Edited version of private advice

Authorisation Number: 1051582506055

Date of advice: 20 September 2019

Ruling

Subject: GST and sale of real property

Question 1

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 property located in Australia (the Property)?

Answer 1

No.

Question 2

Can the margin scheme be applied on the sale?

Answer 2

Not applicable.

Relevant facts and circumstances

You own the property located in Australia (the Property).

The total land area is a number of hectares.

The Property was transferred to you by your relatives for no consideration a number of years ago.

The Property is bushland and when you acquired the Property the land was zoned "Rural".

You have held the Property for capital growth.

You are not aware of any rezoning since your acquisition.

You have not used the Property for any purpose, either commercial or private.

The Property has not been used for income producing purposes and any of the costs of holding or maintaining the Property have not been claimed as an income tax deduction.

You are in your retirement age and want to dispose the Property.

You have not engaged any real estate agents to sell the Property but you are always engaging with interested parties to sell.

You have not received any offers from potential purchasers.

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

You have not taken any steps to subdivide the land.

You have not previously undertaken any subdivision activities or any business of land development.

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 Division 75

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

Reasons for decision

Question 1

GST is payable on the sale of the Property if you are making a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it states:

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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

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

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

It remains to be determined whether the sale of the Property 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 on

Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done:

• in the form of a business (paragraph 9-20(1)(b) of GST Act), or
• in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of GST Act).

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.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Paragraph 264 of MT 2006/1 discusses two court cases, Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (Casimaty), involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 provides the following list of factors:

·       there is a change of purpose for which the land is held

·       additional land is acquired to be added to the original parcel of land

·       the parcel of land is brought into account as a business asset

·       there is a coherent plan for the subdivision of the land

·       there is a business organisation - for example a manager, office and letterhead

·       borrowed funds financed the acquisition or subdivision

·       interest on money borrowed to defray subdivisional costs was claimed as a business expense

·       there is a level of development of the land beyond that necessary to secure council approval for the subdivision

·       buildings have been erected on the land.

Examples 28 to 31 in MT 2006/1 are examples of subdivisions of land that are not enterprises and Examples 32 to 35 are examples of subdivisions of land that are not enterprises.

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this case. This requires 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 is determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

We have reviewed the information you provided and have taken into consideration the following factors:

• The Property was transferred to you by your relatives for no consideration.
• You have held the Property for a number of years for capital growth.
• You have not used the Property for any purpose either commercial or private. The Property has not been used for income producing purposes and any of the costs of holding or maintaining the Property have not been claimed as an income tax deduction.
• You are in your retirement age and want to dispose of the Property.
• You have not taken any steps to subdivide the land.
• You have not engaged any real estate agents to sell the Property but you are always engaging with interested parties to sell.

Considering all the facts and circumstances in your case, the sale is not in the form of a business or an adventure or concern in the nature of trade. The sale of the Property is the mere realization of a capital asset. Accordingly, the sale of the Property is not 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 not satisfied.

Although it is no longer necessary to consider whether you satisfy the condition at paragraph 9-5(d) of the GST Act, for completeness, we discuss the requirements.

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:

(a)  you are *carrying on an *enterprise; and

(b)  your *GST turnover meets the *registration turnover threshold.

The registration turnover threshold is $75,000 (or $150,000 for non-profit organisations).

As outlined above, you are not carrying on an enterprise as the activities you have undertaken amount to the mere realisation of a capital asset. Hence, the requirement of paragraph 23-5(a) of the GST Act is not satisfied. Therefore, as not all the requirements of section 23-5 of the GST Act are satisfied, you are not required to be registered for GST.

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

Consequently, GST is not payable on the sale.

Question 2

The margin scheme in Division 75 of the GST Act can be used to work out the amount of GST payable on a taxable supply of real property provided that certain requirements are satisfied.

As the sale of the Property is not a taxable supply, the margin scheme is not applicable.