Edited version of your written advice

Authorisation Number: 1013085692001

Date of advice: 13 September 2016

Ruling

Subject: GST and sale of leasing assets

Question

Are your proposed sales of the new townhouses located at X to third parties taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sales will be taxable supplies of new residential premises.

Relevant facts and circumstances

You are a sole trader registered for Goods and Services Tax (GST) for a business services enterprise setting up and maintaining small business accounting systems. You retired on X but have kept your GST registration while you service a small group of long term clients. Your GST turnover is below $75,000 per annum.

You bought a house at X in xxxx which you leased out for residential purposes until June xxxx.

A new house was built in the back yard which was subdivided in xxxx and given a new address of Y. This new house has been tenanted until the present day as residential premises.

In xxxx, you decided to demolish the old house due to its age, maintenance costs and structural repairs and build less than five townhouses with the intention of keeping them as rental income into retirement with minimal maintenance issues. The house was demolished in xxxx.

In August xxxx construction commenced of the townhouses. They were completed in June xxxx. GST credits were not claimed for construction as your intention was always to rent the townhouses.

Your personal involvement with the development was limited to engaging the architect, builder and surveyor. All of the subcontracting was done by the builder.

From x July xxxx to x August xxxx, the townhouses situated at X were listed for rental with a real estate agent that exclusively manages only rental properties.

On x August xxxx, you decided to sell the townhouses and another real estate agent specialising in sales was engaged to auction them on x September xxxx. The townhouses were not constructed for a profit making motive. The reasons you state as to why you changed your mind to sell the townhouses are:

• While listed for rental the number and quality of enquiries and attendances at open inspections fell well short of expectations.

• Higher costs than expected were incurred during development and construction which resulted in the prospect of continuing with a higher debt burden in the long term than what was expected when the decision to build was taken.

• You are in semi-retirement and planning to retire without the prospect of any new or additional income stream to pay debt to reduce the risk of financial strain from interest rate increases when the economic cycle eventually turns.

• The unexpected difficulty in finding tenants for the townhouses raised the prospect of financial strain in servicing debt if periods of extended vacancies are repeated in future between tenancies.

• The prospect of extended vacancy periods raises the level of risk with respect to insurance coverage as insurer policies specify that coverage may not apply if properties are vacant for extended periods.

• Selling the townhouses now is the optimal realisation of these assets while they are still in a new condition without any wear and tear of occupancy.

You do not have any other property activities or holdings apart from owning your family home. Apart from the development at X, you have not had any dealings in real estate since the purchase of your home in xxxx.

Assumption 

You submitted that the development was not the undertaking of a profit making scheme of developing land for resale. Your acquisition of X was for the construction and letting of the new townhouses with a view to holding as an investment. You never had an intention of building new townhouses for resale upon acquisition of X.

It is necessary to make assumptions based on the available facts. The private ruling system does not provide for the ATO to answer questions of fact, only matters involved in the application of provisions of the law. The facts above and objective evidence we have been provided do not conclusively identify your intention. As your intention is a relevant, material fact that is not substantiated, we have included the above intention as an assumption.

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 section 9-20

Reasons for decision

A supply will be a taxable supply where the requirements of section 9-5 of the 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)

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration and the new townhouses are located in the indirect tax zone.

We need to consider whether your sale of the new townhouses will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act).

Whether the sale of the property is in the course of an enterprise that you carry on

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; or

c) on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

in the form of a business

Based on the information provided, we do not consider that you are carrying on a business of property development - paragraph 9-20(a) of the GST Act does not apply.

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

We need to discuss whether your activities at X will constitute an enterprise of property development in the form of an adventure or concern in the nature of trade.

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 MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

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 principles outlined in the ruling and the determination has been applied in your circumstances.

You submitted that you were not undertaking a profit making scheme (or an adventure in the nature of trade) of property development for resale. Your purpose, upon acquisition of the property, was for the construction and letting of the new townhouses with a view to holding as an investment. You never had an intention of building townhouses units for resale upon acquisition of the property. Your sales of the new townhouses were due to the existence of financial considerations which compelled the sales.

Based on available facts and assumptions, the profit making intention has not been proven for the sale of the new townhouses. Paragraph 9-20(b) of the GST Act does not apply.

on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property

Although you are not undertaking an adventure or concern in the nature of trade and the activities are not a profit making undertaking or scheme, your activities would still amount to an enterprise for GST under paragraph 9-20 (c) of the GST Act; that is, the new townhouses were constructed for a leasing enterprise.

Although the new townhouses were never leased before the sale, you submit evidence of the intention to build the townhouses for rent. We consider that an enterprise of leasing is capable of commencing prior to the date at which leasing could actually begin. While your intention changed prior to any leasing activity occurring (and thus termination of the enterprise began when you sold the new townhouses) we consider that the change in intention is a peculiarity within the facts and circumstances of this ruling.

Based on available facts and assumptions, you are considered to be carrying on an enterprise of leasing residential premises as defined in section 9-20 of the GST Act and the sale of the new townhouses will be made in the course of carrying on or termination of that enterprise for GST purposes. The requirement in paragraph 9-5(b) of the GST Act will be satisfied.

You have satisfied paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act.

You are also registered for GST, which is a requirement in paragraph 9-5(d) of the GST Act.

Relevance of your GST registration

You have a current GST registration for a business services enterprise setting up and maintaining small business accounting systems.

Under Division 23 of the GST Act, it is the entity carrying on the enterprise that is registered or required to be registered for GST purposes and not the enterprise/business. As you have chosen to register for GST, any taxable supplies that you make in all your enterprises will be subject to GST. Therefore, supplies made in both of your business services and leasing enterprises are able to be subject to GST.

Similarly, for the purposes of the Australian Business Number (ABN), for an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. It is the entity and not the enterprise that is entitled to an ABN (paragraphs 154 and 155 of Miscellaneous Tax Ruling MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number).

Summary

You will have satisfied all of the criteria in section 9-5 of the GST Act when you sell the new townhouses as this will be made in the course or termination of your leasing enterprise and you are registered for GST. They will be taxable as neither of the sales will be GST-free or input taxed.