Edited version of private advice

Authorisation Number: 1051623277808

Date of advice: 20 December 2019

Ruling

Subject: GST and sale of property

Question

Will your sale of vacant land be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

This ruling applies for the following period(s)

1 July 2019 - 30 June 2020

The scheme commences on

29 May 2015

Relevant facts and circumstances

You are not registered for GST.

Individual A (Director) is a Director of the company.

You purchased vacant land on dd/mm/yyyy (settlement date).

The Vendor was ABC Pty Ltd (ABC).

The price of the Property was $xxx,000.

You purchased the property 'subject to lease'.

The Sale Contract defines 'lease' as 'the lease to be entered into by the Vendor as tenant and Purchaser as landlord'.

The Sale Contract states:

'The Purchaser acknowledges that it must:

(a)  substantially commence the construction of a dwelling house on the Land on or before the date 12 months after the Settlement Date;

(b)  following commencement of construction, continually progress construction of the dwelling house in a timely manner;

(c)  ensure the Property is kept clean, presentable and safe at all times until construction is completed;

(d)  complete construction of the dwelling and all fencing on or before the date 24 months after the Settlement Date;

(e)  complete landscaping of the Land on or before the date 6 months from completion of construction of the dwelling house; and

For the purposes of this special condition:

(i)   substantially commence means erection of the footings and slab; and

(ii)  complete and completion means issue of an occupancy permit.'

Pursuant to the Sale Contract you entered into a Lease Agreement with ABC for an initial term of 24 months with an option for 3 further terms of six months each.

The rental amount was $xx,xxx per annum.

Under the terms of the lease, the permitted use of the Property by the tenant (ABC) was as a linear pathway, temporary park, associated landscaping and other ancillary display village purposes.

You do not generate any other income.

Your intention at the time of purchasing the Property was to build a residential dwelling on the vacant land, hold the Property as an investment and generate rental income.

This was the sole purpose for your establishment and incorporation.

You have not previously purchased or sold any property.

At the time of acquiring the Property in yyyy, the Director was also in the process of purchasing his family home and was only able to generate sufficient deposit to secure a loan for his family home.

The Director planned to save for a deposit for you to secure a building loan to finance the construction of the residential dwelling on the Property.

During this period the Director's own business reduced substantially with taxable income falling by approximately 70% over a two year period.

As a result, you were unable to generate sufficient funds for a deposit for a building loan.

The Lease Agreement recently ceased and as a result you experienced a net outflow of funds to meet the interest expense of the loan taken out for the purchase of the Property.

As a result of the pressure to meet ongoing interest payments you see no prospect of being able to secure a building loan.

Consequently, you are considering selling the Property as vacant residential land and are seeking any GST implications in relation to the potential sale.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Paragraph 9-20(c)

Section 9-40

Section 23-5

Paragraph 23-5(a)

Subsection 188-10(1)

Section 188-15

Section 188-20

Section 188-25

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 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 primary issues in this case is whether the sale of the Property is the course or furtherance of an enterprise you carry on and if so, as you are not registered for GST, whether you are required to register.

Enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity, or 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 (paragraph 9-20(c)). The leasing/renting of the Property (vacant land) would fall within the scope of an 'enterprise'. The sale of the Property would be considered to be done in the course of carrying on that enterprise.

Registration

Section 23-5 states that you are required to be registered for GST if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed above, your activities of renting the vacant land and subsequent sale constitutes an enterprise thus satisfying paragraph 23-5(a).

The next issue to consider is whether your GST turnover is $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)  your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)  your projected GST turnover is at or above $75,000.

'Current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

'Projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. 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. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Taking into account your intention at the time of acquiring the Property (construction and rental of residential premises) and subsequent use of the Property (rental of vacant land) we consider that the Property would be correctly classified as a 'capital asset'. Therefore any proceeds from the sale of the Property would be disregarded for the purpose of calculating your projected GST turnover.

To date your sole source of income was that generated from leasing the Property to ABC amounting to less than $75,000 per annum.

Given the above, your GST turnover does not meet the registration turnover threshold of $75,000 and you are not required to be registered for GST.

Your supply of the Property does not satisfy all of the required criteria of a taxable supply and as such you are not liable for GST in relation to the sale of the property in accordance with section 9-40.