Edited version of private advice

Authorisation Number: 1051658138552

Date of advice: 6 May 2020

Ruling

Subject: GST and the sale of vacant land

Question

Will GST be payable on the sale of your vacant block of land under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

This ruling applies for the following period:

X to Y

Relevant facts and circumstances

You are not registered for GST.

On X you purchased a property located at Y (the Property) as an investment.

The Property, which was on one title, consisted of four fully tenanted residential units. The purchase contract also included a planning permit to build two additional dwellings and a permit to apply for the land to be divided into six lots. The subdivision of the land into 6 titles was registered by the Titles Office on X.

You provided a top down plan of the Property on X. You acquired the Property with 4 residential units as an investment in an endeavour to produce a better return on its capital than bank interest, by way of rental income.

The addresses of the 4 units after subdivision are units 2 - 5 at Y.

You intended to build units X and Y in order to derive rental income in the long term.

You carried out the construction of unit X and this is currently tenanted.

You could not raise finance to build on the Block (ie Y) requiring you to change your plans. You wish to offer the Block, which is vacant land, for sale.

In addition, you advised you own one other residential property and derive rental income.

Other than the above, you have not previously undertaken property development projects.

Prior to the above property investments, you invested in shares and still own some shares.

You are not involved in any other enterprises.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999, section 23-5

A New Tax System (Goods and Services Tax) Act 1999, subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999, section 188-25

Reasons for decision

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

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with the indirect tax zone (Australia); 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.

For the supply of the Block to be a taxable supply, all of the requirements in section 9-5 must be satisfied and it must not be GST free or input taxed.

In your case, you will sell the Block for consideration and the property is connected with Australia as it is located in the indirect tax zone. In addition, you are carrying on a leasing enterprise. Therefore, paragraphs 9-5(a), 9-5(b) and 9-5(c) are satisfied. The sale of the Block will be neither GST-free nor input taxed. We now consider whether you satisfy paragraph 9-5(d).

GST Registration

As you are not registered for GST, we will consider whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold.

The applicable registration turnover threshold in this case is $75,000.

You are carrying on a leasing enterprise.

However, if your GST turnover does not meet the registration turnover threshold then you are not required to be registered. This being the case, you will not satisfy section 23-5.

Next, we will consider whether your GST turnover meets the registration turnover threshold.

Registration turnover threshold

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 the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or

·         your projected GST turnover is at or above the registration turnover threshold.

It is necessary to determine whether your projected GST turnover meets the threshold. You are required to be registered for GST if your projected GST turnover is at or above $75,000.

Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

Supplies that are disregarded when working out your projected GST turnover include:

·         supplies that are input taxed

·         supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act)

·         supplies that are not made in connection with an enterprise that you carry on

·         supplies that are not connected with Australia.

Your lease of the X rental units at the Property and the lease of one other rental property are input taxed supplies. Your sale of any shares are also supplies that are input taxed.

These supplies are disregarded when working out your projected GST turnover.

Capital asset

Section 188-25 provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you:

·         by way of transfer of ownership of a capital asset, or

·         solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of 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 (GSTR 2001/7).

The GST Act does not define the term "capital asset". However, GSTR 2001/7 explains that 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. They may be described as the business entity, structure or organisation set up or established for the earning of profits.

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. 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. Therefore, the character of an asset must be determined at the time of expected supply.

Your intention was originally to build a residential property on the Block. Your plan was to build units on both Lot X and Lot Y for the purpose of leasing to tenants, consistent with leasing units Z to W as part of your leasing enterprise. You did not acquire the Block to derive income from its disposal. Due to not being able to raise the finance to develop Lot X, you have placed the lot on the market.

It is the Commissioner's view based on the facts and circumstances provided that the character of the Block remains a capital asset. It follows then, that the disposal of the Block is excluded from the calculation of your projected GST turnover.

It follows that, your projected GST turnover is below $75,000. Your GST turnover does not meet the $75,000 registration turnover threshold. Therefore, you are not required to be registered under section 23-5.

As you do not meet all of the elements of section 9-5 the supply of the Block will not be a taxable supply. The supply of the Block will not be subject to GST.