Edited version of private advice

Authorisation Number: 1051623543078

Date of advice: 7 January 2020

Ruling

Subject: GST and sale of real property

Question 1

Is GST payable on the sale of the Property?

Answer 1

Yes.

Question 2

If the answer to Question 1 is yes, are you eligible to choose to use the margin scheme to calculate the GST payable on the sale of the Property?

Answer 2

Yes, provided you and the prospective purchaser agree in writing that the margin scheme is to apply and that agreement is made on or before the making of the supply, or within such further period as the Commissioner allows, then you may apply the margin scheme in working out the GST payable on the sale of the Property.

Relevant facts and circumstances

Mr A and Ms A (jointly referred to as 'you') are the co-owners of the Property.

A few years ago Mr A as purchaser, signed the Contract for the purchase of the Property, being vacant land. The Contract includes the following:

·        the purchase price of a certain amount

·        if the margin scheme will be used to calculate GST then add the words 'margin scheme' in the box. The words 'margin scheme' appear in the relevant box.

·        General Condition of the Contract provides that if the particulars of the sale specify that the supply made under the Contract is a 'margin scheme' supply, the parties agree that the margin scheme applies to the Contract.

The land area is a certain number of square meters.

Prior to settlement, a Sale of Real Estate Nomination Form (Nomination Form) was signed substituting the purchaser named in the Contract to the nominee, Mr A and Ms A. The Nomination Form provides that the parties acknowledge that they will be jointly and severally liable for the due performance of the obligations of the Purchaser under the Contract.

You decided to purchase the Property for investment purposes. You intended to build residential premises to be used for rental purposes.

The Contract was settled on a particular date. The Settlement Statement lists the transferees as Mr A and Ms A and that the consideration amount in the contract includes any amount of GST.

The purchase of the Property was funded by an Investment Loan for a certain sum with a term of a number of years.

You entered into a "New Homes Contract" with the builder for the construction of a dwelling with garage in accordance with the plans prepared and supplied by the builder. The cost of the works is a particular sum.

Building permit number was issued to the builder.

Another Investment Loan was taken for a certain sum with a term of a number of years. This was taken to finance the construction activities.

Both Loans included another family member as a loan account holder. You advised that the involvement is only for loan servicing purposes.

Due to financial constraints, you decided to sell at the completion of construction.

Construction commenced on a few months ago and was completed recently.

You do not have an agreement which determines your mutual rights and obligations. This is an arrangement between family members. The activities of purchase, construction and sale of the Property are for your mutual benefit. You do not have a joint bank account as income and expenses are apportioned and settled separately.

You have not previously done any construction or land development activities and you do not intend to undertake similar types of activities in the future.

Mr A currently operates a business and is registered for GST. Ms A does not carry on an enterprise on her own.

You provided a link to the real estate advertisement for the property which included the following information:

·        brand new luxury home, wrapped in low-maintenance landscaped gardens

·        exclusively situated in a sought after location

·        compromised with a large master bedroom which is equipped with walk in robe and ensuite

·        a number of spacious bedrooms, with access to a courtyard space.

·        open plan living and kitchen

·        large kitchen equipped with high end materials and appliances

You recently sold the Property for over $75,000. You are waiting for the ATO private ruling to finalise the GST clause of the sale contract.

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 section 40-65.

A New Tax System (Goods and Services Tax) Act 1999 section 40-75.

A New Tax System (Goods and Services Tax) Act 1999 section 75-5.

A New Tax System (Goods and Services Tax) Act 1999 section 188-10.

A New Tax System (Goods and Services Tax) Act 1999 section 188-15.

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.

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

Income Tax Assessment Act 1997 section 995-1.

Taxation Administration Act 1953 subsection 14-255(1) of Schedule 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.

Question 1

Summary

GST is payable on the sale of the Property because you are making a taxable supply under section 9-5.

Detailed reasoning

Section 9-40 provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 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 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.

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

All of the requirements of section 9-5 must be satisfied for the sale of the Property to be a taxable supply.

Who is the entity making the supply of the Property?

The Property is registered to two owners. Therefore, we first need to determine whether the sale of the Property is made by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 to include (among others) an individual and a partnership.

The term 'partnership' is defined in the GST Act by reference to the definition of 'partnership' in the Income Tax Assessment Act 1997. That definition states:

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...

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership, which exists for tax purposes only.

At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

However, the GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes.

