Edited version of your written advice

Authorisation Number: 1051361481124

Date of advice: 17 April 2018

Ruling

Subject: GST and new residential premises

Question 1

Are Individual A & Individual B (the Partnership) carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

If the Partnership is carrying on an enterprise, is the Partnership required to be registered for GST under section 23-5 of the GST Act?

Answer

No. However, the Partnership can choose to be registered for GST.

Question 3

If the Partnership is carrying on an enterprise, is the Partnership entitled to claim input tax credits in respect of acquisitions made in constructing 144B?

Answer

No. However, the Partnership may be entitled to decreasing adjustments under Division 129 if they sell the premises.

This ruling applies for the following periods:

Quarterly period ended XXYYYYY to quarterly period ending XXYYYYY.

Relevant facts and circumstances

The partnership of Individual A and Individual B [the Partnership], acquired the Parent Lot on XXYYYY.

Individual A and Individual B resided in the Parent Lot as their main residence.

In XXYYYY, Individual A and Individual B subdivided the Parent Lot into 2 (two) lots, being Lot A and Lot B.

Individual A and Individual B constructed a new dwelling on each of Lot A and Lot B. In relation to the new dwellings:

(i) Construction commenced in about XXYYYY;

(ii) Construction was completed in about XXYYYY;

(iii) The Cost of construction and finishing the dwellings was approximately $X for each of Lot A and Lot B.

Following the completion of construction of the new dwellings:

(i) Individual A and Individual B resided in Lot B as their main residence for a period of X months. During this period Lot A was vacant.

(ii) Individual A and Individual B then moved into Lot A and have resided in it as their main residence for approximately 12 months.

(iii) Whilst Individual A and Individual B have resided in Lot A, they have leased Lot B to tenants as residential accommodation or held Lot B available for lease to tenants as residential accommodation.

Individual A and Individual B continue to reside in Lot A as their main residence.

The Partnership intends to lease or hold available for lease, Lot B to tenants as residential accommodation.

To fund the construction of the two new dwellings, Individual A and Individual B borrowed the sum of $X and used approximately $X of their own funds.

Due to a change in the financial position of Individual A and Individual B, such that Individual A and Individual B may no longer have the capacity to retain each of Lot A and Lot B, Individual A and Individual B are considering marketing either Lot A or Lot B for sale.

Individual A and Individual B did not register for GST and did not claim any input tax credits for the cost of constructing either of the dwellings on Lot A and Lot B.

After receiving advice, Individual A and Individual B have taken steps to obtain an ABN and to become registered for GST solely for the purpose of preserving their rights to claim input tax credits in respect of the construction of Lot B, should it be determined by the Commissioner that GST will apply to any subsequent sale of Lot B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-40

Section 9-5

Section 9-20

Section 23-5

Division 129

Division 188

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

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

Question 1

Are Individual A and Individual B (the Partnership) carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999?

Section 23-5 provides that you may be registered under the GST Act if:

● you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold)

● you intend to carry on an enterprise from a particular date.

Paragraph 9-20(1)(c) includes in the definition of ‘enterprise’, ‘an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property’.

In respect of the property known as Lot B, following completion of construction (in XXYYYY), you resided in this property as your main residence for a period of X months. Thereafter, you moved into Lot A and Lot B was leased to tenants as residential accommodation or was available for lease to tenants as residential accommodation.

The leasing of Lot B to tenants is considered an enterprise for the purpose of paragraph 9-20(1)(c).

You contend however, that the activity of constructing Lot B and leasing it to residential tenants can properly be characterised as ‘an activity done by an individual, or a partnership (all of the members of which are individuals), without a reasonable expectation of profit or gain and therefore satisfies the criteria in subsection 9-20(2)(c) to be excluded from being considered an enterprise. This is because the Partnership does not expect to make a profit or gain from the derivation of rental income from Lot B for a period of years as it is anticipated that the attainable rental income from Lot B is not likely to exceed the interest and holding costs related to Lot B for some time.

The partnership embarked upon the activity of subdivision, construction and leasing with the intent of obtaining financial advantage at some future time. In entering into the latter activities, there was a reasonable expectation that there would be a profit or gain at some future time in respect of the leasing of the premises for residential accommodation.

Consequently, the partnership does not fall within the qualifications contained in subsection 9-20(2).

Further, 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) discusses the termination of an enterprise at paragraph 140 which states:

Carrying on an enterprise includes doing anything in the course of the termination of an enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all the assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping or other disposal of the assets.

Paragraph 142 of MT 2006/1 goes on to say that a change in purpose or use of all assets could result in the termination of an enterprise.

In this case, due to a change in the financial position of Individual A and Individual B, such that Individual A and Individual B may no longer have the capacity to retain each of Lot A and Lot B, Individual A and Individual B are considering marketing Lot B for sale. The decision to sell the enterprise asset generating the rental income is in the termination of the leasing enterprise.

The Partnership registered for GST, effective, 1 January 2014.

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

Section 9-5 provides 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 for GST.

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

In your case, you intend to sell Lot B for consideration, the supply will be made in the course of your leasing enterprise, the property is located in Australia and you are registered for GST. Further, there is no provision in the legislation that would make the supply GST-free in your circumstances.

Section 40-65 states:

(1) 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).

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The meaning of new residential premises is discussed in section 40-75 and includes residential premises if they:

(a) have not previously been sold as residential premises; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that have been built, to replace demolished premises on the same land.

However, the residential premises are not new residential premises if, for the period of at least 5 years since:

(a) the premises first became residential premises; or

(b) the premises were first substantially renovated; or

(c) the premises were last built

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Based on the facts submitted to us, as the premises were constructed by the partnership in September 2016, the premises remain new residential premises and if sold, the sale will not be an input taxed supply.

