Edited version of private advice

Authorisation Number: 1051629370028

Date of advice: 4 February 2020

Ruling

Subject: GST and the sale of property

Question 1

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the specified property (the Property)?

Answer

No

Question 2

Are you required to give notification to the purchaser of the Property pursuant to subsection 14-255(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes, however the recipient is not required to withhold an amount of GST pursuant to section 14-250 of Schedule 1 to the TAA.

This ruling applies for the following period(s)

1 July 2019 to 30 June 2020.

The scheme commences on

1 July 2019.

Relevant facts and circumstances

You are not registered for GST.

You are a complying superannuation fund.

In yyyy you purchased vacant land (the Property).

You subsequently commenced construction of a single storey brick veneer residential dwelling containing four bedrooms, two bathrooms, a kitchen, dining and living areas.

Construction was completed in mm/yyyy.

The Property has been rented since construction was completed in mm/yyyy.

The purchase of the Property and construction costs was financed from internal funds.

At the time you acquired the Property in yyyy your intention was to build the residential dwelling for the purpose of rent. Your intention was to hold onto the Property long enough to attain reasonable capital growth whilst it continued to be tenanted.

You have not undertaken similar activities of property development in the past and you have no plans in place to engage in similar activities in the future.

One of your members, Individual A, did undertake a residential construction in their own name about x years ago, as a personal investment. This dwelling has four bedrooms, two bathrooms, and a garage under the roofline, and has been tenanted since construction was completed. They have no plans to undertake similar activities in the future.

You are currently considering selling the Property due to the following factors:

·        You are quite unhappy with the current tenant and the manner in which the house is being maintained.

·        The Property is located in a regional area and the number of potential tenants is significantly less than if the Property was in a suburban area. Consequently your income stream may be affected if a suitable tenant is unable to be found.

·        Your members are nearing retirement and depending on the potential sale price of the Property, it may be more financially advantageous to sell the Property and invest the proceeds in areas that offer a greater return.

The Property is in a newly established area and as such you have had difficulty obtaining a sale valuation due to minimal number of sales of similar properties in the area.

Your only other source of turnover (other than rental income) is in the form of interest and dividends received from investments.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 23-5

Paragraph 23-5(a)

Subsection 188-10(1)

Section 188-15

Paragraph 188-15(1)(a)

Section 188-20

Paragraph 188-20(1)(a)

Section 188-25

Section 195-1

Taxation Administration Act 1953

Section 14-250 of Schedule 1

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

Section 9-5 provides that 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 to the indirect tax zone (Australia); and

(d)   you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case, the sale of the Property will be made for consideration and is located in Australia. As such we will consider whether the sale of the Property is made in the course or furtherance of an enterprise that you carry on and if so, as you are not registered for GST, whether you are required to be registered.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund. The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

As such, any activity or series of activities conducted by the trustee of a complying superannuation fund is considered to be an 'enterprise' for GST purposes.

Therefore we consider you are carrying on an enterprise. The acquisition of the land, construction of the residential dwelling, rental and subsequent sale of the Property would all be considered to be done in the course or furtherance of your enterprise.

Furthermore, the definition of 'enterprise' in section 9-20 also 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. The leasing of the Property would constitute an 'enterprise' under this limb of the definition in section 9-20.

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 previously your activities of purchasing the Property, building a residential dwelling, renting the Property and sale of the Property fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above.

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.

Your '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.

Your '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.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. Your rental of the Property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises). As such, rental proceeds in relation to the rental of the Property are not included in the calculations of your 'current GST turnover' or your 'projected GST turnover'.

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 the facts of this case we consider the sale of the Property would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating your projected GST turnover. The Property was not intended to be acquired for the primary purpose of resale. Furthermore you have derived your rental income from the use of the Property as opposed to the trading of properties.

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

Conclusion

The sale of the Property will be made in the course or furtherance of an enterprise you carry on, made for consideration and is located in Australia. However you are neither registered nor required to be registered for GST.

Consequently you will not be making a 'taxable supply' when you sell the Property.

Question 2

Subsection 14-255(1) of Schedule 1 to the 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.

Section 14-250 of Schedule 1 to the TAA provides that a recipient of a taxable supply in certain circumstances involving real property is liable to withhold an amount, and pay that amount to the Commissioner.

Given the above, prior to settlement of the Property you must give written notice to the recipient stating whether they are required to withhold GST and pay that amount to the Commissioner. In this case, your supply to the recipient is not a taxable supply (as discussed in Question 1) and as such the recipient is not required to withhold GST under section 14-250 of Schedule 1 to the TAA.

Law Companion Ruling LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4) discusses GST notification requirements for vendors of residential premises. Paragraphs 58 and 59 of LCR 2018/4 state:

58. A vendor of residential premises or potential residential land must give a written notice to the purchaser before making the supply. The notice must state whether the purchaser is required to make a payment under section 14-250 in relation to the supply.

59. This requirement applies to all vendors of residential premises and potential residential land, not only those who are registered or required to be registered for GST. If the vendor is not registered or required to be registered for GST, they simply state that the purchaser is not required to make a payment.