Edited version of your written advice

Authorisation Number: 1051310470026

Date of advice: 21 November 2017

Ruling

Subject: Enterprise and GST

Question 1

Is the Unit Trust required to be registered for GST?

Answer

Yes

Question 2

Is the sale of a number of newly constructed townhouses a taxable supply?

Answer

Yes

Question 3

Are profits from the sale of the properties to be treated on Income account and not Capital account by the Unit Trust?

Answer

Yes

Relevant facts and circumstances

● Trustee Pty Ltd is the trustee of the Unit Trust (you) as of May 200X.

● You are not currently registered for GST.

● In 200X, you purchased a property for $XXX,000 via a nominee. You do not own any other properties and you have not undertaken any other development activities, nor do you intend to in the future.

● You accounted for the purchase of the property as a non-current asset.

● At the time you purchased the property, you intended to hold the property as a passive investment. The underlying beneficiaries of the trust intended to use the property for their own purposes in retirement either as a future permanent place of residence and/or a holiday home.

● At the time of purchase, the property is recorded on two certificates of title. A habitable residential dwelling (the dwelling) was situated on the property. The dwelling was leased as a holiday rental from the date of purchase.

● During 200Y-200Z the dwelling was spasmodically occupied as a weekender, where the occupants paid the property council rates during that period.

● In 20ZZ the property was offered for sale, as either a development opportunity or as two separate lots; however no reasonable offers were received. The property remained available for purchase whilst remaining on the property market until early 201B.

● In 201A you initiated an application for a planning permit (planning permit) to construct a number of residential dwellings on the property. You were granted a planning permit in mid 201B.

● From early– mid 201B, the dwelling was leased on a permanent basis, by which the tenants paid the rates and all service charges. During this six month period, the tenants carried out cosmetic improvements on the dwelling.

● On or about mid-201B, the dwelling was damaged by the tenants of the property. At this time, it became clear that there were issues with water leakages, which required the water pipes to be fully replaced. The dwelling was uninhabitable thereafter.

● In 201B the property was offered for sale; with the approved planning permit to construct a number of dwellings. However no reasonable offers were received.

● In 201C, you were approved an extension on the planning permit.

● In 201D, you financed the demolition of the dwelling.

● In 201E, you entered into a contract with a third party builder to construct a number of separate strata title residential townhouses (townhouses).

● The construction development was coordinated by an individual who was responsible for overseeing the planning application which was made formally through a Development and Environment Consultant to apply for the council planning permits. You engaged design consultants to design the townhouses. During the process of applying for the council permit, objections were lodged against the construction and you organised for these objections to be defended by means of an appeal in the relevant Tribunal.

● The construction costs for a number of townhouses were approximately $X.X million. You financed the construction of the townhouses using funds from an associate entity. The townhouses were completed in mid-201F with an anticipated combined sale price of $X.Xmillion.

● The townhouses have been available for sale since late-201E.

● The townhouses have not been previously sold as residential premises prior to late-201E, nor have they previously been the subject of a long term lease.

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 23-5

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 Division 188

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Question 1

Detailed reasoning

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This section states:

You are required to be registered under this Act if:

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

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

To be registered for GST, you must be ‘carrying on an enterprise’ and meet the relevant $75,000 GST turnover threshold.

‘Carrying on an Enterprise’

It must be determined whether the sales of the subdivided blocks constitute to “carrying on an enterprise”.

The term ‘enterprise’ is defined in subsection 9-20(1) of the GST Act to include, 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 …

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 (MT 2006/1) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN. 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 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term ‘activity’ or ‘series of activities’ for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term ‘business’ would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

You subdivided and developed the property which you have been using as passive investment for over 10 years into a number of town houses with separate strata titles for the purposes of sale. You advised that you have not previously carried out any land development activities.

Section 9-20 (1)(a) of the GST law, defines an enterprise as an activity, or series of activities, done in the form of a business. The expression “in the form of” widens the definition of enterprise. So although we consider you are not carrying on a property development business as you are not engaged in developing properties on a regular or continuous basis, your activity of developing the property may be “in the form” of a business, and therefore constitute to an enterprise.

However, even if it is not in the form of a business, it must be considered whether your property development activities amount to an isolated transaction that is an enterprise.

Paragraphs 262 to 302 of MT 2006/1 address isolated transaction and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether the activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

265. From the Statham 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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

● 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.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular 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.

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. However, the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

In your case, the property was initially intended to be a passive source of income until the beneficiaries of the trust retired. However we consider that you had a change of intention for which the property was held and you had a reasonable expectation of profit or gain, when you took steps to engage third parties to develop the property by constructing a number of strata titled townhouses.

On two separate occasions in 2009 and 2013, you offered the property for sale, both with and without a planning approval. On both occasions, you rejected the opportunity to dispose of the property outright and instead entered into a developmental arrangement. Your decision to enter into a development arrangement demonstrates that you have made a choice to expose yourself to the risks of the development, including the profits, losses and its general success. Your development took over 12 months to complete. The construction costs were $1.8million, excluding the costs of council permits, defending an appeal in a tribunal and engaging a design consultant totalling more than $80,000.

The risk and financial outlay to construct the townhouses indicate that the level of development was beyond that which is necessary to secure council approval and therefore, you were not merely realising the capital value of the property, but had a reasonable expectation of making a profit or gain.

