Edited version of your written advice

Authorisation Number: 1051190253645

Date of advice: 24 March 2017

Ruling

Subject: Property development

Question 1

If the Taxpayer develops the shop and dwelling at the Property owned by the Taxpayer by demolishing the existing dwelling and constructing four new apartments above the shop for the purposes of the Taxpayer occupying one apartment as a residence, renting out two of the apartments and transferring the fourth apartment to the Trust for the benefit of the Taxpayer's child, is the Taxpayer carrying on an enterprise within the meaning of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

If the Taxpayer develops the Property by demolishing the existing dwelling and constructing four new apartments above the shop for the purposes of the Taxpayer occupying one apartment as a residence, renting out two of the apartments and transferring the fourth apartment to the Trust for the benefit of the Taxpayer's child, is the Taxpayer required to register for GST?

Answer

No.

Question 3

If the Taxpayer develops the Property by demolishing the existing dwelling and constructing four new apartments above the shop for the purposes of the Taxpayer occupying one apartment as a residence, renting out two of the apartments and transferring the fourth apartment to the Trust for the benefit of the Taxpayer's child, is the Taxpayer required to account for GST in respect of the transfer of the fourth apartment to the Trust?

Answer

No.

Relevant facts and circumstances

The Taxpayer purchased the Property in 20XX for investment purposes.

The Property comprises a shop and dwelling, both of which have been rented out by the Taxpayer since the Taxpayer purchased the Property. The Taxpayer has not registered for GST as the total annual rental is approximately $40,000.

In late 20YY the Taxpayer entered into a Contract with the Contractor for construction of a building comprising 4 apartments over the existing shop. The Contract Price appears to be fixed at $X.

The Special Conditions in the Contract provide that construction of the works will commence within a couple of weeks after the shop is vacated, that the existing shop fit out is to be preserved where possible and that any necessary modifications to the shop fit out are included in the Contract Price.

It was stated in the ruling request that the existing dwelling on the Property is to be demolished and that construction of the works is in progress and is expected to be completed by the middle of the 20ZZ calendar year.

The Taxpayer intends to occupy one of the apartments as the Taxpayer's primary residence and to rent out two of the apartments and the shop. The fourth apartment will be transferred to the trustee of the Trust. The Taxpayer's child is a beneficiary of the Trust and it is intended that the Trust will rent out the fourth apartment.

Relevant legislative provisions

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

Reasons for decision

Question 1

Summary

Applying of the factors listed in paragraph 265 of Miscellaneous Taxation Ruling MT 2006/1, the Taxpayer is carrying on another enterprise in relation to the demolition of the existing dwelling and erection of four apartments above the shop on the Property.

Detailed reasoning

Paragraph 9-5(b) of the GST Act:

Section 7-1 of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act provides that an entity ('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.

Enterprise:

Paragraph 9-5(b) of the GST Act requires that the relevant supply is made in the course or furtherance of an enterprise carried on by the Taxpayer. Section 9-20 of the GST Act provides that 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

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

Section 195-1 of the GST Act defines 'business' as:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee

MT 2006/1 discusses the meaning of 'entity carrying on an enterprise' for the purposes of entitlement to an Australian Business Number (ABN), however paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 states that the principles set out in MT 2006/1 apply equally to the term 'enterprise' as it appears in the GST Act. Paragraph 234 of MT 2006/1 provides that 'adventure in the nature of trade' may be an isolated or on-off transaction that does not amount a business but has the characteristics of a business deal.

By renting out the dwelling and shop, the Taxpayer was carrying on an enterprise within the meaning of paragraph (c) of section 9-20 of the GST Act, although the Taxpayer was not required to register for GST as the Taxpayer's GST turnover does not meet the registration turnover threshold ($75,000). Paragraph 306A of MT 2006/1 refers to the High Court of Australia's decision in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 that a lessor is appropriately regarded as engaging in an activity done on a regular or continuous basis in the form of a lease within the meaning of paragraph (c) of the 'enterprise' definition. The Taxpayer's leasing enterprise was temporarily suspended by the shop tenant vacating and the demolition of the existing dwelling. The issue is whether the Taxpayer begins to carry on another enterprise by demolishing the existing dwelling and erecting of the four apartments.

