Edited version of your written advice

Authorisation Number: 1013079003014

Date of advice: 25 August 2016

Ruling

Subject: Enterprise and GST registration

• You purchased a residential property which has been used as your main residence for a number of years.

• The property has not been recorded in your business accounts.

• You intend to retain the primary residence as your main residence.

• You entered into a building contract to have units constructed on the land which you originally intended to rent however once construction was complete you decided to sell the units.

• You registered a partnership entity for GST and claimed input tax credits for capital purchases made in connection with the development.

• The development was financed largely by funds you borrowed from a family member with the balance being financed from your own personal funds.

• You have not employed a manager, rented an office, or created letterhead in managing the development. You carried out all of the administration duties.

• All but one of the units has sold with settlement to occur prior to the end of the relevant financial year.

• You consider you registered in error as you do not satisfy the enterprise test.

Question 1

Was the partnership required to be registered for the GST in respect of the property development activities carried out in constructing and subdividing the units?

Answer

No, the partnership was not required to be registered for the GST in respect of the property development activities carried out in constructing and subdividing the units.

Detailed reasoning

GST is payable on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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 term defined in the Dictionary which starts at section 195-1 of the GST Act.

Enterprise

Subsection 9-20(1) of the GST Act states:

An enterprise is 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; or…

The Tax Office view on what constitutes an enterprise is contained in Miscellaneous Taxation Ruling 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6) provides that the principles contained in MT 2006/1 apply equally to the terms entity and enterprise as used in the GST Act and can be relied on for GST purposes.

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and adventures or concerns in the nature of trade. It provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis whereas an adventure or concern in the nature of trade may include an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. For example, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

Paragraph 244 of MT 2006/1 states:

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade.

Paragraph 252 of MT 2006/1 states that improving a property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

• Assets can be categorised as either, trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

However, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

MT 2006/1 explains that while an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty)] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From the Stratham and Casimaty cases, a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. These factors are:

• 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 to secure 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.

In addition to the factors outlined above, there may be other relevant factors that need to be considered in reaching an overall conclusion. 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.

Application to your circumstances

• Since the purchase of the residential property some years ago, the property has been your principal place of residence. You intend to retain part of the property as your principal place of residence.

• You did not purchase any additional land.

• An evaluation of the information provided suggests that you did have a cohesive plan as you consulted with the builders to ensure the best time/cost benefits for the development, you engaged contractors to carry out any necessary works not undertaken by the builders or yourselves and you engaged a real estate agent in respect of the selling of the units.

• You advised that you have not treated the property as a business asset at any time since its purchase some years ago. However, before signing the construction contract you registered for the GST and claimed input tax credits for capital purchases made in connection with the development.

• The development undertaken on the land, that is, constructing units, exceeds the minimum amount necessary for Council approval to subdivide the land for sale. We consider the subdivision and sale of the land may constitute the extent of activities necessary to qualify as the mere realisation of a capital asset.

• You financed the development largely with funds borrowed from a family member. The balance of funding for the development was provided from your personal funds. Interest on the borrowed funds was to be paid in one lump sum following the sale of the units.

• You advised that no interest payments have been made or claimed as a business expense.

• You have not employed a manager, rented an office, or created letterhead in managing the development. You carried out all of the administration duties.

• You advised that originally it was your intention to rent the units however following construction of the units you changed your intention and decided to sell the units.

• You engaged a real estate agent in the selling of the units.

Was the partnership carrying on an enterprise?

You carried on the activities with a reasonable expectation of making a profit or gain. By having units constructed on the land you improved the property beyond just preparing the land for sale. You brought the property into a more marketable condition which enabled you to gain a better price and enhance the revenue from the sales.

We consider the financing arrangements for the development are consistent with those used when selling a trading asset, that is, you borrowed funding (albeit from a family member) and the interest was to be paid in a lump sum on settlement of the sale of the units.

Your intention was to use the units as income producing assets however following construction of the units you changed your intention and decided to sell the units.

After a consideration of the factors listed in paragraph 265 of MT 2006/1, we have determined that, the activities were undertaken in the commencement of your intended enterprise of leasing residential premises.

Registration Turnover Threshold

Section 23-5 of the GST Act provides that you are required to be registered for GST if you:

(a) are carrying on an enterprise; and

(b) you meet the registration turnover threshold.

We have determined that the property development activities undertaken by the partnership did constitute the carrying on of an enterprise for GST purposes. Hence, you satisfy the requirement in subsection 23-5(a) of the GST Act.

The next step is to determine whether your GST turnover meets the registration turnover threshold, which in your case is $75,000.

In accordance with subsection 188-10(1) of the GST Act, your GST turnover meets the registration turnover threshold if your current GST turnover is $75,000 or more, and the Commissioner is not satisfied that your projected GST turnover is less than $75,000.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

However, certain categories of supplies are excluded from the calculation of the current and projected GST turnovers. Relevant to your case are supplies that are made or likely to be made by you solely as a consequence of ceasing to carry on an enterprise (subsection 188-25(b) of the GST Act).

Paragraphs 46 and 47 of GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover provides guidance on the effect of an isolated transaction, they state:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Was the partnership required to be registered for GST?

We consider the sales of the units were made solely as a consequence of your ceasing to carry on your enterprise of leasing of residential premises. As such, the sales income from the units is disregarded when calculating your projected GST turnover under section 188-25 of the GST Act.

Therefore, you do not satisfy subsection 23-5(b) of the GST Act because your projected GST turnover is below the registration turnover threshold of $75,000. Hence you are not required to be registered for the GST and the sale of the units will not be taxable supplies on which GST is payable.

Question 2

Are you required to refund the input tax credits you claimed?

Answer

Yes, you are required to refund the input tax credits you claimed.

Detailed reasoning

The GST Act provides that a registered entity is entitled to input tax credits for creditable acquisitions.

Under section 11-20 of the GST Act, you are entitled to an input tax credit for any creditable acquisition that you make.

Under section 11-5 of the GST Act,

You make a creditable acquisition if:

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

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered, or required to be registered.

You lodged activity statements for the tax periods for which you were registered and claimed input tax credits for capital acquisitions made in connection with your property development activities.

We have determined that you were not required to be registered for the GST and in accordance with your request your GST registration has been cancelled from your original date of registration. As a result, the acquisitions you made are not creditable acquisitions and you are not entitled to claim input tax credits in respect of these acquisitions.

Hence, you are required to refund to the Commissioner the input tax credits you claimed in the activity statements you lodged during the period for which you were registered for the GST.