Edited version of private advice

Authorisation Number: 1051634395517

Date of advice: 10 February 2020

Ruling

Subject: Sale of newly constructed residential premises

Question

Is the sale of the newly constructed residential property subject to goods and services tax (GST)?

Answer

No.

The scheme commences on:

10 February 20XX.

Relevant facts and circumstances

You are not registered for GST.

You purchased a vacant lot at land in Australia.

You constructed a residential property on the land.

You intended to rent the property after completion.

Your personal circumstances changed prior to construction of the residential property being completed, resulting in you selling the property soon after completion.

You provided evidence of your changed circumstances and motive for selling the property.

You made a profit on the sale of the property.

You and entities associated with you have little knowledge of property development.

Relevant legislative provisions

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

·   Section 9-5

·   Section 9-20

·   Section 23-5

·   Section 23-10

Reasons for decision

Summary

No GST is payable on the sale of the residential property in Australia as the supply was not made in the course or furtherance of an enterprise that you carry on.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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.

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)

The requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied since the residential property was sold for consideration and the property has the necessary connection with the indirect tax zone (which is effectively Australia).

We now need to consider:

·        whether the sale of the residential property was supplied in the course or furtherance of an enterprise carried on by you (paragraph 9-5(b) of the GST Act); and

·        whether you were registered or required to be registered for GST at the relevant time (paragraph 9-5(d) of the GST Act).

An enterprise

Subsection 9-20(1) of the GST Act provides that 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

...

However, subsection 9-20(2) of the GST Act contains a number of exclusions to the definition of enterprise.

Paragraph 9-20(2)(b) of the GST Act provides that an activity or activities done as a private recreational pursuit or hobby are not enterprises, and paragraph 9-20(2)(c) of the GST Act provides that an activity or activities done by an individual or a partnership whose members are individuals without a reasonable expectation of profit or gain are not enterprises.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidelines on the meaning of enterprise for Australian Business Number (ABN) purposes.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6: 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 MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. An enterprise could therefore incorporate a single or one-off transaction such as the building and sale of real property.

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 13 of GSTD 2006/6). Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

As such, it is necessary to determine whether the transaction has a commercial flavour that goes beyond the mere realisation of an investment/capital asset or private asset.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. 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.

MT 2006/1 discusses, amongst other things, whether an isolated activity such as the sale of real property is done in the form of an adventure or concern in the nature of trade. Relevant paragraphs from MT 2006/1 are included below:

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

233. There is no definition of 'in the form of an adventure or concern in the nature of trade' in the ABN Act. However, the concept of 'an adventure or concern in the nature of trade' has arisen in the context of Australian and United Kingdom (UK) revenue law...

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

240. Taxation Ruling TR 92/3 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature.

241. The meaning of the phrase, 'in the form of an adventure or concern in the nature of trade' has at its foundation the concept of 'an adventure or concern in the nature of trade' which is discussed above.

242. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

Characteristics of trade, including the 'badges of trade'

243. Trade takes its ordinary meaning... The word 'trade' is used with its accepted English meaning: traffic by way of sale of exchange or commercial dealing... The commercial character of trade was mentioned more recently by Lord Reid in Ransom v. Higgs (1974) 1 WLR 1594. His Lordship there said: 'As an ordinary word in the English language 'trade' has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation but is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services (1974) 1 WLR, at p 1600'...

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

245. The (Radcliffe) Royal Commission on the Taxation of Profits and Income (UK) in 1954 identified six badges or identifying features of trade. The United Kingdom courts have seen the 'badges of trade' as providing 'common sense guidance'⁹⁴ in reaching a conclusion on such matters.

246. The badges of trade have also been referred to by the High Court in FCT v. Myer Emporium Ltd and more recently by the Full Federal Court in the decision in Puzey v. Federal Commissioner of Taxation.

The 'badges of trade', as mentioned in MT 2006/1, include the following:

·        the subject matter of realisation - this badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

·        the length of period of ownership - a trading asset is generally dealt with or traded within a short time after acquisition.

·        the frequency or number of similar transactions - the greater the frequency of similar transactions the greater the likelihood of trade.

·        supplementary work on or in connection with the property realised - improving the property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

·        the circumstances that were responsible for the realisation - trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered.

·        Motive - if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. Motive is also important in cases if there is a change in character of the asset.

·        Trade v. investment assets - assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. Assets can change their character but cannot have a dual character at the same time.

Paragraphs 258 to 260 of MT 2006/1 also provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other private 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 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.

In relation to isolated transactions and sales of real property, MT 2006/1 relevantly provides as follows:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

265. 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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

·        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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require 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 will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Some activities are specifically excluded from being an enterprise. These are discussed in paragraphs 329 to 408 of MT 2006/1 and include activities done:

·        by an employee/as a withholding payment earner;

·        as a private recreational pursuit or hobby;

·        by an individual or a partnership without a reasonable expectation of profit or gain; or

·        as a member of a local governing body.

GST registration

In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if:

(a)   it is carrying on an enterprise, and

(b)   its GST turnover meets the registration turnover threshold of $75,000.

In accordance with section 23-10 of the GST Act, an entity may be registered for GST if:

(a)   it is carrying on an enterprise (whether or not its GST turnover is at, above or below the registration turnover threshold), or

(b)   it intends to carry on an enterprise from a particular date.

How this applies in your case

Taking into consideration the badges of trade and the factors as set out above, the following is noted in your case:

·        you borrowed funds for the acquisition of the land; you made a profit on the sale of the property; and you kept some records in relation to transactions concerning the property. However, you are not registered for GST and therefore have not claimed any input tax credits in relation to the acquisition of the land or construction costs.

·        you provided a copy of a document indicating that you planned to construct a residential building on the land and on completion rent it out.

·        a residential building was in fact constructed as you had planned, but it was not rented out as had been planned. Rather, the property was sold very soon after the building had been completed. You however provided details of the changed circumstances which were responsible for your sudden sale of the residential property, together with evidence to support your explanations regarding your motive for selling.

·        you advised that you and entities associated with you have limited knowledge of property development and you provided background information about your activities and past property dealings, as well as those of entities associated with you to support this. The residential property is the only property that you or entities associated with you have sold that has contained a newly constructed residential building which has never been occupied or rented.

Based on the above, we have concluded that the sale of the residential property in Australia was the mere realisation of a capital asset.

Hence, the requirement of paragraph 9-5(b) of the GST Act will not be satisfied under these circumstances as the sale was not made in the course or furtherance of an enterprise.

The final requirement to be satisfied under section 9-5 of the GST Act is paragraph 9-5(d), which is that the supplier is either registered or required to be registered for GST.

As you are not carrying on an enterprise, you are neither required nor entitled to be registered for GST (refer to sections 23-5 and 23-10 of the GST Act). Hence, paragraph 9-5(d) of the GST Act is also not met.

In order for a supply to be a taxable supply all four paragraphs of section 9-5 of the GST Act would need to be met (in addition to the supply neither being GST-free or input taxed).

As a result, as paragraphs 9-5(b) and 9-5(d) have not been met you have not made a taxable supply in relation to the sale of the residential property in Australia. Therefore no GST is payable by you on the sale.