Activity, or series of activities:

The 'enterprise' definition refers to 'an activity, or series of activities, done…'. Paragraph 153 of MT 2006/1 provides that an activity is essentially an act or series of acts that an entity (defined in subsection 184-1(1) of the GST Act to include an individual) does. Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity, or a series of activities, that amount to an enterprise. Example 15 in MT 2006/1 sets out the activities usually associated with the sale of real property:

Example 15 - activities associated with the sale of real property

161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise?

162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included:

● assessing the economic viability of the project ;

● purchasing the land ;

● engaging an architect ;

● constructing a block of units on the land ;

● engaging a real estate agent and auctioneer ; and

● arranging for the sale of the units at auction.

163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise.

Example 15 indicates that where, as in the present case, the Taxpayer has engaged a third party (i.e. the Contractor) to undertake an activity, the Taxpayer is nevertheless doing that activity. We therefore consider that, for the purpose of determining whether the Taxpayer is carrying on an enterprise, the Taxpayer is taken to carry out the demolition of the existing dwelling and all of the works referred to in the Contract.

Isolated property transactions:

Paragraphs 262 to 302 of MT 2006/1 discuss whether an entity is either carrying on an enterprise (i.e. either in the form of a business or in the form of an adventure in the nature of trade) or merely realising a capital asset where there is a 'one off' property transaction. Paragraph 264 of MT 2006/1 provides that two Federal Court decisions, Statham and Another v FCT 89 ATC 4070 (Statham) and Casimaty v FCT 97 ATC 5135 (Casimaty) provide guidance on when the subdivision and sale of land amounts to either a business or a profit-making undertaking or scheme. Paragraph 265 provides that if several of the following factors are present in relation to an isolated property transaction it may be an indication that a business or adventure in the nature of trade is being carried on:

● 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.

Change of purpose for which the land is held:

In Casimaty Ryan J held that there had been no change in the purpose for which the land was held where portions of a 988 acre farming property (Acton View) had been subdivided and sold in eight subdivisions over 18 years during which period the taxpayer continued to carry on a primary production business on the balance of the property (p. 5151):

Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there is nothing to suggest a change in the purpose or object with which Acton View was held.

In this respect, the present case is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change in purpose. In Whitfords Beach those circumstances were the passing of control of the landholding company from the owners of the fishing shacks to three development companies. In Official Receiver v FCT the critical circumstance was that control of the land passed to the Official Receiver who sought the instructions of creditors as to whether he should dispose of the land in its undeveloped state or undertake its extensive development to increase returns to creditors. In the Melbourne Trust case one critical consideration was the formation of the realization company as a distinct entity with shareholders unrelated to the failed banks or their creditors.

In the present case the Property was held by the Taxpayer for the purposes of deriving rental income from the shop and the dwelling. As the Contract refers to the works not commencing until after the shop is vacated and the ruling request referred to the existing dwelling being demolished prior to construction, we consider that the present case is distinguishable from Casimaty and Example 13, that there is a change of purpose for which the Property is held and that indicates that the Taxpayer is carrying on another enterprise.

Additional land is acquired to be added to the original piece of land:

This factor reflects a distinction made in a number of United Kingdom court decisions discussed in Casimaty (91 ATC 5139-5142). In CH Rand v The Alberni Land Co Ltd (1920) 7 TC 629 (Alberni Land Co) Rowlatt J held that the surplus arising from sale of portions of land held by the company on trust for various persons was not the profits of a trade or business because the function of the company was merely to realize the capital value of the land.

However, in The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1936) 11 TC 232 (Alabama Coal), Rowlatt J distinguished Alberni Land Co. In Alabama Coal the State of Alabama had issued bonds to bondholders and then defaulted. The State of Alabama had then transferred lands to trustees for the benefit of the bondholders and incorporated the taxpayer company for the purpose of, inter alia, developing and realizing the lands, including 'buying new land so as to develop and nurse the lands'. In Alabama Coal Rowlatt J held that the fact that the taxpayer company bought new lands made Alabama Coal a different case from Alberni Land Co. Rowlett J referred (p.254) to the following passage in the judgment of Farwell LJ in Hudson's Bay Co Ltd v Stevens (1909) 5 TC 424 at 437:

Again, a land owner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as an owner not as a land speculator... It would be different if a land owner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader.

and stated (ibid):

… in order to see clearly that the Hudson's Bay Case (1909) 5 Tax Cas 424, for instance, does not apply, there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money.

