Edited version of your written advice

Authorisation Number: 1013037908045

Date of advice: 28 July 2016

Ruling

Subject: GST and enterprise: supply of new residential premises

Questions

1. Were you carrying on an enterprise of property development when you built and sold the new units (units) on the original property?

2. Is your sale of the units to third parties a taxable supply?

Answers

1. Yes, you were carrying on an enterprise of property development when you built and sold the units on the original property.

2. Yes, your sale of the units to third parties is a taxable supply.

Relevant facts and circumstances

You are registered for GST. You bought the original property in XXXX at $A via a loan from a bank.

You borrowed $B from the bank to finance the demolishment of the old residential building on the original property, subdivision of the original property into separate titles and built the units. You stated to the Bank your intention for the loan is to build and sell units.

You entered into a building contract for the above building project and spent $C. Some units were sold off the plan, and others were sold after construction finished. None of the units were advertised for lease, nor were they leased. You stated you intended to lease when you bought the original property but during construction of the units, you received too good offers hence you sold the units.

You already remitted the GST payable (using margin scheme) to the ATO and claimed GST paid in the relevant BAS.

You had experience in a similar building project before but in another legal structure, and you also own a property which is now on lease.

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 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

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 supplies that you make are for consideration, and the units are located in Australia; and you are registered for GST.

Therefore, we need to consider whether your sale of the units 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.

We need to discuss whether your building and sale of X new units on the original property 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 bought the original property in XXXX and borrowed money and entered into a contract with a builder to demolish the existing residence and erect new units on the original property. You are registered for GST.

You have never been involved in property development before and that your activities represent a one off transaction on the original 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 original property, not the beginning of an ongoing property development business.

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

You meet a lot of the factors listed in paragraph 265 of MT 2006/1 as follows…………

McCurry v. FCT (1998) 39 ATR 121 (McCurry)

This case is relevant in determining whether the taxpayer's activities constituted a profit-making undertaking or scheme which was a business or commercial dealing.

Broadly, McCurry involved two brothers acquiring land in rural South Australia and constructing three townhouses on the land financed from borrowings and their own funds. Although the taxpayers argued that the reasons for their sale was due to financial difficulties, a further affidavit supplied contradicted this by their admittance that one of their purposes was acquisition and sale for a profit and they considered it to be a good time to sell.

The court in McCurry concluded that the taxpayers had entered into a profit-making undertaking or scheme and the profits were assessable under subsection 25(1) of the Income Tax Assessment Act (ITAA 1936), the predecessor provision of section 6-5 of the ITAA 1997. Davies J remarking in the decision (at ATC 4489):

If a property is acquired in the course of a business or commercial dealing with a view to obtaining a profit from its development and sale, that venture is not regarded as an investment and the profit derived therefrom is income for the purpose of sec 25(1). Here, the taxpayers entered into a commercial dealing.

This is a summary of the judgment in McCurry:

• It was the main or dominant purpose of the scheme which was important. It was not inconsistent with there being a profit-making undertaking that two possible ends were in mind, one of deriving profit on sale and the other of deriving regular income. However, of the two factors, the possibility of reselling the developed property at a profit was the dominant factor.

• It does not matter that the taxpayers had in mind these two alternatives provided that the possibility of making a profit by the development of the land and its resale was the predominant factor which actuated the transaction.

• The factors from which this inference was drawn were: most of the moneys used were borrowed moneys; Units were first put on the market shortly prior to their completion, the intention being to realise a profit which had been foreseen; and no step was taken to secure tenants for the property.

• The taxpayers' scheme was not totally abandoned and the Units were not irrevocably committed to another activity. Profit-making by the sale of the Units always remained an option for the taxpayers, notwithstanding that, for some period when it was convenient to do so, the Units were used for another purpose.

The first factor in McCurry is that most of the moneys were borrowed moneys and `To transform capital, you must at least have capital to begin with'. The project did not represent an investment of surplus funds and it was likely that, at some stage, the units would have to be sold to repay to the Bank the moneys borrowed.

This is similar to your circumstances in that your project is highly geared.

Secondly, in McCurry, the units were first put on the market shortly prior to their completion, the intention being to realise the profit which had been foreseen. And the units were put back on the market only 12 months later and were sold.

This is similar to circumstances in your case. Some units were sold off the plan. All units in your case are new and never been put to a purpose that indicates an investment or private or personal purpose.

Thirdly, in McCurry no step whatever was taken to secure tenants for the property and no inquiry as to letting the units was made. In McCurry, Bradley McCurry conceded that no inquiries were made to ascertain the amount that could reasonably be expected to be received from renting out the units. He conceded also that unit 1 always remained unoccupied and was never rented out.

In your case, there is no evidence that the units have been put on the market to let.

Our conclusion is that your development and sale of the units is in the course of an enterprise of property development and more than the mere realisation of a capital asset in a leasing enterprise.

We consider that your property development activities have the characteristics of a commercial transaction. You are 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 units is made in the course of carrying on an enterprise of property development for GST purposes (paragraph 9-5(b) of the GST Act).

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 units is not GST-free under any provisions of the GST Act or any other legislation.

In relation to input-taxed supply, 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 units are residential premises to be used predominantly for residential accommodation. They were put on the market for sale and would be new and unoccupied when sold. They are neither used before 2 December 1998, nor rented for five years. On the basis of these facts, they are new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of the units 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 units satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply.

We note that you already remitted the GST payable (using margin scheme) to the ATO and claimed GST paid in the relevant BAS.