Goods and Services Tax Ruling GSTR 2004/6 explains how GST applies to transactions involving tax law partnerships and co-owners of property.

Paragraph 40 of GSTR 2004/6 states:

40. Two or more entities may enter into a single agreement to purchase property for leasing purposes. The entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.

Example 1 at paragraphs 42 and 43 of GSTR 2004/6 is about the formation of a tax law partnership:

42. Raymond and Julie, neither of whom are registered for GST, purchase an industrial shed as joint tenants, with the sole purpose of leasing it. The purchase is funded by joint borrowings.

43. As Raymond and Julie act jointly in relation to the acquisition and leasing of the property, they are in a tax law partnership. The partnership is formed when Raymond and Julie enter into the agreement to acquire the industrial shed.

In applying the principles contained in GSTR 2004/6 to your circumstances, we consider that a tax law partnership exists in your circumstances. This is because, similar to Example 1, there is an association (existence of a mutual or common purpose) between Mr and Ms A (you) as the co-owners who have an entitlement to receive income jointly (as one entity) from the sale of the Property. The partnership is formed when you entered into the agreement to purchase the Property.

Hence, we need to consider if the requirements of section 9-5 are met by the partnership.

Taxable supply

Based on the information provided, the sale of the Property satisfies the requirements of paragraphs 9-5(a) and 9-5(c). That is, you supply the Property for consideration and the supply is connected with Australia as the Property is located in Australia.

It remains to be determined whether the sale of the Property is made in the course or furtherance of an enterprise that you carry on, whether you are required to be registered for GST and whether the sale is either GST-free or input taxed.

Whether the sale is made in the course or furtherance of an enterprise that you on

You purchased the vacant land with the intention of constructing residential premises for rental purposes. However, due to financial constraints you decided to sell at the completion of construction.

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

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.

When applying the principles above with the facts you provided, there are several events which occurred for which we consider that the development and sale of the Property is in the course of an enterprise and more than the mere realisation of a capital asset. Significant factors that are relevant which lead to this conclusion are as follows:

·       There is a change of purpose for which the Property was held. Although you initially intended to purchase the Property to build residential premises to be used for rental purposes, due to financial constraints you decided to sell once construction was completed.

·       There was a coherent plant for the purchase, development and sale of the Property. You entered into a "New Homes Contract" for the construction of a dwelling with garage. The construction of the house was completed. You engaged a real estate agent to market and sell the Property. These activities have a commercial flavour and the character of the Property at the time of expected supply is not of a capital asset.

·       You incurred considerable expenses to develop the land and it was clearly to increase return on disposal by developing the land and constructing a dwelling so as to get a better price for it.

·       Substantial funds were borrowed to finance the acquisition of the land and the construction of the house.

·       All planning, construction, marketing and sales are undertaken by professionals and trade contractors.

·       The construction of a house on the land is beyond what is necessary to develop and sell the land.

You advised that you have not previously done any construction or land development activities and you do not intend to undertake similar types of activities in the future. While the activities you undertook are a one-off transaction, on the basis of the facts and taking into consideration all the factors, we consider that there is a significant commercial component in your development and sale activities, and the extent of the activities is not merely the realisation of a capital asset. These activities indicate a commercial approach taken by you and there is a clear intention of profit making. Accordingly, the activities undertaken by you in relation to the development and sale of the Property have the appearance and characteristics of a business deal and these activities would constitute an adventure or concern in the nature of trade.

Hence, you are considered to be carrying on an enterprise as defined in section 9-20. Accordingly, the sale of the Property is made in the course of that enterprise and the requirement of paragraph 9-5(b) is satisfied.

Whether you are required to be registered for GST?

As you are not registered for GST, it needs to be determined whether you are required to be registered for GST.

Section 23-5 provides that you are required to be registered if:

·      you are carrying on an enterprise, and

·      your GST turnover meets the registration turnover threshold of $75,000.

As outlined above, you are carrying on an enterprise. We therefore need to determine if your GST turnover meets the registration turnover threshold.

Section 188-10 provides that your GST turnover meets the registration turnover threshold if:

·      your current GST turnover is at or above $75,000, and the Commissioner is not satisfied that your projected GST turnover is below $75,000 or

·      your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the projected value of all supplies expected to be made in the next 11 months.

In working out both your current and projected GST turnover certain supplies are disregarded. However, none of these exclusions apply in your case.

