ongoing property development business.

As your activities of development and sale of new units is an isolated transaction, it is necessary to determine whether the development and sale of the new units will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

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

Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that 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 listed at paragraph 265 of MT 2006/1 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. 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 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. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

From the facts provided, you purchased the Land some years ago to be used for investment purposes. The Land contains residential buildings, which have been rented out until the present. However, you intend to contract with the Architect who will engage engineers, surveyors and builders to undertake the demolishment of the existing buildings, the subdivision of the Land, and the construction of X new residential units. You intend to sell Y new units off the plan and lease the remainder units on a regular or continuous basis once construction of the units is completed.

As provided in section 9-20 of the GST Act, activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property are activities in carrying on an enterprise. Further paragraph 122 of MT 2006/1 provides that activities done by the entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

Accordingly, you were carrying on an enterprise of leasing before your intention to subdivide, build, sell the new units and rent out the remainder units.

We consider that your development of the Land and the sale of the new units in the course of an enterprise and more than the mere realisation of a capital asset because:

• There is a change in purpose for which the Land is held. Your original purpose of using the Land for your leasing enterprise has changed to that of subdividing and constructing the new units for sale and leasing out the remainder units.

• You have a coherent plan for subdivision and development of the Land and later the sale of the new units. You intend to enter into contract arrangements with the Architect who will plan to subdivide the Land and construct X new residential units. All planning and construction and finishing work will be completed by professionals and trade contractors. The new units for sale are new and unoccupied. You intend to sell the new units off the plan, and the selling price of each new unit is approximately $A.

• You will borrow funds to finance the subdivision, construction and/or other costs.

• The development of the Land for the new units is beyond that necessary for council approval of the Land, and the development cost of the new units is substantial.

• You will erect X new residential units on the Land.

Based on the facts provided, these activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new property have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise of property development as defined in section 9-20 of the GST Act, and the sale of the new units will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the new units that you have constructed.

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: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover 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 activities of developing the Land and selling the new units constitute the carrying on of an enterprise of property development. At the time of the intended sale, the nature of your assets (the new units) are not capital assets, they are revenue (trading) assets. The sale of the new units does not constitute the transfer of capital assets and paragraph 188-25(a) of the GST Act does not apply. You are deriving income from the disposal of revenue (trading) assets even if the disposal is part of a one-off transaction.

Therefore, the sale of the new units is not excluded from the calculation of your projected GST turnover. Hence, the value of the sale must be included in the calculation of your current and projected GST turnovers.

Paragraph 188-25(b) of the GST Act does not apply to you since you are still carrying on an enterprise after selling the new units, hence the consideration received from the sale of the new unit is included in the calculation of your projected GST turnover.

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

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, it is not taxable if it is GST-free or input-taxed.

GST-free and input taxed supply

The sale of the new residential units 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. This ruling is available from our website at www.ato.gov.au

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 units are residential premises to be used predominantly for residential accommodation. The new units will be put on the market for sale and would be new and unoccupied when sold. The new units are neither used before 2 December 1998, nor rented for five years. On the basis of these facts, the new units are new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of the new units will 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 units satisfy all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11^th of the sale price to the ATO.