Edited version of your written advice

Authorisation Number: 1012959253944

Date of advice: 11 February 2016

Ruling

Subject: Goods and services tax and enterprise: supply of new residential premises.

Question

Is the sale of the new residential premises by you to third parties a taxable supply?

Answer

Yes, your sale of the new residential premises will be a taxable supply.

Relevant facts and circumstances

You have never been involved in property development.

You are registered for GST in connection with a business unrelated to property development.

You acquired a property (the property) and there is a free standing residence on the land which has been leased pursuant to a residential tenancy to an arm's length tenant since its acquisition through to the present day.

You intended to renovate the property and make the property your main residence.

The zoning of the property when you acquired it was 'residential' and you considered an extensive renovation, or demolition and replacement with a single level home, would be possible.

You were made aware that there was a proposed new State Government Development Plan and the property is now located in a different zone. You now contemplate to build a block of units on the property. It was anticipated that the property would be community titled and that you would retain an apartment as your main residence.

You have progressed a development which involves the construction of a multi storey residential apartment building. You expect your development application will be approved.

The expected development cost will be around $X million (GST inclusive) which is proposed to be funded as to $Y from existing savings and the balance by Bank borrowing. Upon completion of construction your intention is to apply for the issue of Z titles in your name.

You will retain one apartment for your own use as your main residence.

You plan to sell P number of units, and total proceeds of sale is $Q million. You plan to obtain finance of $R million dollars to fund the project. The building cost including architect fees, consultant engineers fees, development fees and council costs is estimated to be $S.

An estimated profit is $T.

You propose to retain the following parties for the purpose of conducting the project: architects, lawyers, tax advisors, builder and real estate agents.

You conduct your own business on a full-time basis and do not anticipate conducting any of the 'hands on' work connected with the conduct of the project.

In any event, you have no experience or expertise in property development not having ever conducted any property development project previously.

You are not registered for GST in connection with the ownership and development of the Property;

You have not claimed, and do not intend to claim, input tax credits for GST charged to you by service providers in connection with the project;

You do not intend to claim a tax deduction for interest expenses in connection with borrowings to fund the project.

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 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 195-1

Reasons for decision

NOTE:

Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Summary

We consider you will be going above and beyond what is required to merely realise the value of the property to best advantage. In particular:

• You would be able to sell the property for a substantial profit without developing it.

• You will be borrowing a significant amount of money to develop the property.

• The development will be a significant enhancement of the property.

• You have approached the development in a businesslike way. You will seek expert advice from an architect, a tax advisor, a town planner, a builder, and lawyers

• You intend to make a significant profit from the transaction.

Hence, we consider that your property development activity would constitute an adventure or concern in the nature of trade.

Your supply of the new residential premises to third parties is 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), 9-5(c) and 9-5(d) of the GST Act as the supply that you make are for consideration, the new residential premises are located in Australia, and you are registered for GST.

Therefore, we need to consider whether your sale of the new residential premises is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) 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 residential property. We need to discuss whether your proposed activities on the property will constitute an enterprise of property development.

Paragraph 9-20(1)(b) 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 property. 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 property, not the beginning of an ongoing property development business.

As your activities of development and sale of new residential premises is an isolated transaction, it is necessary to determine whether the development and sale of the new residential premises 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 property and leased it until the present.

You have approached the transaction in a businesslike way. You have sought expert advice from an architect, a financial planner, a builder, a town planner, and lawyers to undertake the demolishment of the existing buildings, the subdivision the property into separate titles, and the construction of new residential units. You intend to sell X new residential premises and retain a unit for main residence once construction of the units is completed.

You have estimated that you will make a substantial profit from the transaction.

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, and sell the new residential units.

We consider that your development of the property and the sale of the new residential premises are 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 property is held. Your original purpose of using the property for your leasing enterprise has changed to that of subdividing and constructing the new units for sale.

• You have a coherent plan for subdivision and development of the property and later the sale of the new units. You intend to enter into contract arrangements with builder/architect/planner professionals who will subdivide the property and construct a prestige multi storey residential apartment building. The professionals sought approval from council for the subdivision and you plan to obtain finance from the bank. All planning and construction and finishing work will be completed by professionals and trade contractors. The new residential premises for sale are new and unoccupied. You intend to sell X new units, and the total sale price will be approximately $Y million dollars.

• You plan to borrow about $Z million dollars to finance the subdivision, construction and/or other costs.

