Edited version of private advice

Authorisation Number: 1051649209115

Date of advice: 19 March 2020

Ruling

Subject: GST and sale of property

Question

Is the sale of the townhouse a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Section 9-5 of The GST Act provides that you make a taxable supply if:

·   You make the supply for consideration; and

·   The supply is made in the course or furtherance of an enterprise that you carry on; and

·   The supply is connected with the indirect tax zone; and

·   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 sale of the townhouse (Property) will be for consideration and the supply is connected with the indirect tax zone. Therefore, the only contentions are whether the supply is made in the course or furtherance of an enterprise that you carry on, and whether you are registered or required to be registered for GST.

You were carrying on a leasing enterprise that involved the leasing out of the two townhouses. We consider that seeking for tenants in November 2019 formed part of that leasing enterprise.

Section 195-1 of the GST Act extends the meaning of 'carrying on' an enterprise to include anything done in the course of the commencement or termination of the enterprise. The sale of the Property would result in the termination of the leasing enterprise and therefore be in the course or furtherance of the leasing enterprise that you carry on. You were not carrying on an enterprise of property development as apart from the two townhouses you had not previously been involved in any other development of property. However, if you were to engage in another property development in future, you may be considered to be carrying on a property development enterprise.

Sections 23-5 and 23-15 of the GST Act state that you are required to register for GST if you are carrying on an enterprise, and your registration turnover threshold is $75,000. Subsection 188-10(1) provides that you have a GST turnover that 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 less than $75,000; or

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

Current GST turnover is defined in section 188-15 of the GST Act as the sum of the values of all supplies made in a particular month and the preceding 11 months and does not include supplies that are input taxed. As the only supplies that you have made are input taxed residential rent, you do not meet the current GST turnover.

Projected GST turnover is defined in section 188-20 of the GST Act as the sum of the values of all supplies made in a particular month and the following 11 months. Section 188-25 provides that this does not include any supply made, or likely to be made, which is by way of transfer of ownership of a capital asset.

The Commissioner states at paragraph 31 of GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover that generally the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. As the Property in this case is an asset that helps you to produce profit, it is a capital asset.

In working out your projected turnover, section 188-25 of The GST Act says to disregard any supply made, or likely to be made, from the sale of a capital asset. As established above, capital assets include land. Therefore, the sale of the Property is disregarded in calculating your projected turnover.

The sale of the Property will take place when settlement occurs. Your current GST turnover at the time of settlement may be above the turnover threshold. As one cannot predict the sale of capital assets with certainty, the Commissioner is satisfied that your projected GST turnover is below the turnover threshold.

You do not satisfy both limbs of the GST turnover test and as a consequence do not satisfy the fourth limb of section 9-5 of the GST Act as you are not registered and not required to be registered. You therefore are not making a taxable supply.

This ruling applies for the following period:

April 2020 to December 2020

The scheme commences on:

April 2020

Relevant facts and circumstances

You are not registered for GST.

You acquired a residential property in 200x. The property has been leased out since then.

The tenant at the property vacated in 201x.

As the residence on the property was old and in poor condition, you and your spouse decided to develop the property into two townhouses. The intention was that you would continue to lease out both townhouses and one day gift a townhouse to each of your two children. The demolition of the house began in 201x.

In 201x, you entered into a building contract to construct two townhouses on the property.

Your intention with respect to one of the two townhouses changed towards the end of 201x due to the government's draft plan for a freeway showing that it would affect your main residence.

As a result, you sold your main residence in 201y and moved into one of the two townhouses on completion of the building of the townhouses. You have been residing there since then.

In 201y, a Certificate of Occupancy was issued with respect to the other townhouse - the Property.

In 201y, you entered into an agreement with a real estate agency to lease out the Property but the response from potential tenants was poor. You are contemplating the sale of the Property in order to service your debt.

If you were to sell the Property, you will need to arrange for the subdivision. The two townhouses are currently on a single title.

You had not previously been involved in any other development of property.

Relevant legislative provisions

Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999

Section 195-1 of A New Tax System (Goods and Services Tax) Act 1999

Section 23-5 of A New Tax System (Goods and Services Tax) Act 1999

Section 23-15 of A New Tax System (Goods and Services Tax) Act 1999

Section 188-15 of A New Tax System (Goods and Services Tax) Act 1999

Section 188-20 of A New Tax System (Goods and Services Tax) Act 1999

Paragraph 31 of GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

Section 188-25 of A New Tax System (Goods and Services Tax) Act 1999