Edited version of your written advice

Authorisation Number: 1051504631024

Date of advice: 30 April 2019

Ruling

Subject: GST registration and the sale of property.

Questions

1) Are you required to register for GST in relation to the sale of your property in Australia?

2) Should you be required to register for GST, will the sale of your property be an input taxed supply of residential premises in accordance with section 40-65 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and therefore not subject to GST?

Answers

1) No, unless the sale were to amount to more than a mere realisation of a capital asset which based on the facts as provided we do not consider it to be, or unless the weekly rent were to increase substantially and a significant part of it were to be in respect of a supply other than an input taxed supply of residential premises to be used predominantly for residential accommodation in accordance with section 40-35 of the GST Act.

2) This question is no longer applicable given the answer to question 1.

This ruling applies for the following period:

1 August 2018 to 31 August 2023.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

● You entered into a contract of sale of real estate in 20XX.

● The property being sold by you is in Australia.

● The property has been owned by you since the early 2000’s.

● You are not registered for GST because the only enterprise that you carry on is that of collecting residential rent.

● The property is located in an area which is made up of a mixture of hobby farms and more substantial lots to residential land subdivisions with lot smaller lot sizes.

● The property is consists of approximately X hectares of land, on which there is a residential dwelling and X large sheds.

● The residential dwelling consists of a large house. In total, there are X bedrooms and X bathrooms, as well as X kitchens and multiple living areas. A double garage and swimming pool are also shown on the floor plan.

● The residential dwelling on the property is not ‘commercial residential premises’ as the term is defined in section 195-1 of the GST Act.

● Photos of the property show that the house is in a condition fit for human occupation as a residence; and that there is a large, mainly flat and open, area of land surrounding the residence. The sheds are not clearly visible from the photos.

● You advised that the sheds are made of metal/tin and have a concrete base and that X out of the X of them have a roller door. They do not contain any special fittings (other than being fitted with power), nor do they have any shelving (they are empty shells).

● The sheds are not maintained by you; consequently they are in a state of disrepair. As they are not very well sealed, birds can get into them; so they do not lend themselves to store any goods of valuable significance.

● You advised that the property was acquired by you in the early 2000’s from a private family who had resided at the property and used the residential dwelling (which was built in the late 19X0’s) as their main residence.

● You also advised that the prior owners ran a minimum amount of livestock on the property to keep grass levels down; and that they did not conduct any commercial primary production business activities on the property as the land size does not allow for any commercial scale operation.

● You moved into the property after you acquired it from the prior owners, occupying the property as your main residence until mid-20XX. You also ran a limited number of livestock on the property during your occupancy to maintain grass levels at a manageable height.

● After mid-20XX, the property was then leased to an unrelated third party tenant under a residential lease agreement. In accordance with the terms of the tenancy agreement, the property has only been rented for domestic residential purposes.

● The rent that you charge is $X per week and the same tenant currently still resides at the property.

● Other than the residential lease mentioned above, the entire property (including the residential dwelling and the land) has only ever been used for private and domestic purposes since it was acquired by you.

● The sheds have either been vacant or used to store household/domestic items by both you during your period of occupancy and also later by the tenant. The sheds have never been used for any commercial activity.

● You do not know the purpose for which the previous owners erected the sheds. They came as a bonus on the land with the residential home when the property was acquired.

● Under the residential lease, the tenant has free and unencumbered use of the residential dwelling, the sheds and the entire surrounding land.

● You do not retain any of the property for your own use or the use by any party associated or related to you. It is clearly understood between you and the tenant that the tenant has the right to the quiet enjoyment of the property.

● While the residential lease agreement does not specifically permit nor deny the tenant from using the land to graze animals, you advised that this is limited to a domestic arrangement for the purpose of keeping down the grass levels on the property. The tenant is not permitted to run any commercial operations on the land.

● You advised that the current tenant is in the process of vacating the property as they are building their own home. Your intention is to release the property once the current tenant has vacated.

● There have been no capital improvements added to the land or modifications made to the residential dwelling or sheds since the property was acquired by you (i.e. there have been no substantial renovations for GST purposes).

● You are now selling the property. The property is being sold to an unrelated third party who is acquiring the property for the purpose of applying for a rezoning so that it may then undertake a residential subdivision of the land.

● A contract for the sale of the property was entered into in 20XX with an extra-long settlement period of over a year.

● In accordance with the special conditions to the contract, the parties acknowledge that the property is a residential property, being used as a residential property, and not for any other purpose.

● The property will not be subject to lease upon sale by you (i.e. at settlement the purchaser will be entitled to vacant possession of the property, which includes the residential dwelling, sheds and surrounding land).

● Title to the property will pass to the purchaser at settlement.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 23-5

Section 23-15

Section 40-35

Section 40-65

Section 188-10

Section 188-15

Section 188-20

Section 188-25

Section 195-1

Reasons for decision

Summary

Your GST turnover does not meet the registration turnover threshold. This is because your current GST turnover is below the turnover threshold and your projected GST turnover does not meet or exceed the turnover threshold, as the only supply you are presently making and expect to make in the next 11 months is the lease of your property in Australia for $X (or not significantly more than $X) per week. This will also be the case in the future when your sale of the property eventually settles, as long as: the sale does not amount to more than a mere realisation of a capital asset, and the weekly rent does not increase significantly where any part of the rent is for a supply other than an input taxed supply of residential premises to be used predominantly for residential accommodation.

