Edited version of your written advice

Authorisation Number: 1051361439582

Date of advice: 16 April 2018

Ruling

Subject: Construction and sale of residential premises

Question

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

Answer

Yes.

Relevant facts and circumstances

You, became property investors in 20XX.

You sought advice from a mortgage broker. You initially wanted to acquire a number of properties for the purposes of investment, utilising existing equity in your own home. After attending housing sales and not being able to find a suitable property to invest in, you decided to build an investment property for the purposes of renting.

The mortgage broker suggested a line of credit (LOC) loan which would allow you to pay 20% of the deposit price, stamp duty and other up-front costs associated with purchasing between 2 or 3 future investment properties.

The mortgage broker established a LOC loan for the amount of $X, which was approved by the Bank on xx xx 20xx.

On xx xx 20xx you paid a deposit to the builder to purchase a property at in Australia (the property). The property consisted of vacant land (land) and you entered into a contract with the builder to build a dwelling on the land (the dwelling) as part of a house and land package. You entered into a purchase contract with the builder on xx xx 20xx. The contract with the builder was for a dwelling to be constructed for $xx on the land. The purchase price of the land was $xx.

Building work in relation to the dwelling commenced in xx 20xx.

At the time of commencing building work you expected a rental return of $xxx per week.

You took out 2 loans to cover xx% of the land and building costs of the dwelling. The loans were as follows:

● A loan with x for $xx0 with variable interest rates over a x year term. This loan commenced on xx xx 20xx (loan 1).

● A construction loan with x for $xx. This loan commenced on xx xx 20xx. It was an interest only loan at variable rates for a x year period, with the loan term being x years (loan 2).

Repayments of up to xx% of loans 1 and 2 were made via your offset LOC account.

Over the next x months you became increasingly concerned about the risk associated with purchasing the dwelling. You felt that you were subjected to financial stress due to the following:

● Interest rates were increasing in relation to loans 1 and 2, the LOC and your existing private home loan.

● Further development of the surrounding area resulted in many rental and properties for sale becoming available in the market, which according to you were or had the potential to drive down rental and sale prices.

● Additional construction and completion costs resulted in you exhausting your line of credit and borrowing money from your family. Your LOC loan reached $x and you borrowed $x from your family to meet the costs of constructing a drive way and landscaping costs. You also engaged other contractors to carrying out some of the incomplete works in an effort to reduce your costs.

● You had no other savings and renovations carried out on your principal place of residence (private dwelling) depleted your financial resources. The LOC loan covered some of the costs associated with the renovation to your residence. The renovation costs associated with your private dwelling was originally quoted as $x, but increased to $x and about $x of the work remains incomplete and will have to be completed by another contractor.

After visiting the accountant in x 20xx, you formed a partnership and obtained an ABN for this partnership. The partnership entitled xx to xx% of the income from the rent or sale of future investment properties and xx was entitled to the remaining xx%. You also registered the partnership for GST. You claim the formation of the partnership agreement and registration for GST was for future investment houses you contemplated building.

Building work on the dwelling was completed in xx 20xx.

In xx 20xx you spoke to the real estate agent about either selling or renting out the dwelling. The real estate agent indicated at this time that there were buyers interested in purchasing your dwelling.

The dwelling was marketed by the real estate agent in xx 20xx for rent or for sale. The rental amount being sought at this time was $xx per week.

In xx 20xx, you cancelled your ABN and GST registration, as you believed GST would not be payable on the sale of the dwelling as it would be used for rental purposes and only applied to future investment properties you may purchase.

You entered into a contract to sell the dwelling to the purchaser on xx xx 20xx. The sale price did not include GST.

The new purchasers moved into dwelling immediately and rented it from you for x weeks prior to the completion of the sale. You received rental income of $x per week.

The dwelling was sold for $x, with the date of settlement of sale being xx xx 20xx.

You have used the proceeds from the sale of the dwelling to pay any remaining debt relating to the two loans and LOC loan.

You have previously not engaged in property development activities and do not intend to engage in such activities in the future.

Relevant legislative provisions

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

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

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 terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

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 (Australia), and

(d) you are registered, or required to be registered for GST.

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

For the supply of the Property to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

You have bought, developed and sold new residential premises for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Further, the supply of the Property in your situation will neither be GST-free or input taxed.

Accordingly, we must determine whether:

(a) your sale of the Property are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

Enterprise

On balance, your activities are in the form of an adventure or concern in the nature of trade (an isolated transaction or one-off), and the character of the asset is of a revenue nature. You acquired the property for the purpose of development and once built had the intention of either holding the property for rental or for sale. You sold the property. This means that you are carrying on an enterprise for the purposes of section 9-20 of the GST Act and are required to be registered for GST under section 23 of the GST Act.