Question 2

If the Partnership is carrying on an enterprise, is the Partnership required to be registered for GST under section 23-5 of the GST Act?

You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. Your GST turnover does not include supplies that are input taxed and supplies that are made by way of transfer of ownership of a capital asset of yours.

In your case, the Partnership is making input taxed supplies of the premises by way of lease. If they decide to sell the premises, they will be selling a capital asset of their ‘leasing’ enterprise. As the proceeds from these transactions are not included in their GST turnover, this turnover does not meet the registration turnover threshold and accordingly the Partnership is not required to be registered.

However, if you are carrying on an enterprise, section 23-10 allows you to choose to register even if your GST turnover does not meet the registration turnover threshold. We note that the Partnership has voluntarily registered for GST effective XXYYYY.

Question 3

If the Partnership is carrying on an enterprise, is the Partnership entitled to claim input tax credits in respect of acquisitions made in constructing Lot B?

You are entitled to the input tax credit for any creditable acquisition you make. One of the requirements for an acquisition to be creditable, is that it be made solely or partly for a ‘creditable purpose’.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

From the information provided, the original intention of the partnership was to lease Lot B to residential tenants. This is an input taxed supply and therefore, the acquisitions made in constructing Lot B, would not have been for a creditable purpose. However, due to a change in the financial position of Individual A and Individual B, such that Individual A and Individual B may no longer have the capacity to retain each of Lot A and Lot B, the partnership are considering marketing Lot B for sale (and this transaction may be a taxable supply).

If your actual extent of use for a creditable purpose is different from your planned use, you may need to make an adjustment under Division 129.

Goods and Services Tax Ruling GSTR 2009/4, Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose discusses adjustments under Division 129. Paragraph 29 of GSTR 2009/4 is particularly relevant in your case. This paragraph states:

29. If an entity constructs new residential premises to use solely by way of leasing the residential premises, and this planned use is supported by an objective assessment of the surrounding facts and circumstances, the entity's acquisitions will relate solely to making supplies that would be input taxed,²⁸ and will not be made for a creditable purpose. The entity will not be entitled to input tax credits in relation to the acquisitions.²⁹ Although the acquisitions in these circumstances are not creditable acquisitions, adjustments can still arise under Division 129 if the entity subsequently applies the residential premises for a creditable purpose.³⁰

At the end of each adjustment period for relevant acquisitions, an entity will have to consider whether or not it is required to make an adjustment under Division 129 for a change in extent of creditable purpose.

To ascertain whether an adjustment arises for a change in extent of creditable purpose under Division 129 it is necessary to determine the extent to which a thing has been applied for a creditable purpose up until the end of the relevant adjustment period.

Subsection 129-50(1) provides that an entity applies a thing for a creditable purpose to the extent that the entity applies it in carrying on its enterprise. However, subsection 129-50(2) provides that an entity does not apply a thing for a creditable purpose to the extent that the application relates to making supplies that are input taxed or the application is of a private or domestic nature. The meaning of the term 'apply' is central to determining the extent to which an acquisition has been applied for a creditable purpose, and whether or not an adjustment arises under Division 129.

Paragraph 38 of GSTR 2009/4 goes on to say that:

38. New residential premises will not be applied for a creditable purpose, to any extent, when they are being used exclusively as part of an enterprise of leasing residential premises. However, the new residential premises would not be precluded from being applied for a creditable purpose in the future if the entity subsequently decided to sell the new residential premises as part of its enterprise activities and, based on an objective assessment of the facts and circumstances, the entity commenced holding the new residential premises for the purpose of sale.

Paragraphs 44 to 47 provide guidance on demonstrating that new residential premises are being held for sale in an entity’s enterprise.

An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity's enterprise. Such an assessment requires a weighing up of the evidence that supports a finding that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose. There must be satisfactory evidence to support a conclusion that the premises are being held for the purpose of sale, or for some other purpose.

Although any one factor may not be sufficient on its own, the following are some examples of objective facts and circumstances that the Commissioner would expect to be present to conclude that premises are being held for the purposes of sale. The following is not an exhaustive list and there may be other facts and circumstances in individual cases that will also be relevant to determining if the particular premises are being held for the purposes of sale. In any particular case, the Commissioner would expect there to be a preponderance of relevant factors to support a conclusion that premises are being held for the purposes of sale. Some of the factors that may be relevant include:

● marketing of the premises for sale, such as, listing the premises for sale with a real estate agent or agents, advertising the premises for sale in relevant publications or via Internet advertising websites for real property, arranging 'open for inspection' times, and showing prospective buyers through the premises;

● business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale;

Similarly, evidence that the premises has been applied, to some extent, in relation to making input taxed supplies includes, for instance:

● business plans, feasibility studies or minutes of meetings demonstrating that the entity has determined to use the premises for lease;

● periods of actual leasing of the premises; and

● marketing of the premises for lease.

In your case, you have advised that the partnership plans to sell Lot B. Where objective indicators demonstrate that the property is being marketed for sale, you will have a Division 129 adjustment, as there has been a change in the extent to which the acquisitions made in constructing Lot B are being applied in carrying on your enterprise. Pursuant to subsection 129-40(1), this will be a decreasing adjustment.

Division 129 provides for adjustments in relation to things in tax periods that are adjustment periods. The number of adjustment periods that relate to a thing are determined by the GST-exclusive value of the acquisition. The number of adjustment periods for acquisitions (that do not relate to business finance) are set out in the following table.

If you sell the property, the next tax period applying to you that ends:

● on 30 June in any year; or

● if none of the tax periods applying to you in a particular year ends on 30 June – closer to 30 June than any of the other tax periods applying to you in that year;

is the last adjustment period for the acquisition or importation in question.

Further information on new residential premises and adjustments for changes in extent of creditable purpose can be found in Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.