Edited version of your written advice

Authorisation Number: 1051326846296

Date of advice: 16 January 2018

Ruling

Subject: Property and enterprise

Question 1

Will your supply of the property located in Australia be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 Section (GST Act)?

Answer:

Your supply of the property will be a mixed supply which is partly a taxable supply and partly an input taxed supply.

Question 2

Are you entitled to apply the margin scheme pursuant to Division 75 of the GST Act to calculate the GST payable?

Answer:

Yes

Relevant facts and circumstances

You, the Trustee for the Trust (the Trust) are not registered for GST.

The Trust was created to acquire a property located in Australia. The property was acquired for the purpose of re-sale for a profit sometime in the future.

You acquired the property in mmyyyy for $X.X million. The property is XX acres in size and includes a residential premise, swimming pool and fruit trees. The house and swimming pool are surrounded by a large hedge and separated from the balance of the property. The fruit trees and balance of the farmed area is outside the hedges.

The purchase contract (for your acquisition) names the vendors. The margin scheme was not applied to the sale. The vendors were not registered for GST.

In order to increase the value of the property, you engaged a company to apply for a development permit for the property.

In mmyyyy, a real estate agent approached you and offered to sell the property for $X million to a property developer. You decided to engage this agent as the selling price he mentioned was higher than what you had expected.

After some negotiation about various issues, you came to an agreement with the new buyer for this property. The contact was signed on ddmmyyy with settlement to occur in mmyyy. Subsequently, you withdrew the development permit application from the council at the request of the new buyer.

The price is GST inclusive with the margin scheme being applied to calculate the GST payable.

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 9-80

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

A New Tax System (Goods and Services Tax) Act 1999 Division 75. and

A New Tax System (Goods and Services Tax) Act 1999 Section 195.

Reasons for decision

In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Section 9-5 provides that you make a taxable supply if:

(a) You make the supply for consideration

(b) The supply is made in the course or furtherance of an enterprise that you carry on

(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.

Your supply of your property will meet paragraphs (a) to (c) and will not be GST free. Therefore, where you are required to be registered for GST, it will be a taxable supply, except to the extent that it is input taxed.

Required to be registered for GST

Section 23-5 of the GST Act provides that you are required to be registered if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

Enterprise

Section 9-20 of the GST Act defines the term enterprise to include:

● an activity, or series of activities, done in the form of a business;

● an adventure or concern in the nature of trade; or

● provision of a lease, licence or other grant of an interest in property on a regular or continuous basis.

The ATO view on the meaning of the term ‘enterprise’ is explained in detail in 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).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade.

● A business encompasses trade engaged in on a regular basis.

● An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. It refers to ‘the badges of trade’ and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of ‘trade’ and held for income producing purposes, or held as an investment asset or for personal enjoyment.

Paragraphs 270 to 272 in MT 2006/1 deal with land bought with the intention of resale.

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.¹¹¹

Examples of subdivisions of land that are enterprises

Example 28

271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit.

272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner.

When you acquired the property with the intention to sell at a profit, you were conducting an enterprise within the meaning of section 9-20.

GST turnover

As set out above the Commissioner has determined that you are carrying on an enterprise and therefore we will examine whether your GST turnover meets the registration threshold.

Section 188-10 provides that you have a particular turnover threshold if:

● 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

● your projected GST turnover is at or above the turnover threshold.

The threshold for either current or projected turnover is currently $75,000.

Your current GST turnover is the value of all supplies you have made or are likely to have been made in the current month and the previous 11 months excluding input taxed supplies, supplies that are not for consideration and are not taxable supplies under section 72-5 and supplies not made in connection with an enterprise you are carrying on.

Your projected GST turnover at a time during a particular month is the sum of all supplies you have made or are likely to be make during that month and the next 11 months other than input taxed supplies, supplies that are not made for consideration and are not taxable supplies under section 72-5 and supplies not made in connection with an enterprise you are carrying on.

Whilst your current GST turnover is below the threshold, your projected GST turnover exceeds the GST turnover threshold, as it includes the supply of the Property. Consequently, you are required to be registered for GST.

As you are required to be registered for GST, your supply of the Property satisfies all the requirements of section 9-5 for of the GST Act, except to the extent that the supply of the property will be input taxed.

Input taxed supply of residential premises

Section 40-65 provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, the sale is not input taxed to the extent that the residential premises are:

● commercial residential premises, or

● new residential premises.

The term 'residential premises' is defined in section 195-1 to include land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 212/5) considers how subdivision 40-B and 40-C applies to residential premises. Paragraph 46 of GSTR 2012/5 provides that:

There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

The house and the swimming pool with the associated area within the hedge meets the definition of residential premises that are not commercial residential premises. Further, the premises are not new residential premises as you acquired them from the previous owner.

Therefore, the supply of the portion of the property with the house, will be an input taxed supply.

The balance of the property will be a taxable supply.

Mixed and composite supplies

Your supply of the Property will be a mixed supply, consisting of:

● an input taxed supply of the residential premises and land within the hedged area, and

● a taxable supply of the balance of the Property.

Section 9-80 provides that where a supply is partly taxable and partly non-taxable, the value of the taxable supply is worked out on a proportional basis.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains how to identify the taxable and non-taxable parts of a supply and the difference between a mixed supply and a composite supply.

Paragraph 16 of GSTR 2001/8 provided that the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. Your supply of the property is a mixed supply and you will need to apportion the sale price between the input taxed supply of the house and the balance of the property.

Paragraphs 25 to 27 of GSTR 2001/8 provide that you can use any reasonable basis to apportion the consideration and calculate the value of the taxable and non-taxable parts of a supply. Whichever method you choose should be supported by your business records.

Paragraph 95 of GSTR 2001/8 provides the following guidance.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.53

Apportioning the sale price on a sqm basis will not generally lead to a reasonable outcome as different structures on a property, the age of the structures and other matters will lead to different values being associated with the different areas of your property.

Example 15C at paragraph 103F of GSTR 2001/8 gives an example of the supply of a property comprising commercial and residential components. It provides the following guidance:

Example 15C - commercial and residential premises

103F. Hilary is registered for GST. She sells a property that consists of commercial premises and residential premises. The property is on a single title and is currently untenanted, although the commercial part was recently rented for $1,000 per week and the residential part for $500 per week.55A Hilary may reasonably apportion two thirds of the consideration for the sale (the same proportion the rent for the commercial premises bears to the total rent of $1500) to the commercial part and one third to the residential part to ascertain the value of the taxable part.

Question 2

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

a. Selling a freehold interest in land; or

b. Selling a stratum unit; or

c. Granting or selling a long-term lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme.

If the land is not ineligible for the margin scheme, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease.

Margin scheme eligibility

Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme. None of the circumstances listed applies to your acquisition of the Property. Your supply of the Property will be a supply of a freehold interest in land. You and the purchaser have agreed in writing that the margin scheme is to apply. Therefore, the margin scheme will apply to your supply of the Property, pursuant to subsection 75-5(1).