In the present case the Taxpayer has not acquired additional land to be added to the Property. On that basis, application of this factor indicates that the Taxpayer is not carrying on another enterprise.

The parcel of land is brought to account as a business asset:

This factor appears to relate to the circumstances in Casimaty where Ryan J referred (97 ATC 137) to a deposition by the taxpayer that by 1983 the sheep and cattle farming activities carried on by the partnership comprising the taxpayer and his wife on the property had become unprofitable and had generated 'substantial carry forward losses' but that:

...acting on the view that I was doing nothing more than selling off portions of the property which had been given to me by my father I did not bring the land sales into the affairs of the partnership and no attempt was made to use up the carry forward losses available to either my wife or myself.

In the present case the Property is already brought to account as a business asset by the Taxpayer as it is used to derive rental income from the shop and dwelling. Consequently we do not consider that this factor is relevant to the Taxpayer.

There is a coherent plan for the subdivision of the land:

Application of this factor is explained by comparing Example 30 and Example 35 in paragraphs 277 to 283 and 297 to 302 of MT 2006/1.

In Example 30 there is a coherent plan for the development of a 100 hectare property because the taxpayer consults an accountant and legal adviser, engages a project manager, engages contractors to carry out the works and engages sales agents to carry out a marketing program.

In Example 35 there is no coherent plan for the subdivision of a rural property where the owners undertake a series of small subdivisions in order to service debts, undertake the minimal amount of works required to sell the subdivided lots and continues to live on the remaining part of the property.

In our view the Taxpayer's case is closer to Example 30 because the Taxpayer has a plan for the development and subsequent use of the entire Property and has engaged a builder to carry out substantial works. Application of this factor indicates that the Taxpayer is carrying on another enterprise.

There is a business organisation, e.g. a manager, office and letterhead:

In Statham the Federal Court noted (89 ATC 4073) that the marketing of the subdivided lots was attended to by local real estate agents without the participation of the taxpayers and that no site office was set up to either cater for the sales of the lots or conduct the taxpayers' affairs and found (89 ATC 4076) that a significant factor which strongly suggested that the taxpayers were not conducting a business or engaging in a profit-making undertaking or scheme was that the taxpayers had no business organisation, no manager, no office, and no letterhead.

In Casimaty the taxpayer deposed (97 ATC 5139) that all sales had been negotiated through the taxpayer's stock and station agents, that the taxpayer did not keep records of enquirers or possible purchasers and, except in the cases of persons previously known to the taxpayer, did not pass on the names of enquirers to the agents. Ryan J stated (97 ATC 5152) that if the taxpayer had set up his own sales organization or advertised or conducted sales himself instead to entrusting those activities to agents, the inference would have been more strongly available that the taxpayer had gone into business. Ryan J compared Stevenson v FCT 91 ATC 4476 (Stevenson) where the taxpayer personally dealt with prospective purchasers and 'multi-listed' the subdivided lots with a variety of agents.

As the Taxpayer intends to retain the shop and three of the apartments and transfer the fourth apartment to a trust for the benefit of the taxpayer's child the Taxpayer does not need a business organisation. This factor indicates that the Taxpayer is not carrying on another enterprise.

Borrowed funds financed the acquisition or subdivision:

In Statham Woodward, Lockhart and Hartigan JJ listed a number of 'significant factors' (89 ATC 4076), including:

No moneys were borrowed by, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee

Woodward, Lockhart and Hartigan JJ stated (ibid) that those significant factors strongly suggested that the taxpayers were not conducting a business or engaging in a profit-making undertaking or scheme. On behalf of the Commissioner it was submitted (89 ATC 4077):

…that the owners, by providing a bank bond, were prepared to risk up to $950,000, and did in fact risk in excess of $450,000. As he put it, the owners elected to go down the path of high risk and high profits rather than the path of a mere realisation of the asset as it stood. He submitted that this was an important factor in deciding whether the owner's activity fell on the same side of the line as the developer's business venture.

Woodward, Lockhart and Hartigan JJ rejected this submission (89 ATC 4077):

These considerations do not, in our opinion, have the effect of pushing a mere realisation of assets over the line into the region of a business venture or profit-making undertaking or scheme. In relation to finance, the owners merely had to provide a bond.

In the present case the Contract (Introduction - Item 4 - the contract price) includes the annotation 'subject to bank finance' and the Taxpayer has confirmed that borrowed funds are financing the development. This factor indicates that the Taxpayer is carrying on another enterprise.