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…

Miscellaneous Taxation Ruling 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 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.

What is an activity, or series of activities?

The ‘enterprise’ definition in section 9-20 of the GST Act 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.

To explain this, paragraph 161 and 162 in MT 2006/1 provides an example that 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.

Adventure or concern in the nature of trade:

‘An adventure or concern in the nature of trade’ is not defined in either the GST Act or the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Paragraph 234 of MT 2006/1 states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Isolated property transactions or ‘one offs’

MT 2006/1 aligns itself with Taxation Ruling TR 92/3 and provides a list of the following factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

● there is a change of purpose for which the land is held;

● there is a coherent plan for the subdivision of the land;

● there is a level of development of the land beyond that necessary to secure council approval for the subdivision;

● 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 business organisation, for example a manager, office and letterhead;

● borrowed funds financed the acquisition and subdivision;

● interest on money borrowed to defray subdivisional costs was claimed as a business expense; and

● buildings have been erected on the land.

Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated commercial transaction amounts to a business operation or commercial transaction:

● the nature of the entity undertaking the operation or transaction;

● the nature and scale of other activities undertaken by the taxpayer;

● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

● the nature, scale and complexity of the operation or transaction;

● the manner in which the operation or transaction was entered into or carried out;

● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

● if the transaction involves the acquisition and disposal of property, the nature of the property, and

● the timing of the transaction or the various steps in the transaction.

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.

Application to your situation

An objective assessment of the information provided establishes that your intention in entering into the transaction to build a dwelling was for the purpose of making a profit or gain from an isolated transaction.

Your intention in relation to the property changed and your activities show an intention to generate a profit through building a dwelling and immediately selling the house to pay the debts arising in relation to your activities and to realise a high sale price before other properties come onto the market.

Your activities include;

● In xx 20xx, you formed a partnership and obtained an ABN for this partnership

● You sought advice from your accountant and a mortgage broker.

● You attended housing sales to find a suitable property

● You secured finance with the xx Bank and xx to cover costs of land and construction.

● You entered into a purchase contract with the builder on xx xx 20xx. The contract with xx was for a dwelling to be constructed on the land.

● You engaged other contractors to carrying out some of the incomplete works

● Building work on the dwelling was completed in xx 20xx

● The dwelling was marketed by the real estate agent in xx 20xx for rent or for sale.

● You entered into a contract to sell the dwelling to the purchaser on xx xx 20xx. (The Purchaser was the then tenant for a x week period)

As outlined in paragraph 42 of TR 92/3, when a taxpayer’s intention in relation to an asset changes and the taxpayer decides to venture into a profit-making scheme with the characteristics of an isolated transaction, the activity of the taxpayer will constitute the carrying out of a profit-making scheme.

Your intention at the time of sale of the property was to either rent it or sell it. Your actions in placing the Property on the market for either rent or sale in x 20xx showed that you held a dual intention to either sell or rent dwelling. Your expectation of obtaining a rental return of $x per week when you commenced building the dwelling was realised as the dwelling was marketed for rent at $x per week when completed. When your real estate agent expressed to you there were potential purchasers that held an interest in the property, and coupled with the financial stress you were under, you continued to hold an intention of either renting or selling. Following construction of the dwelling, you had not abandoned that intention of either marketing the Property for either sale or rent. You immediately entered into a contract with a purchaser within approximately x months following construction of the dwelling.

Based on the information provided, it is viewed that the building and sale of the Property is a profit making undertaking.

We therefore consider that you carried on an enterprise in relation to the acquisition, development and sale of the Property.

Requirement to register for GST

Section 23-5 of the GST Act requires you to be registered for GST if:

a) you are carrying on an enterprise and

b) your GST turnover meets or exceeds the registration turnover threshold. (The current registration turnover threshold is $75,000.)

Your GST turnover does not include the supply of capital assets as per subsection 188-25 of the GST Act.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

Paragraph 31 of GSTR 2001/7 provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’, as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations.

Paragraph 46 of Goods and Services Tax Ruling GSTR 2001/7 confirms that an isolated transaction comprising the acquisition and development of a property for resale is a series of activities done in the form of an adventure or concern in the nature of trade and therefore falls within paragraph 9-20(1)(b) of the ‘enterprise’ definition in the GST Act:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

As set out above we consider that:

1 your activities are an enterprise in the form of an adventure or concern in the nature of trade, and

2 the supplies are neither GST Free or input taxed.

Therefore the value of the supply of the Property will be included in your turnover threshold. As the sale value exceeds $75,000 you are required to be registered for GST.

You satisfy the requirements of paragraph 9-5(d).

The supply of the Property being new residential premises as defined in section 40-75 of the GST Act will be taxable supply as per subsection 9-5 of the GST Act.