Edited version of your written advice

Authorisation Number: 1013086261731

Date of advice: 8 September 2016

Ruling

Subject: GST and carry on an enterprise

Question 1

Where Entity A transfers the completed units through redemption of redeemable shares will they be made in the course or furtherance of an enterprise they carry on?

Answer

No.

Relevant facts and circumstances

Entity A is an incorporated entity that currently has an ABN but is not registered for GST.

The shares in Entity A are comprised of one ordinary share and a number of shares. The shares shareholders are individual family members, or entities controlled by those family members.

Entity A's constitution provides that the holders of shares have the right:

• to occupy or authorise other parties to occupy their allocated unit;

• to request that the company transfer their allocated unit to them;

• to receive notice of and attend any general meeting of the company; and

• in a winding up or reduction of capital of the company, to repayment of the capital paid up on each share but not to participate in the distribution of surplus assets of the company.

but do not have the right to:

• vote at any general meeting of the company; or

• receive any dividend.

Entity A acquired land with an existing house.

Entity A has stated that it was incorporated for the sole reason of undertaking the property development, after which it would be wound down.

Entity A has stated that the purpose of the development is to demolish the existing house and build capital assets (strata units) that will be used to generate rental income for the benefit of the family members. Each shareholder intends to hold their respective units as an investment to generate rental income.

Entity A advised that the structure was chosen to avoid stamp duty. The unit will be occupied before the transfer of legal title takes place in accordance with Entity A's plan to obtain stamp duty exemption, but it is expected that the transfer will occur as soon as possible after occupation.

From the time of purchase the property was rented out to third parties at market rate. The property acquisition was funded by the bank.

While the property was leased, the bank would only advance funds for the purchase of the property, and all other holding and leasing costs were funded by the shareholders.

Following demolition and once the property was ready for construction, the bank provided construction finance under a cost of completion method.

The development funding shortfall between construction finance and the construction costs is funded by the shareholders.

The subscription price for each share is the proportion of the project costs that the directors determine is attributable to those shares' allocated unit.

The following costs will be borne by the shareholders and form part of their subscription price:

• holding the leasing costs of the property prior to the commencement of construction;

• development and building approvals;

• GST costs relating to the development;

• the gap between construction finance and construction costs; and

• all other costs (such as council fees, inspections, quantity surveyors etc).

The Directors may issue shares and request further amounts from the shareholders towards the estimated subscription price, depending on the final project costs.

Entity A entered into a building contract for the demolition of the existing house and the construction of the strata units.

At any time after the practical completion of the development the holder of the shares can require Entity A to transfer their allocated unit to the shareholder in consideration of the shareholder agreeing to the buyback of their share.

Entity A advice that upon completion of construction, they will transfer each allocated unit to the relevant shareholder.

Entity A does not intend to sell any of the allocated units for a profit.

Entity A contends that it cannot lease the allocated units as it has no legal right to do so given the conditions of the shares - being the shareholder's right to occupy or permit another to occupy.

Entity A has stated that it will not retain any profits upon redemption of the shares as each shareholder will receive title in their allocated unit and the corresponding liability.

Entity A contends that the shares will be brought back for the total amount paid up by the shareholder in relation to the special share i.e., the subscription price plus any further calls on account of the project and development costs. The special shares will not be redeemed for market value.

Entity A has stated that any increase in value resulting from the developed units automatically accrues to the shareholders and not Entity A because shareholders have the right to occupy, or to authorise another person to occupy. Entity A has no such right as it holds the bare freehold interest only. The bare legal title (without occupation rights) has no market value as:

• an arm's length purchaser acting reasonably will not pay for a bare legal interest as there is no right to occupy or receive rental income.

• Any increase in value would be on the special share, as the shareholder has the rights to occupation and generating of any related income.

Since the acquisition of the property, the Directors have not been paid for their time, and will not be paid, as Entity A does not generate income with which to pay wages or management and consultant fees.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, and

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1).

Reasons for decision

Summary

Entity A is not conducting an enterprise as its sole function and intention from the outset is to acquire the property, borrow funds for the development, develop, relieve double-stamp duty implications and transfer these to the shareholders for their redeemable shares which is limited to the costs of the shareholder's unit. In this instance, the participants in the arrangement are family members and they have selected a company structure for their arrangement and for them to hold their respective units as long term rental investments.

Detailed reasoning

You make a taxable supply where section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is satisfied. The section provides 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.

Enterprise is defined under subsection 9-20(1) of the GST Act and is defined as 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) …

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 263 of MT 2006/1 provides the following:

The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

The main indicators of carrying on a business are:

• a significant commercial activity;

• a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

In the absence of other facts, we consider that Entity A's activities are not carried out in the form of a business as these current activities are part of a one off transaction on the property and not the beginning of an ongoing property development business. Therefore, paragraph 9-20(1)(a) of the GST act will not be satisfied. We will now consider if Entity A's activities are in the form of an adventure or concern in the nature of trade.

Taxation Ruling TR 92/3 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. Taxation Ruling TR 92/3 considers the principles in Myer Emporium and provides guidance in determining whether profits from isolated transactions are ordinary income and assessable under section 6-5.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both of the following elements are present:

• the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

• the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if the transaction satisfies both elements above, it is generally not a mere realisation of an investment.

Whether a profit from an isolated transaction is income according to ordinary concepts depends on the facts and circumstances of the case.

Taxpayer's intention or purpose

The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstance of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale or property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

In this case, there is no profit-making purpose or intention. Accordingly, any profit arising from the eventual property disposal is not ordinary income for Entity A. Hence, Entity A is not considered to be undertaking an activity or activities in the form of an adventure or concern in the nature of trade under paragraph 9-20(1)(b) of the GST Act.

Therefore, transferring a unit will not be done in the course or furtherance of an enterprise that Entity A carries on and paragraph 9-5(b) of the GST Act will not be satisfied.