Edited version of your written advice

Authorisation Number: 1051418450191

Date of advice: 29 August 2018

Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the Land?

Answer

No.

Relevant facts and circumstances

You, as joint tenants, bought the block of Land. At the time of purchase, the Land contained a shed.

The purchase was financed by your personal savings.

You lodged the development application which was approved by the Council a few months later. The consent relates to the demolition of existing structures and construction of residential flat building – comprising a number of dwellings. A total contribution of a certain sum must be paid to Council prior to the issue of a Construction Certificate.

The residential units were intended for investment purposes, i.e. for rental purposes.

Improvements done since the purchase of the Land includes site survey, clearance, level, water connection and new fences.

You provided a list of expenses on the Land which were paid for from personal finance and savings.

You decided to sell the Land because you are unable to continue with the construction of the residential units due to financial constraints.

The vacant Land has been on the market for sale with a Real Estate. You provided a link to the advertisement which shows that it is a block of cleared land in a prime location with street frontage and with all services, and a development approval for a residential building comprising a number of dwellings.

You are currently in negotiations to sell the Land.

The estimated selling price is over $XXX.

You have not previously bought and sold land nor undertaken any development activities.

You do not carry on any other business or enterprise and you are not registered for GST.

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 195-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

You are not making a taxable supply under section 9-5 of the GST Act when you sell the Land because, although the sale of the Land is for consideration, connected with the indirect tax zone and made in the course or furtherance of an enterprise that you carry on, you are neither registered nor required to be registered for GST.

Consequently, GST is not payable on the sale.

Detailed Reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act, which states that you make a taxable supply if:

● you make a supply for consideration

● the supply is made in the course or furtherance of your enterprise

● the supply is connected with Australia, and

● 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.

All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply.

Who is the entity making the supply of the Land?

The title to the Land is registered in the name of individuals as joint tenants. Therefore, we first need to determine whether the sale of the Land is made by each individual separately or by a partnership for GST purposes.

The term 'you' in the GST Act applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (among others) an individual and a partnership.

The term 'partnership' is defined in the GST Act by reference to the definition of 'partnership' in the Income Tax Assessment Act 1997. That definition states:

partnership means:

(a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly…

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership, which exists for tax purposes only.

At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

However, the GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes.

Goods and Services Tax Ruling GSTR 2004/6 explains how GST applies to transactions involving tax law partnerships and co-owners of property.

As explained in paragraph 40 of GSTR 2004/6, we take the view that if two or more entities enter into a single agreement to purchase property for leasing purposes, the entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.

In applying the principles contained in GSTR 2004/6 to the facts provided, we consider that a tax law partnership exists in your circumstances.

This is because there is an association (existence of a mutual or common purpose) between the co-owners who have an entitlement to receive income jointly (as one entity).

Therefore, the application of section 9-5 of the GST Act applies from the perspective of the partnership.

Taxable supply

Based on the information provided, the sale of the Land satisfies the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you supply the Land for consideration and the supply is connected with the indirect tax zone as the Land is located in Australia. You are not registered for GST. Furthermore, the sale of the Land in the circumstances described is neither GST-free nor input taxed.

It remains to be determined whether the sale of the Land is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Whether the sale is made in the course or furtherance of an enterprise that you carry on

You purchased the Land with the intention of constructing residential units for rental purposes.

Section 9-20 of the GST Act provides that enterprise includes, among other things, 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.

Goods and Services Tax Ruling GSTR 2004/8 which considers the meaning of 'in the course or furtherance' as required in paragraph 9-5(b) of the GST Act states at paragraphs 28 and 29:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

Paragraph 30 of GSTR 2004/8 lists characteristics which indicate strongly that a sale of a thing has a connection with an enterprise:

● at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

● at the time of sale it was applied in carrying on your enterprise to at least some extent; and

● it is sold as a transaction of your enterprise.

Each of these points will indicate a connection, and not all of the points need to be satisfied.

Section 195-1 of the GST Act defines the meaning of carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Miscellaneous Taxation Ruling MT 2006/1 discusses commencement and termination of an enterprise as follows:

Commencement of an enterprise

122. Given this definition, it follows that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

123. In the Commissioner's view the term, 'doing anything in the course of the commencement....of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

124. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated.

…

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all 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.

The purchase of the Land with the intention of constructing residential units for rental purposes is the commencement of a leasing enterprise. You have undertaken preparatory works to the construction of the building. However, due to financial constraints construction has not commenced and you are now in the process of selling the vacant Land. The sale of the Land results in the termination of the leasing enterprise.

We consider that the sale of the Land has a sufficient connection with the leasing enterprise. Accordingly, the sale of the Land is made in the course or furtherance of an enterprise that you carry on and the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Whether you are required to be registered

As you are not registered for GST, we need to determine if you are required to be registered.

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 (currently $XXX).

As outlined above, you are carrying on a leasing enterprise.

We therefore need to determine if your GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

● your current GST turnover is at or above $XXX, and the Commissioner is not satisfied that your projected GST turnover is below $XXX or

● your projected GST turnover is at or above $XXX.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the projected value of all supplies expected to be made in the next 11 months.

In working out both your current and projected GST turnover, you disregard certain supplies including supplies that are input taxed.

Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

The rent that is expected to be generated from the leasing of the residential premises is for an input taxed supply under paragraph 40-35(1)(a) of the GST Act and is excluded when calculating both the current and projected GST turnovers. As such, any projected rental income that you may have anticipated receiving would be excluded from determining whether the project turnover threshold had been met or exceeded.

The construction of the building never commenced and you are now in the process of selling the Land. As the sale of the Land is not an input taxed supply the question becomes whether the sale of the Land results in the projected turnover threshold being met or exceeded.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

● by way of transfer of ownership of a capital asset, and

● solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of capital assets is discussed in Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 32 of GSTR 2001/7 state:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as the 'business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

As the Land was purchased with the intention of holding it for a reasonable period of time, to be held as income producing asset, it is a capital asset of the leasing enterprise. Further, the sale of the Land will result in the cessation of the leasing enterprise by you. Hence, the value of the sale of the Land is excluded in calculating your projected GST turnover.

As such, when you sell the Land both your current and projected GST turnovers are below $XXX. Hence, as your GST turnover does not meet the registration turnover threshold, you are not required to be registered for GST under section 23-5 of the GST Act.

As you are neither registered nor required to be registered for GST, the requirement of paragraph 9-5(d) of the GST Act is not satisfied.

Therefore, as you do not satisfy all the requirements of section 9-5 of the GST Act, the sale of the Land is not a taxable supply.