• The development of the property is beyond that necessary for council approval of the property, and the development cost of the new residential premises is substantial. It will be a significant enhancement of the property. You intend to make a significant profit from the transaction.

• You will construct a multi storey residential apartment building on the property.

• You would be able to sell the property for a substantial profit without developing it.

We consider that the project has the characteristics of a commercial transaction. You will be carrying out an isolated commercial transaction with a view to a profit. Hence the activities undertaken by you in the development of the new residential premises for sale 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.

Addressing in order the contentions on page 6 of your ruling request:

1) You state you have never been a property developer before. However, you are approaching this scheme in a businesslike way in the same way as a commercial transaction.

2) You did not acquire the property for resale at a profit. However, you now decide to commit the property into a profit making scheme.

3) Your purpose in carrying out this scheme is to enable you to retain an apartment as your main residence. Notwithstanding this purpose, given the nature and scale of what you will be doing, you will be carrying out a profit making scheme (whether you intend it to be or not).

4) You advise you never intended to build a multi-storey apartment block but Council rules now oblige you to. However, you have an available alternative, being to sell the property without doing anything to it (which would be a mere realisation). As another alternative, you could sell the land to a developer on the condition that you retain an apartment in the complex.

5) You state you are merely realising your asset to best advantage. In constructing a multi-storey building on the property, you are doing more than merely realising your asset. You are going well beyond a mere realisation and significantly improving the property.

We now address the cases you have cited in support of your contention that your activities on the property is not in connection with a profit making undertaking.

McCorkell v FCT 98 ATC 2199

In that case, the taxpayer was 81 years old and had no family to continue his orchard business. He therefore subdivided his 15 hectare orchard into 37 allotments. The taxpayer did minimal work himself. The AAT held he was not carrying on a business of property development.

The AAT said:

• 'In addition a growing number of residential properties were abutting his land with growing concerns and complaints about spraying the orchard which was, in some instances, within 15 metres of homes.' [paragraph 4]

• 'Mr McCorkell had initially contemplated selling the land as one parcel but had not been able to attract a satisfactory offer.' [paragraph 13]

• 'It may well have been that, if Mr McCorkell had chosen an option involving partners or substantial borrowings, there may have been some indicia of business activities. But he did not.' [paragraph 13]

This case is distinguishable from yours on the basis that McCorkell:

• tried to sell his land but was unable to attract a satisfactory offer,

• may have been forced to sell anyway if complaints about spraying had limited his ability to carry on business as an orchardist, and

• did not borrow substantial money to implement his plan.

Casimaty v FCT 97 ATC 5135

The Federal Court found (at 5138):

… at no time did he [Casimaty] do any more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up levy banks on creeklines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities.

The case is distinguishable from yours on the basis that Casimaty did minimal work, or as little as possible to ensure sale, whereas in your case you are taking significant additional steps to develop the property to substantially increase its value.

Statham & Anor v FCT 89 ATC 4070

The Full Federal Court stated (at 4076) 'the owners were at first content to sell the land as one parcel, but were unable to do so'. In effect, the owners were 'forced' to subdivide as they couldn't sell the land as one parcel. Also, no money was borrowed (although a bank guarantee was provided).

Your case is distinguishable from Statham because you would be able to sell the property without any development at all and still make a significant profit. You are also borrowing a significant amount to implement your plan.

As Mason J commented in relation to the factual scenario in Whitfords Beach: 'All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset.'

There will be development and improvement of the property to a marked degree such that it would not be possible to characterise what you intend doing as the mere realisation of your asset.

In summary, your supply of the new residential premises satisfies paragraphs 9-5(a) to (d) of the GST Act. However, your supply 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.

Conclusion:

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 Australian Taxation Office (ATO).

Additional Information - Margin scheme

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which are available on our website at www.ato.gov.au

Additional Information - Claiming input tax credits

Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

• you acquire anything solely or partly for a creditable purpose; and

• the supply of the thing to you is a taxable supply; and

• you provide, or are liable to provide, consideration for the supply; and

• you are registered, or required to be registered.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

• the acquisition relates to making supplies that would be input taxed; or

• the acquisition is of a private or domestic nature.

Therefore, you are entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the new residential premises.

Please note that you are not entitled to claim ITCs on the GST included in the cost incurred for the top apartment if you intend to use it for your main residence.

All public rulings and publications are available on the ATO website at www.ato.gov.au