Edited version of private advice

Authorisation Number: 1051661193658

Date of advice: 01 May 2020

Ruling

Subject: GST and sale of new residential premises

Question

Is the supply of new residential premises by Entity A (as Vendor) to the Purchaser a taxable supply under section 9-5 of the A New System (Goods and Services Tax Act 1999 (GST Act)?

Answer

Yes

This ruling applies for the following periods:

1 July 2019 till quarter ending 30 June 2020

The scheme commences on:

1 March 2020

Relevant facts and circumstances

Entity A carries on an activity of property investment. Its activities involve acquiring property which is uses to make supplies of residential leases.

In 20XX Entity A entered onto a contract to acquire a Property. This property consisted of an existing residential premise.

At the time of acquiring the Property, Entity A intended to demolish the premise and construct three new townhouses for the purpose of retaining the properties as long term investments. That is, the intention for these townhouses was that they would become available for rent when ready.

In 20XX Entity A demolished the existing residential premises on the Property and shortly thereafter applied to council to obtain development approval to constructed three new residential properties (townhouses). As part of this process the Property was subdivided into three separate titles.

Construction of the three townhouses commenced in early 20XX. However during the course of construction, the Purchaser expressed an interest in acquiring one of the townhouses.

At the same time, Entity A was having some issues with their bank and was advised by their bank manager that they would be required to reduce some of their bank debt (bank loans) to satisfy lending/risk requirements.

The Purchaser applied for finance and upon success Entity A entered in a contract of sale with the Purchaser in mid-20XX to supply one of the townhouses (Unit X) at a current market value.

Construction of the three townhouses was completed in late 20XX at which time transfer of Unit X took place.

The scale of Entity A's enterprise at completion of the construction has expanded with their property portfolio increasing by the 2 remaining townhouses they retained. These are now being leased as residential premises.

Historically, the Investment Trust has not previously sold new residential premises, nor does the Investment Trust intend to make sales of new residential premises in the future.

Investments is not registered for GST.

Relevant legislative provisions

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

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

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

Reasons for decision

Section 9-5 of the GST Act sets out the requirements for a taxable supply and provides the supply will be a taxable supply where:

·        it is made for consideration;

·        it is in the course or furtherance of an enterprise you carry on;

·        it is connected with the Indirect Tax Zone (Australia); and

·        you make the supply is registered or required to be registered for GST.

However a supply is not a taxable supply to the extent it is GST free or input taxed.

In this case Entity A is making a supply of new residential premises and as such is not GST-free of input taxed. Further the supply of the new residential premises is made for consideration, is connected with Australia and is made in the course or furtherance of the enterprise carried on by Entity A. Although Entity A is not registered for GST what remains to be considered is whether Entity A is required to be registered for GST.

Section 23-5 of the GST Act provides that and entity is required to be registered for GST where it carries on an enterprise and its GST turnover meets the registration turnover threshold. For the purposes of section 23-15 of the GST Act the GST registration turnover threshold is an amount of $75,000.

Section 188-10 of the GST Act explains whether your GST turnover meets, or does not exceed, a turnover threshold. Relevantly section 188-10 states:

(1)   You have a GST turnover that meets a particular *turnover threshold if:

(a)   your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold, or

(b)   your projected GST turnover is at or above the turnover threshold.

(2)   You have a GST turnover that does not exceed a particular *turnover threshold if:

(a)   Your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

(b)   Your projected GST turnover is at or below the turnover threshold.

In this case the sale of the new residential premises was for an amount which is above the current GST turnover threshold. Therefore what remains to be considered is whether your projected GST turnover is at or below the turnover threshold.

Section 188-20 of the GST Act provides the meaning of projected GST turnover. It states:

(1)    Your projected GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a)    supplies that are *input taxed; or

(b)    supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c)    supplies that are not made in connection with an *enterprise that you *carry on.

Accordingly your projected GST turnover satisfies 188-20 of the GST Act.

However you have submitted that in this case section 188-25 of the GST Act applies and the amount received from the sale of the new residential premises should be disregarded from the projected GST turnover. This is on the basis that Entity A is not a "property developer" and ordinarily holds properties as long term investments.

Section 188-25 of the GST Act states the following:

Transfer of capital assets, and termination etc. of enterprise, to be disregarded

In working out your *projected GST turnover, disregard:

(a)    any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)    any supply made, or likely to be made, by you solely as a consequence of:

(i)       ceasing to carry on an *enterprise; or

(ii)      substantially and permanently reducing the size or scale of an enterprise.

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) considers the issue of transferring of a capital asset. In particular at paragraphs 46 to 47 of GSTR 2001/7 it states:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Consistent with the above, the sale of the new residential premises is not a transfer of a capital asset. As such we do not accept the submission that 188-25 of the GST Act applies and that the sale is to be disregarded when calculating the projected GST turnover.

As Entity A has exceeded the GST turnover threshold it is required is required to be registered for GST.

Accordingly, as the remaining requirements of section 9-5 of the GST Act are satisfied, the sale of the property by Entity A will be a taxable supply.