In working out your projected GST turnover, paragraph 188-25(a) requires that you disregard any supply made or are 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 discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a).

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

As discussed above, your property development activities constitute the carrying on of an enterprise. At the time of the sale, the nature of Property is that of a revenue asset. The sale of the Property does not constitute a disposal of a capital asset. You are deriving income from the disposal of the revenue asset even if the disposal is part of a one-off transaction.

Therefore, section 188-25 is not applicable. The sale of the Property is not a transfer of a capital asset and is not excluded from the calculation of your projected GST turnover.

Hence, the value of this sale should be included in the calculation of the current and projected GST turnovers.

The sale price of the Property exceed $75,000. As such, when you sell the Property, both your current and projected GST turnovers are above $75,000. Hence, your GST turnover meets the registration turnover threshold and you are required to be registered for GST. Accordingly, the requirement of paragraph 9-5(d) is satisfied.

Whether the sale is GST-free or input taxed

The sale of the Property, in the circumstances described is not GST-free under any provision of the GST Act or under a provision of another Act.

Paragraph 9-30(2)(a) provides that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act.

Subsection 40-65(1) provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, paragraph 40-65(2)(a) provides that the supply is not input taxed to the extent that the residential premises are 'new residential premises'.

Paragraph 40-75(1)(a) provides the meaning of 'new residential premises' to include those premises that have not previously been sold as residential premises and not previously subject to a long-term lease.

The definition of 'residential premises' in section 195-1 refers to land or a building that is occupied as a residence or is intended to be occupied, and is capable of being occupied, as a residence.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises.

In this case, the Property consists of residential premises to be used predominantly for residential accommodation. The residential premises are newly constructed and unoccupied when sold. Hence, the sale is of new residential premises as defined under subsection 40-75(1) and does not satisfy the requirements to be an input taxed supply under subsection 40-65(1).

Furthermore, the sale of Property is not input taxed under any other provision of the GST Act or under a provision of another Act.

Therefore, as all the requirements of section 9-5 are satisfied, the sale of the Property is a taxable supply. Hence, GST is payable on the sale.

Question 2

Summary

Provided you and the prospective purchaser agree in writing that the margin scheme is to apply and that agreement is made on or before the making of the supply, or within such further period as the Commissioner allows, then you may apply the margin scheme in working out the GST payable on the sale of the Property.

Detailed reasoning

Generally, the amount of GST payable on the sale of real property is equal to one-eleventh of the sale price. If eligible, you may be able to use the margin scheme on the sale of the Property. Under the margin scheme the amount of GST payable on the sale is one-eleventh of the margin for the sale.

Subsection 75-5(1) provides that you may use the margin scheme in working out the amount of GST on a taxable supply of real property you make if you and the recipient of the supply have agreed in writing that the margin scheme is to apply and you make a taxable supply of real property.by:

·        selling a freehold interest in land

·        selling a unit, or

·        granting or selling a long-term lease.

Subsection 75-5(1A) provides that the agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However subsection 75-5(2) provides that the margin scheme will not apply to your supply if the supply is ineligible for the margin scheme.

Subsection 75-5(3) outlines circumstances where a supply is ineligible for the margin scheme. Of relevance is paragraph 75-5(3)(a) which provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

In your case, you acquired the Property under the margin scheme. The words 'margin scheme' appear in the relevant box of the Contract and General Condition of the Contract provides that if the particulars of the sale specify that the supply made under the Contract is a 'margin scheme' supply, the parties agree that the margin scheme applies to the Contract.

Consequently, subparagraph 75-5(3)(a) is not met and therefore paragraph 75-5(3)(a) does not apply to make the supply by you ineligible for the margin scheme.

Therefore, provided you and prospective purchaser agree in writing that the margin scheme is to apply to the supply and that agreement is made on or before the making of the supply, or within such further period as the Commissioner allows, then under subsection 75-5(1), the margin scheme may apply in working out the amount of GST on the taxable supply of the Property.

Refer to Goods and Services Tax Ruling GSTR 2006/8 which outlines how the margin scheme applies to a supply of real property acquired on or after 1 July 2000.

Additional information:

Subsection 14-255(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a supplier of residential premises by way of sale must, before making the supply, give to the recipient a written notice stating whether the recipient will be required to make a payment to the Commissioner under section 14-250 of Schedule 1 to the TAA.

Refer to Law Companion Ruling LCR 2018/4 which discusses the GST notification requirements for vendors of residential premises.