Edited version of private advice

Authorisation Number: 1051246338575

Date of advice: 06 July 2017

Ruling

Subject: GST sale of a duplex and margin scheme

Question 1

Is your sale of the unit the sale of a capital asset and consequently you are not liable to pay the goods and services tax (GST) on the sale?

Answer

No. The sale of the unit is taxable and you are liable to pay the GST on the sale.

Question 2

For GST purposes, can the GST on sale be treated as the margin between the sale price and the value of the land at the start of construction or since the property was originally purchased?

Answer

The margin has to be the difference between the sale price of the unit and an apportionment on the original purchase price.

This ruling applies for the following periods:

NA

The scheme commences on:

NA

Relevant facts and circumstances

You purchased a property which was input taxed.

One of your partners lived in the property for a period of time.

The property was demolished and two units were built on the site.

The partnership registered for GST and sold one of the units.

Input tax credits were claimed along the way on the construction costs relating to the unit that was sold.

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 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

A New Tax System (Goods and Services Tax) Act 1999 section 75-15

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1

Summary

The sale of the unit is taxable and you are liable to pay the GST on the sale.

Detailed reasoning

Enterprises and Disposal of Capital Assets

Section 9-20 of the GST Act provides that an enterprise is an activity or series of activities conducted in the form of:

• a business
• an adventure or concern in the nature of trade; or
• on a regular or continuous basis in the form of a lease.

Section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

The definition of the term 'enterprise' for GST purposes and what activities constitute an enterprise are discussed in the following two publications which are available on our website ato.gov.au

• Miscellaneous Taxation 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
• 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?

Therefore, according to section 9-20 of the GST Act the leasing of the old house on a regular or continuous basis is considered to be the carrying on of an enterprise.

Further, the construction of the units, the claiming of input tax credits in relation to their construction and the subsequent sale is also viewed as activities being carried on in the furtherance of your enterprise.

Not the sale of a Capital Asset

MT 2006/1 provides assistance to entities in determining their entitlement to an Australian Business Number (ABN). In doing this the Ruling considers the meaning of certain key words and phrases used to define an enterprise.

Paragraphs 266, 273-276 of MT 2006/1 have been reproduced below:

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of 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.

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain ... as his plan has enabled him to be able to keep and live in one of the units.

Therefore, the disposal of one of the units by way of sale would constitute a supply made in the course or furtherance of your enterprise and not the disposal of a capital asset.

Taxable Supplies

As stated above the sale of the unit is not the sale of a capital asset. What needs to be determined is whether the sale is taxable under section 9-5 of the GST Act.

A taxable supply is made under section 9-5 of the GST Act if the supply is made for consideration, in the course or furtherance of an enterprise that is carried on by the supplier, the supply is connected with the indirect tax zone (Australia), and the supplier is registered or required to be registered for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

There are no provisions in Division 38 of the GST Act which allow the supply of residential premises by way of sale to be GST-free.

Subsection 40-65(1) of the GST Act provides that the sale of residential premises is an input taxed supply. However, subsection 40-65(2) of the GST Act excludes the supply of new residential premises from being an input taxed supply.

Subsection 40-75(2) of the GST Act provides that premises are not new residential premises if they have been used for a period of at least five years to make input taxed supplies of residential premises by way of lease, hire or licence under section 40-35 of the GST Act.

However, in this case the unit was sold as new before the five year period has expired. This means that it is considered to be new residential premises.

In this case the sale was made for consideration, in the course or furtherance of your enterprise; you were registered for GST and the supply is connected to Australia.

Thus, when you sold one of the units you made a supply of new residential premises to the purchaser. As the supply of new residential premises is neither GST-free nor input taxed, your supply of the unit to the purchaser was taxable.

Question 2

Summary

The margin has to be the difference between the sale price of the unit and an apportionment on the original purchase price.

Detailed reasoning

Margin Scheme

Under subsection 75-10(2) of the GST Act the margin for the supply of real property is the amount by which the consideration for the supply exceeds the consideration for its acquisition.

For GST purposes the margin is defined as the difference between the consideration paid for the acquisition of what is sold and the consideration received for the sale.

Section 75-15 of the GST Act provides that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired.