Edited version of private advice

Authorisation Number: 1051633243530

Date of advice: 5 February 2020

Ruling

Subject: GST and sale of residential property

Question

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 property situated at a specified location?

Answer

No

Relevant facts and circumstances

Individual A is not registered for GST.

Individual B is not registered for GST.

Individual A and Individual B (collectively referred to as 'you') are not registered for GST.

In yyyy you purchased a xxxm² vacant block of land (the Property).

You acquired the property for the purpose of constructing of residential dwelling for the purpose of deriving rental income.

You entered into a contract with a builder for the construction of a single storey residential duplex.

Construction was completed in mm/yyyy.

One duplex contains two bedrooms, bathroom, kitchen and living areas. The second duplex contains 3 bedrooms, two bathrooms, kitchen and living areas.

The purchase of the vacant land and construction costs were financed via a bank loan.

Upon the local council issuing an occupancy certificate, the Property was available for letting through a real estate agent.

The Property was first rented on dd/mm/yyyy.

The Property is still currently rented.

The real agent is responsible for the collection of rent, attending to matters with the tenant, arranging any necessary repairs and payment of outgoings.

Individual A is a full time employee.

Individual B is employed in the aged care sector.

You do not carry on any other business or enterprise activities other than the rental of the Property.

You have not engaged in activities of property development in the past and you do not have any intention to carry on such activities in the future.

You have offered the Property for sale.

The reason for selling the Property is to repay a loan you had received from a family member. The loan was unrelated to the Property.

The financial circumstances of the family member recently changed and in an effort to assist you decided to sell the Property to repay the loan.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Paragraph 9-20(1)(c)

Section 23-5

Paragraph 23-5(a)

Section 40-65

Section 40-75

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

Reasons for decision

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 on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)). The leasing of the Property would constitute an 'enterprise' under this limb of the definition in section 9-20.

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. The acquisition of the vacant land, construction of the residential duplex, rental and subsequent sale of the Property would all be considered to be done in the course or furtherance of your 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 previously your activities of purchasing the Property, building a residential duplex, 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.

Other relevant comments

The Property falls within the definition of 'new residential premises' contained in section 40-75. The sale of 'new residential premises' are excluded from being classified as an input taxed supply pursuant to section 40-65. Whilst this is the situation in this case, the supply of the Property will not be a taxable supply where all of the requirements in section 9-5 are not satisfied.