Edited version of your written advice

Authorisation Number: 1051439272306

Date of advice: 9 October 2018

Ruling

Subject: GST and the sale of new residential property

Question

Is your sale of the new residential property subject to GST?

Answer

Yes, the sale of the new residential property is subject to GST

Relevant facts and circumstances

● You jointly own a real property. You are not registered for goods and services tax (GST) as individuals or as a partnership.

● You acquired a property located a property for $xxx, 000 in XXXX. This property was large block of land with a house on it.

● You acquired the property with the intention of moving into it after a few years as your permanent home when you were in an adequate financial position to do so.

● The house on the property was rented out between XXXX XXXX and XXXXX XXXX.

● You occupied the house on the property as your principal place of residence from XXXXX XXXX to XXXXXXXXX XXXX.

● In XXXX, you subdivided the property in two lots.

● The subdivision costed you around $XX,XXX. The costs of the subdivision of the property were paid from joint funds using your saving and through borrowing against other assets.

● Your intention of subdividing the property was to build new residential premises to use as your primary place of residence. However, part way through the subdivision process your plans changed. You purchased another property as your primary place of residence.

● In XXXX XXXX, you commenced construction of the new residential property on Lot 2. The construction cost for the new residential property is around $XXX,XXX.

● You sold Lot 1 with the existing house in XXXX to fund the construction of new residential property.

● You borrowed a minor proportion against other assets to fund the construction of new residential property.

● You have not claimed any income tax deductions in your income tax returns for the expenses incurred in relation to subdivision and construction of the new residential property.

● The construction of the new residential property has now reached practical completion and you now plan to list it for sale.

● The approximate sale price of the new residential property will be around $X,XXX,XXX.

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 40-65

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Reasons for decision

GST is payable on a taxable supply. Under section 9-5 of the GST Act, 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 Australia; 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.

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the property is located in Australia respectively.

Therefore, we need to consider:

● whether your sales of newly developed property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

● whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

● in the form of a business,

● in the form of an adventure or concern in the nature of trade,

● or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1, and Goods and Services Tax Determination GSTD 2006/6. The principles outlined in these public rulings have been applied to your circumstances.

Based on the facts provided, you purchased the property to use as your principal place of residence. You subdivided the property in two lots in XXXX. Your intention of subdividing the property was to build new residential premises to use as your primary place of residence. However, part way through the subdivision process your original purpose changed. In XXXX XXXX, you commenced construction of the new residential property on lot 2 for sale.

We consider that your subdivision, construction and sale of new residential property are in the course of an enterprise and more than the mere realisation of capital assets because:

● There is a change of purpose for which the property was held. You subdivided and constructed the new residential property for sale.

● You had a coherent plan for development of the new residential property.

● You sold Lot 1 with the existing house in XXXX to fund the construction of new residential property

● The subdivision and construction of the new residential property is beyond necessary for council approval.

● You erected new building on lot 2.

On the basis of these factors taken in combination, these activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new residential property have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sale of the new residential property will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the subdivision and sale activities that took place.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its 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:

(a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

(b) your projected GST turnover is at or above $75,000.

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 next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

(b) supplies that are not for consideration.

(c) supplies that are not made in connection with an enterprise that you carry on.

(d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of constructing and selling the new residential property constitute the carrying on of an enterprise. At the time of the sale, the nature of your asset has changed from capital to revenue (trading) asset. The sale of the new residential property does not constitute the transfers of capital assets and section 188-25 of the GST Act does not apply. You are deriving income from disposals of revenue (trading) assets even if the disposals are part of a one-off transaction.

Therefore, the sale of the new residential property is not excluded from the calculation of your projected GST turnover. Hence, the value of this sale must be included in the calculation of your current and projected GST turnovers.

Accordingly, prior to the sale of the new residential property, you should be registered for GST because your projected GST turnover would be above the GST registration threshold of $75000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

GST-free and input tax supply

The sale of new residential property is not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

(a) commercial residential premises, or

(b) new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in subsection 40-75(1) to mean premises that:

(a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

(b) have been created through substantial renovation of a building, or

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

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the newly constructed property is residential premises to be used predominantly for residential accommodation. You plan to sell the property as soon as construction finishes. The new residential property is neither used before 19XX, nor rented for X years. On the basis of these facts, the new residential property is new residential premises as defined under subsection 40-75(1) of the GST Act, and the sale of the property will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

Accordingly, your sale of new residential property satisfies all the requirement of section 9-5 of the GST Act and is subject to GST.

Additional information

GST at settlement

From 1 July 2018, the purchaser has withholding obligation if they are the recipient of a taxable supply of a new residential premises. The withholding amount is due on or before the day that consideration for the supply (other than a deposit) is first provided.

As a supplier, you will be required to assist your purchasers to comply by notifying them that they have withholding obligation.

The amount a purchaser must withhold and pay to us is generally either:

● 1/11th of the contract price (for fully taxable supplies)

● 7% of the contract price (for margin scheme supplies), or

● 10% of GST exclusive market value of the supply (for supplies between associates for consideration less than GST inclusive market value).

Purchasers do not need to register for GST just because they have a withholding requirement.

Please refer to the following link for further information:

https://www.ato.gov.au/business/gst/in-detail/your-industry/property/gst-at-settlement/