Interest on money borrowed to defray subdivisional costs was claimed as a business expense:

In Casimaty the taxpayer borrowed money secured by a first mortgage over the property and subsequently granted a second mortgage to a bank to secure an overdraft which was used to finance the taxpayer's farming operations (97 ATC 5136). In cross examination the taxpayer stated that the purpose of the subdivisions was to alleviate this debt burden and that some of the proceeds of sale of earlier subdivisions were used to finance later subdivisions.

In Casimaty Ryan J referred (97 ATC 5148) to Stevenson where the taxpayer owned and worked a farm comprising 446 acres. The taxpayer sold one portion comprising 26 acres prior to 1965 and sold another portion comprising 360 acres in 1975. At the end of 1976 the taxpayer (then aged 70) decided to subdivide and sell 35 acres and retain the remaining 55 acres. As the conditions included in the approval of the subdivision were extensive the taxpayer borrowed extensively to defray subdivision expenses before carrying out the subdivision in eight stages involving the creation of 180 lots. In Stevenson the Federal Court held that the AAT had not erred in finding that the taxpayer's activities between 1976 and 1986 constituted more than the mere realisation of a capital asset and amounted to carrying on the business of subdivision, development and sale of land. The Federal Court referred to the following factors referred to by the AAT (emphasis added):

…In particular I regard as significant the degree of his personal involvement in the planning, in the negotiations with the Shire Council and the State Rivers and Water Supply Commission, in obtaining finance, in the employment of contractors, in the marketing of the blocks and in their actual sale. The subdivision and development was substantial. The land has been subdivided into over 180 small blocks. The development has turned farmland which had been unserviced by water supply or sewerage and without a made road into fully serviced residential blocks with a sealed road and drainage. The taxpayer not only obtained finance but he risked it.

In Casimaty Ryan J referred (97 ATC 5152) to the inference drawn by the AAT in Stevenson, based on the personal involvement of the taxpayer in the relevant activities, that the taxpayer was carrying on a business and distinguished Stevenson on that basis.

As noted above, the Taxpayer is borrowing funds to finance the development of the Property. The Taxpayer will be entitled to claim as a business expense the portion of any interest paid on the borrowed funds which has a nexus with the derivation of rent by the Taxpayer from the shop and two of the apartments. The Taxpayer's circumstances are therefore similar to Stevenson and indicate that the Taxpayer is carrying on another enterprise.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision:

This factor is explained by comparing Casimaty to the decision of the Full High Court in FCT v Whitfords Beach Pty Ltd 82 ATC 4031 (Whitford's Beach).

In Whitford's Beach the taxpayer company was incorporated in 1954 for the purpose of acquiring 1,584 acres of land so as to ensure that the taxpayer company's original shareholders had access to fishing shacks which they owned and which were located on a beachfront reserve. After the original shareholders sold their shares in the taxpayer company to three other companies in 1967 the taxpayer company appointed a project co-ordinator, undertook a search for a water supply, negotiated with the local authority for construction of a road and procured a re-zoning from urban deferred to urban and approval of a subdivision. By 1970 the first survey plan for 272 lots was deposited and 200 residential lots had been sold. The Federal Court held, by a majority, that the sale proceeds were not taxable as the taxpayer company's activities did not go beyond the mere realisation of a capital asset in the most enterprising way. The Commissioner successfully appealed to the Full High Court which held that the taxpayer company's activities amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development (Gibbs CJ, Mason and Wilson JJ).

In Casimaty Ryan J referred to the judgment of Mason J in Whitford's Beach (97 ATC 5145):

In the course of his judgment in that case Mason J acknowledged that merely because a sale of land is preceded by a subdivision does not preclude it from being the realization of a capital asset. However His Honour was careful to point out that the surrounding circumstances of a subdivision may carry it across the line into the business of land development.

Ryan J then set out the following passage from the judgment of Mason J in Whitford's Beach 87 ATC 4047 (emphasis added):

In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. 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. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

In Casimaty, on the other hand, Ryan J referred to the taxpayer carrying out works such as construction of an internal road, provision of water services, farm fencing all boundaries and extension of a water main (second subdivision), similar works plus construction of an access road (third and fourth subdivisions) and similar works plus drainage of a creek (fifth subdivision). However Ryan J accepted the taxpayer's evidence that (97 ATC 5138):

…at no time did he 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 creek lines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities.

