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Edited version of your written advice
Authorisation Number: 1051504699471
Date of advice: 10 April 2019
Ruling
Subject: GST and new residential premises
Question
Will your sale of the Property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?
Answer
Yes.
Relevant facts and circumstances
Entity A is not registered for GST.
Entity B is not registered for GST.
Entity A and Entity B (You) are not registered for GST.
You bought your family home in YYYY. You own your family home as joint tenants.
Your family home has always been your family home and it has never been tenanted.
You are both in the process of retiring and have a mortgage of around $X.
To clear your mortgage and to have a new home for your retirement years (remaining in the area), you will demolish your family home, sub-divide into two blocks and build a new dwelling on each block. You will sell one property, Property B (the Property) to repay the outstanding debt and live in the other newly built dwelling Property A.
On DDMMYYYY, you had an initial consultation with Entity D. You were invoiced for a preliminary investigation of the site on DDMMYYYY.
On DDMMYYYY all plans and documentation were submitted to the local government authority.
On DDMMYYYY you received an endorsed planning permit in respect of application X for your proposal to develop the land for the construction of two dwellings.
You have provided a plan of subdivision.
You will finance the subdivision and development with a bank loan. The estimated cost is $X.
The estimated selling value of the Property B block to be sold without a dwelling is $X and with the dwelling is $X.
You have engaged various parties to complete the development.
The status of the development is:
● The house has been demolished.
● Subdivision undertaken and awaiting titles.
● Building works have commenced in MMYYYY.
● The development is expected to be completed in MMYYYY.
You have never previously developed property.
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 9-40
A New Tax System (Goods and Services Tax) Act 1999 Section 23-5
A New Tax System (Goods and Services Tax) Act 1999 Section 40-75
A New Tax System (Goods and Services Tax) Act 1999 Section 184-1
A New Tax System (Goods and Services Tax) Act 1999 Section 188-20
A New Tax System (Goods and Services Tax) Act 1999 Section 188-25
Reasons for decision
In this reasoning, please note:
● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au
● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act
Summary
You, the partnership of Entity A and Entity B, are building new residential premises for sale and will be liable for GST on the sale.
Detailed reasoning
You are liable for GST on any taxable supplies that you make.1
Section 9-5 provides that you make a taxable supply if:
(a) you make the supply for consideration
(b) the supply is made in the course or furtherance of an enterprise that you carry on
(c) the supply is connected with the indirect tax zone (Australia), 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.
For the supply of the Property to be a taxable supply, all of the requirements in section 9-5 must be satisfied.
You will sell the Property in Australia for consideration and therefore satisfy paragraphs 9-5(a) and 9-5(c). Further, the supply of the Property in your situation will neither be GST-free or input taxed.
Accordingly, we must determine whether:
(a) your sale of the Property is in the course or furtherance of an enterprise that you are carrying on, and
(b) if so, whether you are required to be registered for GST.
Enterprise
Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.
An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.
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 provides guidance on what activities will amount to an enterprise.
In your case, there are several factors present that indicate that your activities are an adventure or concern in the nature of trade, including:
● a coherent plan to demolish the existing premises, subdivide the land, build a dwelling and sell the Property
● borrowing of funds to finance the development which is expected to cost $X
● the building of a dwelling on the land with an estimated sale value of $X.
Your situation is similar to example 29 in MT 2006/1 (reproduced below), including carrying out the necessary steps to develop and sell the Property with a reasonable expectation of profit or gain:
Example 29
273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.
274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.
275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.
276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.
We consider that the sale of the Property is in the course of an enterprise you are carrying on, therefore you will satisfy paragraph 9(b) in addition to satisfying paragraphs 9-5(a) and 9-5(c).
New Residential Premises
If you proceed with your intention to sell the Property you will make a supply of ‘new residential premises’ defined in section 40-75 to include, in summary, premises that have not previously been sold as residential premises.
A sale of new residential premises will be taxable where all the requirements of section 9-5 are satisfied.
GST Registration
You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.
We have already established you are carrying on an enterprise.
Your expected proceeds from the sale of your ‘new residential premises’ will be relevant in determining whether you meet the registration turnover threshold, as you will need to calculate your ‘projected GST turnover’.
Under section 188-20 your ‘projected GST turnover’ at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months, subject to the exclusion of certain types of supplies. Section 188-25 disregards the transfer of ownership of capital assets.
To determine if you are required to be registered for GST the Property must be classified as either a capital or revenue asset.
If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. That is, a disposal of an asset as part of an adventure or concern in the nature of trade will be a revenue asset.
The Property is a revenue asset and its supply is not excluded from your projected GST turnover. The sales proceeds from your proposed sale will be included when calculating whether your turnover meets the GST registration turnover threshold.
As your proposed sale of the Property (located in Australia) will exceed $75,000, your turnover will meet the GST registration turnover threshold.
You are required to be registered for GST, satisfying paragraph 9-5(d). Therefore, you satisfy all the requirements of a taxable supply under section 9-5.
Your sale of the property will be a taxable supply and you will be liable for GST on the sale.
Entity
The term ‘you’ applies to an entity, and it is an entity that makes a taxable supply and is liable for GST on a taxable supply it makes. An ‘entity’ includes a partnership. A partnership for GST purposes is defined by reference section 995-1 of the Income Tax Assessment Act 1997:
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; or
(b) a limited partnership.
In your specific circumstance, you are an association of persons (Entity A and Entity B) that is not in business, but that is nevertheless in receipt of ordinary income jointly, being the proceeds from the sale of the Property.
Therefore, you, the partnership of Entity A and Entity B will be liable for GST if you proceed with your intention to sell the Property.