Therefore, as you are neither registered nor required to be registered for GST, no GST would be payable by you on your supplies. As such, it is not necessary to consider the further question of whether or not your sale of the property would be input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

You are carrying on an enterprise as paragraph 9-20(1)(c) of the GST Act provides that an enterprise includes an activity, or a 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 relation to whether or not your GST turnover meets the registration turnover threshold, section 23-15 of the GST Act provides that your registration turnover threshold (unless you are a non-profit body) is: $50,000 or such higher amount (currently $75,000) as the regulations (A New Tax System (Goods and Services Tax) Regulations 2019) specify. Section 195-1 of the GST Act (the dictionary section) defines GST turnover as:

(a) in relation to meeting a *turnover threshold – has the meaning given by subsection 188-10(1); and

(b) in relation to not exceeding a *turnover threshold – has the meaning given by subsection 188-10(2).

(* denotes a defined term in section 195-1 of the GST Act).

Subsection 188-10(1) and (2) of the GST Act state as follows in relation to whether your GST turnover meets, or does not exceed, a turnover threshold, including the registration turnover threshold:

(1) You have a GST turnover that meets a particular *turnover threshold if:

(a) 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

(b) your projected GST turnover is at or above the turnover threshold.

(2) You have a GST turnover that does not exceed a particular *turnover threshold if:

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

(b) your projected GST turnover is at or below the turnover threshold.

Section 188-15 of the GST Act sets out what to include and how to calculate your current GST turnover, which is your turnover for the current month and the previous 11 months. Section 188-20 of the GST Act sets out what to include and how to calculate your projected GST turnover, which is your turnover for the current month and the next 11 months.

Supplies that are input taxed do not form part of either your current GST turnover or your projected GST turnover.

Further, any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours is to be disregarded when working out your projected GST turnover (refer to section 188-25 of the GST Act).

Based on the facts that you have provided, your current GST turnover does not meet or exceed the GST registration turnover threshold of $75,000. The rent that you receive is $X per week (which is the equivalent of $X per annum).

Your projected GST turnover (which is your turnover for the current month and the next 11 months) also does not meet or exceed the GST registration turnover threshold of $75,000 as your sale of the property is not expected to settle for over a year from now.

In any event, the proceeds from your sale of the property will not form part of your projected GST turnover where the sale is a mere realisation of a capital asset, which based on the facts that you have provided it would be.

Below are extracts of relevant paragraphs from Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) which provide assistance in determining if a sale of real property is a mere realisation of a capital asset:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

245. The (Radcliffe) Royal Commission on the Taxation of Profits and Income (UK) in 1954 identified six badges or identifying features of trade. The United Kingdom courts have seen the 'badges of trade' as providing 'common sense guidance' [94] in reaching a conclusion on such matters.

246. The badges of trade have also been referred to by the High Court in FCT v. Myer Emporium Ltd [95] and more recently by the Full Federal Court in the decision in Puzey v. Federal Commissioner of Taxation. [96]

The subject matter of realisation

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. A work of art is an example of an asset that may provide personal enjoyment. The purchase of a single work of art to display in a person's home can be contrasted to the purchase of a large quantity of goods.

The length of period of ownership

249. A trading asset is generally dealt with or traded within a short time after acquisition.

The frequency or number of similar transactions

251. The greater the frequency of similar transactions the greater the likelihood of trade.

Supplementary work on or in connection with the property realised

252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade. [99]

The circumstances that were responsible for the realisation

253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

Motive

254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

255. Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment.

Trade v. investment assets

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. [102]

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

260. Assets can change their character but cannot have a dual character at the same time. [103]

266. 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.

Weighing all of the factors above, unless the facts were to change on or prior to settlement in more than a year’s time, we do not consider your property sale to amount to more than a mere realisation of a capital asset.

You are doing nothing more than selling a capital asset that you have held since the early 2000’s to generate rental income. You have made no improvements or additions to the property in preparation for its sale. You will not be subdividing the property; it is the unrelated purchaser who intends to do so.

However, as the current and projected GST turnover in any given month is calculated by reference to your turnover for the current month and the previous or next (whichever is relevant) 11 months, you will need to regularly monitor your GST turnover to ensure that you are not required to register for GST in the future.

Should any of the facts change in the future for example, this could impact on your requirement to register for GST.

It is however unlikely that any increases to the weekly rent for the property would result in you being required to register for GST. For a future rent increase alone to have an impact on your requirement to register for GST, the rent increase would need to be substantial, and in addition, a significant part of the rent charged would need to be in respect of a supply other than an input taxed supply of residential premises to be used predominantly for residential accommodation in accordance with section 40-35 of the GST Act.

Were you in the future however to make additional/different supplies to those set out in the facts, or were the sale of the property in the future to amount to more than a mere realisation of a capital asset (e.g. where there in a change in the character of the property such that the sale became part of a profit making undertaking or scheme), then this could impact on your future requirement to register for GST and also possibly on whether or not GST was payable (or payable in part) in respect of the property sale.

You have advised however that presently, your only activities involve the leasing of and future sale of the property.

Therefore, unless your future sale of the property is going to be something other than a mere realisation of a capital asset when it settles, the sale proceeds would not form part of your projected GST turnover, such that where everything else remains the same, you would also not be required to be registered for GST in the future.

Where you are neither registered nor required to be registered for GST, none of the supplies that you make will be taxable supplies (refer to paragraph 9-5(d) of the GST Act); meaning that no GST would be payable by you on your sale of the property.

As such, it is not necessary to consider the further question of whether or not your sale of the property would be an input taxed supply (either in full or to some extent) under section 40-65 of the GST Act.