There was a coherent plan for the subdivision of the land. You engaged an individual to be responsible for overseeing the development of the land by constructing a number of townhouses. You consulted and used development and Environment Consultants to formally apply for the council planning permits and engaged design consultants to design the townhouses.

Although you did not acquire other parcels of land or borrow money from a third party to finance the development, based on the combination of factors considered above, there is sufficient evidence to indicate that the activity of demolishing, subdividing and constructing a number of townhouses was done by you is in the form of a business or an adventure or concern in the nature of trade.

Section 9-20 (2) of the GST Act, sets out exclusions to enterprise, however none of those factors are present and therefore no exclusion applies.

Therefore, the subdivision and sales of the subdivided blocks are in the course or furtherance of an enterprise that you carry on. Consequently, the requirement of paragraph 23-5(a) of the GST Act will be met.

GST Registration Turnover

Division 188 of the GST Act contains the rules to work out the GST turnover for the purposes of determining whether you are required to be registered for GST. The GST turnover calculation under Division 188 of the GST Act does not include input taxed supplies (paragraphs188-15(1)(a)of the GST Act).

Section 40-65 (2)(b) of the GST Act, excludes the sale of new residential premises from being input taxed.

The term 'new residential premises' is defined in section 40-75 of the GST Act to mean:

(1) Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than * commercial residential premises) and have not previously been the subject of a * long-term lease;

Since the townhouses located at 1-3 Veronica St, Inverloch where constructed in 2017, they have not been previously sold as residential premises, and have not previously been the subject of a long term lease.

Therefore, the sale of the property is a taxable supply. The sale of the property is included in the GST turnover calculation. Consequently, the requirement of paragraph 23-5(b) of the GST Act will be met.

As you satisfy both the requirements of section 23-5 of the GST Act, you will be required to register for GST.

Question 2

Detailed reasoning

As explained in Question 1, the sales of a number of townhouses are not input taxed under any provisions of the GST Act or any other Act.

The townhouses are not GST-free under any provisions of the GST Act or any other Act.

If the supply of the townhouses meets all the requirements of section 9-5 of the GST Act, then the sales are taxable supplies. You are liable to remit 1/11th of the consideration that you receive for the supply of each townhouse as GST.

Question 3

Detailed reasoning

There are two ways profits from property sales can be treated under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxation purposes:

(1) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of property as trading stock.

(2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose.

A gain from the disposal of property will be stamped with the character of income where:

1. it is made in the ordinary course of carrying on a business; that is, where "what ... is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business": California Copper Syndicate v Harris (1904) 5 TC 159 at pp.165-166; and London Australia Investment Company Limited v Commissioner of Taxation (1976-1977) 138 CLR 106;

2. it is made outside of the ordinary course of a taxpayer's business from an isolated (or "extraordinary") transaction entered into with the intention or purpose of making a profit. (This is the so-called first limb or strand of the decision in Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 at pp.209-210); or

3. it is made from an isolated or one-off business venture or profit-making scheme: Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355.

In respect of isolated or one-off business ventures or profit making schemes, Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income (TR 92/3) at paragraphs 33 – 36 states:

33. The views expressed in Whitfords Beach and Myer that profits from isolated transactions can be assessable income must be looked at in the context of the facts involved in those cases. In Myer, the taxpayer was carrying on a large business at the time it entered into the transactions and, in Whitfords Beach, the taxpayer company embarked on a substantial business venture.

34. Nevertheless, there is a strong line of reasoning through the judgments in Whitfords Beach and Myer that suggests that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income. In Myer, at 163 CLR 213; 87 ATC 4369; 18 ATR 699-700, the Full High Court had this to say about the nature of profits from isolated transactions:

'It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.'

35. A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

(a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

(b) 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.

36. 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme (Myer at 163 CLR 213; 87 ATC 4368-4369; 18 ATR 699-700). If a transaction satisfies the elements set out in paragraph 35 it is generally not a mere realisation of an investment.

From the above it can be concluded that where there was an intention from the outset to sell a property development at a profit and where the property development is made in the course of carrying on a business or as a commercial transaction, these activities are of a revenue nature and therefore assessable under section 6-5 of the ITAA 1997.

From the reasoning of question 1 and consideration of the factors in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, you were not considered to be carrying on a property development business as you are not engaged in developing properties on a regular or continuous basis. Therefore, it can be concluded that the sale of the properties will not form part of any ordinary business activities.

However, where a profit making activity is a one off or isolated transaction and not part of the Taxpayer’s ordinary business activities, the activities may still be revenue in nature and assessable under section 6-5 of the ITAA 1997 where at the time of purchase there was a profit making purpose.

When considering the intentions of a Taxpayer at the time of acquiring the land or a property development, paragraph 38 of TR 92/3 states:

38. The intention or purpose of the taxpayer (of making a profit or gain) referred to in Myer 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 circumstances of the case. This is implicit from what the Court said, in the passage quoted in paragraph 30 above:

'..it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income…'

In paragraph 42 of TR 92/3, an example of change of intention of a Taxpayer is addressed:

42. For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

(a) as the capital of a business; or

(b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

In the reasoning of question 1, based on the provided facts and an objective analysis on your activities upon acquiring the property, we considered that your activities have changed in and have gone beyond a mere realisation of a capital asset. We consider that your initial intention when the property was purchased has changed through the development activities. Based on the circumstances, we consider that your intention or purpose of entering into the transaction in relation to the properties is to make a profit or gain. Therefore, any gains realised on the sale of the properties will constitute assessable income under section 6-5 of the ITAA 1997.