In the present case the Taxpayer confirmed that the Property has always been zoned commercial and that the works are not being undertaken to comply with a council requirement. That supports the view that the Taxpayer is carrying on another enterprise.

Buildings have been erected on the land:

In Statham (89 ATC 4070) one of the matters which the Full Federal Court held to strongly suggest that the taxpayers were not carrying on a business or engaging in a profit-making undertaking or scheme was that the taxpayers did not erect buildings on the land, not even, for example, a site office. In Casimaty Ryan J stated (97 ATC 5152) that if the taxpayer had constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to the taxpayer an intention to carry on a business of land development and improvement.

In the present case an existing building (the dwelling) will be demolished and four apartments will be erected on the Property. That supports the view that the Taxpayer is carrying on another enterprise.

Conclusion:

Six of the nine factors listed in paragraph 265 of MT 2006/1 indicate that the Taxpayer is carrying on another enterprise in relation to the demolition of the existing dwelling and erection of four apartments above the shop on the Property.

Question 2

Summary

As the Commissioner is satisfied that the Taxpayer's projected GST turnover is below the GST registration threshold, the Taxpayer does not have a GST turnover that meets the GST registration threshold and the Taxpayer is not required to register for GST.

Detailed reasoning

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

(a) you are carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

For the reasons set out in Question 1 we consider that the Taxpayer is carrying on another enterprise in relation to the demolition of the existing dwelling and erection of four apartments above the shop on the Property.

Regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 provides that the registration turnover threshold (other than for non-profit bodies) is $75,000.

Section 195-1 of the GST Act provides that, in relation to meeting a turnover threshold, 'GST turnover' has the meaning given by subsection 188-10(1) of the GST Act. Subsection 188-10(1) states:

You have a GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Subsection 188-10(3) defines 'turnover threshold' to include the registration turnover threshold.

Current GST turnover:

The test in paragraph 188-10(1)(a) is in two parts. The first part is whether the Taxpayer has a current GST turnover which is at or above the registration turnover threshold.

Section 188-15 deals with the calculation of current GST turnover. Subsection 188-15(1) states:

(1) 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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

In the present case the only supply that the Taxpayer will make in relation to the enterprise involving the demolition of the existing dwelling and erection of four apartments above the shop on the Property is the transfer of one apartment to the Trust. As that supply is for no consideration, the value of that supply is excluded from the Taxpayer's current GST turnover unless it is a taxable supply under section 72-5 of the GST Act. Section 72-5 states (in part):

(1) The fact that a supply to your *associate is without *consideration, does not stop the supply being a *taxable supply if:

(a) your associate is not *registered or *required to be registered; or

(b) your associate acquires the thing supplied otherwise than solely for a *creditable purpose.

(2) This section has effect despite paragraphs 9-5(a) and 84-5(1)(d) (which would otherwise require a taxable supply to be for consideration).

'Associate' is defined in section 195-1 of the GST Act as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA). Paragraph 318(1)(d) of the ITAA provides that a primary entity that is a natural person is associated with the trustee of a trust where an associate of the primary entity benefits under that trust and paragraph 318(1)(a) provides that a primary entity is associated with a relative of that primary entity. Thus the Taxpayer and the trustee of the Trust are associated (because the Taxpayer's child benefits under the Trust) and the supply of an apartment by the Taxpayer to the Trust for no consideration will nevertheless be deemed to be a taxable supply if either paragraph 72-5(1)(a) or (b) is satisfied.

In relation to paragraph 72-5(1)(a) we have confirmed that the Trust has an ABN but is not registered for GST. Assuming that the apartment is the sole asset held by the Trust then the Trust is unlikely to be required to be registered for GST because the rent paid to the Trust will be consideration for an input taxed supply made by the Trust (i.e. the supply of premises by way of lease, hire or licence is input taxed if the supply is of 'residential premises') and input taxed supplies are excluded from the calculation of current GST turnover by paragraph 188-15(1)(a) of the GST Act. Thus paragraph 72-5(1)(a) is likely to be satisfied.

Paragraph 73-5(1)(b) will also be satisfied as the Trust will acquire the apartment otherwise than solely for a creditable purpose because paragraph 11-15(2)(a) of the GST Act provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. As noted above, subsection 40-35(1) of the GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if the supply is of residential premises (the definition of which includes land or a building that is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation).

