Edited version of private advice

Authorisation Number: 1051614884420

Date of advice: 2 December 2019

Ruling

Subject: GST and sale of property

Question

Is the sale or supply of Duplex 1 treated as a taxable supply for the purposes of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

Mr X is registered for GST and carries on an enterprise of providing taxi travel.

Mrs X is not registered for GST.

Mr X and Mrs X (together referred to as 'You') are not registered for GST.

In yyyy you purchased property (XXXsqm) situated at a specified location (Property).

The Property settled on dd/mm/yyyy.

You purchased a 50% share of the Property (as joint tenants) with friends Mr and Mrs Y (Y) (as joint tenants) as tenants in common.

You purchased the Property with Y as property prices were very high and as such very difficult to purchase on your own.

The purchase of the Property was financed through a loan in the names of you and Y.

Your intention, together with Y, when acquiring the Property was to demolish the existing house on the Property, and construct a duplex.

Your intention was to use one of the homes (Duplex 1) as your primary place of residence and the other (Duplex 2) was to be used by Y.

In yyyy you and Y demolished the existing house, subdivided the Property and constructed a duplex.

Construction commenced in yyyy and was completed in yyyy.

Construction costs were financed through a loan in the names of you and Y.

Subdivision of the Property was approved on dd/mm/yyyy resulting in a Torrens Titles Subdivision into two lots of XXXsqm and ZZZsqm.

During this period your circumstances changed and you relocated interstate in yyyy.

As a result you are in the situation that you need to sell Duplex 1.

You do not foresee returning in the near future.

Neither you nor Y have previously been involved in the subdivision and/or development of property.

You do not have any intention to undertake similar development activities in the future.

You are currently operating as a full time taxi driver.

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 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(c)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

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

Reasons for decision

Note: In this reasoning, unless otherwise stated,

·         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 the indirect tax zone; 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.

The issue in this case is whether the sale of Duplex 1 is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b).The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done:

·         in the form of a business (paragraph 9-20(1)(a)) or

·         in the form of an adventure or concern in the nature of trade (paragraph

·         9-20(1)(b)).

However paragraph 9-20(2)(c) provides that activities done by an individual, or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain are specifically excluded from the definition of an enterprise.

Section 195-1 (the Dictionary) states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

In relation to the term enterprise, section 9-20 states:

(1)  An enterprise is an activity, or series of activities, done:

(a)  in the form of a *business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)  on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d)  ...

The question of whether an entity is carrying on an enterprise is further examined in 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.

The Goods and Services Tax Determination: Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? 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.

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

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, lists indicators of carrying on a business:

·         a significant commercial activity;

·         a purpose and intention of the taxpayer to engage in commercial activity;

·         an intention to make a profit from the activity;

·         the activity is or will be profitable;

·         the recurrent or regular nature of the activity;

·         the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

·         activity is systematic, organised and carried on in a businesslike manner and records are kept;

·         the activities are of a reasonable size and scale;

·         a business plan exists;

·         commercial sales of product; and

·         the entity has relevant knowledge or skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 180 of MT 2006/1 discusses that an enterprise may be carried on a small scale stating:

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

In this case, given the facts we consider that you are not carrying on an enterprise in the form of a business. Next we will consider whether your activities are an activity in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

Paragraph 244 of MT 2006/1 explains that 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.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

·         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; and

·         buildings have been erected on the land.

You activities were motivated by your desire to use the newly constructed premises as your principal place of residence. However due to your specific circumstances you relocated interstate resulting in the need to sell the premises.

In weighing up all of the facts of this case, we do not consider your activities to constitute an adventure or concern in the nature of trade. Your activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes. Furthermore, your activities were not done with the expectation of generating a profit. As discussed above, it was your intention at the time of acquiring the Property to build a dwelling to use as your primary residence.

Consequently, your sale or supply of Duplex 1 is not in the course or furtherance of an enterprise you carry on. Therefore, the sale will not be a taxable supply as defined in section 9-5 and you will not be liable for GST on the sale.