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Edited version of private advice
Authorisation Number: 1051592229929
Date of advice: 14 October 2019
Ruling
Subject: GST and sale of new residential premises
Question
Is the sale of your residential rental property a taxable supply?
Answer
No. The sale of your residential rental property is not a taxable supply because you are not registered nor required to be registered for GST.
Relevant facts and circumstances
You are not currently registered for GST
You purchased a property with the intention of building a house for yourself. However, due to personal circumstances, you were unable to do this and you decided to renovate the house and rented it
As the house was old, you later decided to build a dual occupancy townhouse on the land and started applying for plans and permits through your local council. Your intention was to live in one townhouse and rent the other when it was completed
When the construction was completed, you moved into one of the townhouses and rented the other one straight away
After about X months, the tenant (the first tenant) decided to move out as they purchased their own house. As a result, you once again had to find a tenant and finally got another tenant (the second tenant) after about X months
The second tenant moved out after about one year, at which point you decided to try and sell the townhouse as it was getting extremely difficult to rent out. However, given the downturn in the property market, you were unable to sell the property and you managed to rent it out again about X months after the second tenant moved out
The second tenant recently approached you to purchase the property as they knew you tried to sell it earlier in 20XX. The second tenant has put an offer on the property but you are yet to sign contracts.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-5
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-20
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-40
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 23-5
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 40-70
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 188-15
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 188-20
A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 188-25
Reasons for decision
Unless otherwise specified, all legislative references in these reasons are to the A New Tax System (Goods and Services Tax) Act 1999.
Relevant legislation and ATO view
Section 9-40 provides that an entity is liable to pay GST on a taxable supply it makes.
Section 9-5 provides that an entity makes a taxable supply if:
· the entity makes the supply for consideration
· the supply is made in the course or furtherance of an enterprise that the entity carries on
· the supply is connected with the indirect tax zone, and
· the entity is registered or required to be registered for GST.
Section 9-20 defines the term enterprise to include an activity or series of activities done on a regular or continuous basis in the form of a lease of a property.
The phrase 'in the course or furtherance' is not defined in the GST Act but is broad enough to cover any supplies made in connection with an entity's enterprise. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. [Paragraphs 28 and 29 of GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132?]
Section 23-5 provides that an entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. Unless the entity is a non-profit body, the registration threshold is $75,000.
When working out an entity's GST turnover, the following are disregarded:
· supplies that are input taxed (sections 188-15 and 188-20); relevantly, section 40-70 provides that the leasing of residential premises is input taxed.
· any supply of a capital asset (section 188-25); the GST Act does not define the term 'capital asset'. Generally, the term 'capital asset' refers to an asset that makes up 'the profit yielding subject' of an enterprise. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. [Paragraphs 31 to 36 of GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover]
Generally, the sale of residential premises is input taxed, which means GST is not payable on the supply. However, the sale of new residential premises is not input taxed. Relevantly, new residential premises are those premises that have not rented for at a period of least 5 years (section 40-75).
Application of the law to your case
The townhouse you rent out is new residential premises because it is just over X years since it was built. This means that, if you sell the townhouse before having rented it out for at least 5 years, the sale will not be input taxed.
The sale of the townhouse satisfies the first 3 requirements for a taxable supply - that is, the sale is for consideration, is made in the course or furtherance of your enterprise of leasing and the townhouse is connected with the indirect tax zone.
The only other requirement to consider is whether you are registered or required to be registered for GST at the time of the sale.
As you are currently not registered for GST, we need to determine if you are required to be registered.
The rental income you receive from leasing the townhouse and the proceeds from selling the townhouse are not counted towards your turnover when determining whether you are required to be registered for GST. Therefore, your turnover will not meet the registration turnover threshold.
As such, the sale of the townhouse will not be a taxable supply under section 9-5.