For the reasons set out above the supply of an apartment by the Taxpayer to the Trust will be deemed by section 72-5 to be a taxable supply and the value of that supply will be included in the calculation of the Taxpayer's current GST turnover in section 188-15.

Section 72-10 deems that supply to have a value equal to its 'GST-exclusive market value'. Section 195-1 of the GST Act defines 'GST-exclusive market value' as 10/11ths of the 'GST-inclusive market value' of the supply and defines 'GST-inclusive market value' of a thing as the market value of the thing without any discount for any amount of GST on the supply. The Taxpayer stated that each apartment will have a market value of approximately $X. On that basis the GST-exclusive market value to be included in the Taxpayer's current GST turnover would be approximately $X (i.e. 10/11 X $380,000) and would exceed the $75,000 registration turnover threshold.

Projected GST turnover:

The second part of the test in paragraph 188-10(1)(a) is whether the Commissioner is not satisfied that the Taxpayer's projected GST turnover is below the turnover threshold.

Subsection 188-20(1) defines projected GST turnover:

(1) 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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Subsection 188-20(3) and section 188-25 require a number of supplies to be disregarded in working out the Taxpayer's projected GST turnover, in particular paragraph 188-25(a) provides that any supply made, or likely to be made, by the Taxpayer by way of transfer of ownership of a capital asset of the Taxpayer's is to be disregarded in working out the Taxpayer's projected GST turnover.

Paragraph 37 of Goods and Services Tax Ruling GSTR 2001/7 provides that 'transfer of ownership' means the transfer of the whole of the beneficial interest in the capital asset with or without legal title. There will be a transfer of ownership of the apartment as the Taxpayer will transfer the legal title to the apartment to the trustee of the Trust and the Taxpayer's child will acquire the beneficial interest in the apartment under the terms of the Trust.

Paragraph 31 of GSTR 2001/7 provides that 'capital assets' refers to those assets that make up 'the profit-yielding subject' of an enterprise which may be described as the business structure set up for the earning of profits. Paragraph 34 of GSTR 2001/7 distinguishes 'capital assets' from a 'revenue asset', the latter being an asset whose realisation is inherent in, or incidental to, the carrying on of a business. In the present case three of the four apartments are (together with the shop) a business structure set up for the earning of profits in the form of rent and the transfer of the ownership of one apartment to the Trust is a transfer of part of that business structure and therefore a transfer of ownership of a capital asset of the Taxpayer for the purposes of section 188-25.

As the transfer of the apartment to the Trust is disregarded in working out the Taxpayer's projected turnover, the Commissioner cannot be satisfied that the Taxpayer's projected turnover is at or above the registration turnover threshold. Consequently the second part of the test in subsection 188-10(1) is not satisfied, the Taxpayer does not have a turnover that meets the registration turnover threshold, paragraph 23-5(b) is not satisfied and the Taxpayer is not required to register for GST.

Question 3

Summary

As the Taxpayer is not registered for GST and not required to register for GST the requirement in paragraph 9-5(d) of the GST Act is not met, the supply of the apartment by the Taxpayer to the Trust is not a taxable supply and the Taxpayer is not required to account for GST in respect of that supply.

Detailed reasoning

As noted in Question 1, section 9-5 of the GST Act provides that an entity ('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.

In relation to paragraph 9-5(a), section 72-5 of the GST Act provides that the fact that the transfer of the apartment by the Taxpayer to the Trust is without consideration does not stop that supply being a taxable supply because the Trust acquires the apartment otherwise than solely for a creditable purpose. Subsection 72-5(2) provides that section 72-5 has effect despite paragraph 9-5(a). Thus paragraph 9-5(a) is satisfied.

In relation to paragraph 9-5(b), for the reasons set out in Question 1 we consider that the Taxpayer is carrying on another enterprise in relation to the development of the Property and supply of one apartment to the Trust.

In relation to paragraph 9-5(c) the supply of an apartment to the Trust is connected with the indirect zone as subsection 9-25(4) of the GST Act provides that a supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

However, paragraph 9-5(d) is not satisfied as the Taxpayer is not registered for GST and for the reasons set out in Question 2 we consider that the Taxpayer is not required to register for GST.

Consequently the supply of the apartment by the Taxpayer to the Trust is not a taxable supply and the Taxpayer is not required to account for GST in respect of that supply.