Edited version of your written advice

Authorisation Number: 1051468696507

Date of advice: 20 December 2018

Ruling

Subject: GST and sale of leased residential properties.

Question

Are the sales of residential properties taxable supply and subject goods and services tax (GST)?

Answer

No.

Relevant facts and circumstances

● Applicants purchased a residential property in March 20XX and the property was leased out in April 20XX.

● The applicants are not registered for goods and services tax (GST).

● In February 20YY, the property was demolished and the applicants subdivided the land and built two new residential units.

● The applicants have funded the subdivision and the construction of two units from their personal savings and the balance was funded by a bank loan.

● Both units were leased out in January 20ZZ after the completion of the construction in December 20YY.

● The residential unit A was sold in March 20SS and the unit B is still leased and due for settlement in February 20TT.

● The applicants have decided to sell both units due to the continuous fall in the property market.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 – section 23-5, 23-15

A New Tax System (Goods and Services Tax) Act 1999 – section 40-35, 40-65, 40-75

A New Tax System (Goods and Services Tax) Act 1999 – section 188-10, 188-15, 188-20, 188-25

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

You make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with the indirect tax zone; and 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.

A supply of residential premises is not GST-free under the GST Act. However, section 40-65 of the GST Act provides that the supply of residential premises is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the supply is not input taxed to the extent that the residential premises are ‘commercial residential premises’ or ‘new residential premises’ other than those used for residential accommodation before 2 December 1998.

The term ‘new residential premises’ is defined under subsection 40-75(1) of the GST Act, and it includes premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.

New residential premises

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. Paragraph 22 of GSTR 2003/3 provides that the supply of residential premises by way of sale is a taxable supply where all the following conditions are met:

● the residential premises are new residential premises as defined in section 40-75;

● the new residential premises were not used for residential accommodation before 2 December 1998;

● the supply is made for consideration;

● the supply is made in the course or furtherance of an enterprise that the vendor carries on;

● the residential premises are in Australia; and

● the vendor is registered or required to be registered.

The term ‘new residential premises’ is defined under subsection 40-75(1) of the GST Act, and provides that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease or

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

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

However, under subsection 40-75(2) of the GST Act, residential premises are not new residential premises if the premises have only been used for making input taxed supplies of residential rental under paragraph 40-35(1)(a) of the GST Act for the period of at least 5 years since:

(a) the premises first became residential premises: where the premises have not been previously been sold as residential premises and have not previously been the subject of a long term lease

(b) the premises were last substantially renovated: where the premises have been created through substantial renovations of a building, or

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

In this case, the supply of two residential units subject of this ruling would be considered as new residential premises under paragraph 40-75(1)(a) of the GST Act as the units have not previously been sold as residential premises and have been only rented out for less than five years.

The supply of two new residential units would meet the first five conditions listed in paragraph 22 of the GST 2003/3. As explained above the two residential units are new residential units; and were not used for residential accommodation before 2 December 1998; and sold for consideration; and the residential units are in Australia and have been tenanted for rental after completion. Therefore, the applicants are considered to be carrying on an enterprise of leasing residential premises and the sale of the two residential units will be in the course or furtherance of their leasing enterprise.

However, the applicants are not registered for GST and the issue of whether the applicants are required to be registered for GST should be determined.

Section 23-5 of the GST Act provides that you are required to be registered under this Act if you are carrying on an enterprise, and your annual turnover meets the registration turnover threshold. Subsection 23-15(1) of the GST Act provides that your registration turnover threshold (other than a non-profit body) is $75,000.

GST turnover threshold

Subsection 188-10(1) of the GST Act provides that you have a GST turnover that meets 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 current GST turnover is the value of all the supplies made by you during the current month and previous eleven months. Projected GST turnover is the value of all the supplies made or likely to be made by you in the current month and the next eleven month.

Under subsections 188-15(1) and 188-20(1) of the GST Act, input taxed supplies such as residential rent is excluded from current and projected GST turnover. The rental income from the lease of residential properties is not included in the calculation GST registration turnover. In addition, the proceeds from the disposal of a capital asset are also excluded from the projected GST turnover under section 188-25 of the GST Act.

Section 188-25 of the GST Act provides that in working out your projected GST turnover, disregard:

● any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours, and

● any supply made, or likely to be made, by you solely as a consequence of;

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

Capital assets

Goods and Services Tax Ruling GSTR 2001/7 explains the Tax Office view on the operation of section 188-25 of the GST Act. 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’ of and may be described as ‘the business entity, structure or organisation set up or established for the meaning 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.

In this case, the two residential units had been held by the applicants to produce rental income. Therefore, the two residential units had been the profit yielding subject of the leasing enterprise carried out by the applicants. As such, the two residential units had been capital assets.

As the sales of the two units represented the transfer of ownership of a capital asset, the proceeds from the sales would be excluded from the calculation of projected annual turnover. Therefore, the applicants are not required to be registered for GST.

As explained above, the applicants neither registered nor required to be registered for GST, the supply of two residential units would not satisfy all the requirements of section 9-5 of the GST Act. Therefore, the supplies would not be taxable and not subject to GST.

Please note that we have not considered the capital gains tax consequences of those sales in this private ruling.