Edited version of private advice

Authorisation Number: 1051713982983

Date of advice: 07 July 2020

Ruling

Subject: GST and sale of new residential property

Question 1

Will the sale of Property A be subject to the goods and services tax (GST) under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Based on the information given, the saleof Property A will not be subject to GST as the sale of the property will not be a taxable sale under section 9-5 of the GST Act.

Question 2

Will you have to register for GST when you sell the Property A?

Answer

Based on the information given, you will not be required to be registered for GST as the turnover of the sale is not included in your projected annual turnover under section 188-25 of the GST Act.

Question 3

Does GST need to be withheld by the purchaser on the sale of Property A?

Answer

As advised in question 1 the sale of the Australian will not be subject to GST and therefore there will be no GST to be withheld.

However, you will be required to notify the purchaser in writing that they do not have a withholding obligation when purchasing the property.

Question 4

If you have to register for GST are you able to register for the Margin Scheme?

Answer

As advised in question 1 the sale of the property will not be a taxable sale. In this instance you cannot apply the Margin Scheme.

Relevant facts

Mrs and Mr XYZ (you) currently live in Australia and you are not individually or in a partnership registered for GST.

You separated and you decided to jointly purchased two house and land packages - Property A and Property B. Each of you would move to each property and the main resident property would be sold. However you reconciled before the construction of the new properties have been finished.

You decided to sell Property A due to financial issues. Property A is the property that is subject to the private ruling request.

Currently you do not earn any income from the other two properties that you owned since you live in one of them and Property B is currently under construction. You have not decided what you will do when the new house on Property B is finished.

Property (A)

We have received a copy of the sale and purchase of the land contract for Property A. No GST was paid on the purchase of the vacant land.

We received a copy of the signed contract for the building of a house on the vacant land that you had with an Australian entity. The total price for building the house on the vacant land you purchased included GST.

After the handover of the property to you, it was left vacant and listed for sale. After a prospective purchaser withdrew their offer, you decided to take the property off from the sale market.

Property A is currently being rented to help cover expenses. With the property taken off the market you currently do not have any sale contract for the property. You will rent the property until it is sold and If you sell the property you intend to sell the property not subject to tenancy.

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

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

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

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

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Questions 1 and 2

Under paragraph 40-35(1)(a) a supply of residential premises by way or lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed. In this instance GST is not included in the rental charge.

Under subsection 40-65(1) of the GST Act a sale of residential property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation.

However, the sale of the residential property is not input taxed under subsection 40--65(2) of the GST Act to the extent that the residential premises are:

a)    commercial residential premises; or

b)    new residential premises other that those used for residential accommodation before 2 December 1998.

Under subsection 40-75(1) of the GST Act, residential premises are new residential premises if they:

a)    have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

b)    have been created through substantial renovations of a building; or

c)    have been built or contain a building that has been built to replace demolished premises on the same land.

However, under subsection 40-75(2) of the GST Act residential premises are not new residential premises if for a continuous period of at least 5 years the residential premises have been used only for the purpose of making input taxed supplies (that is residential rental) since:

a)    the premises first became residential premises - where the premises have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

b)    the premises were last substantially renovated - where the premises have been created through substantial renovations of a building; or

c)    the premises were last built - where the premises have been built or contain a building that has been built, to replace demolished premises on the same land.

Subsection 40-75(2) of the GST Act requires that for the period of at least 5 years, the premises have been used only for making input taxed supplies under paragraph 40-35(1)(a) of the GST Act. This requirement in subsection 40-75(2) is satisfied where the only supplies of the premises were by way of lease, hire or licence (i.e. residential rental) for any continuous period of at least 5 years between when the premises would otherwise have become new residential premises and when they are sold.

We consider the 5 years must be a continuous period. A continuous period is not broken by short periods between tenancies where the premises are actively marketed for rent following the departure by a previous tenant. However, a continuous period would not include periods when the premises are used for a private purpose or left vacant with no attempt to lease, hire or licence.

Property A is a new residential house that has not been sold as residential property before. The property was originally marketed for sale and then was placed on the market for rent. The rental of the property is less than five years. In this instance Property A is a new residential premise under subsection 40-75(1) of the GST Act.

A sale of new residential premise is a taxable sale under section 9-5 of the GST Act where the supplier is registered or required to be registered for GST.

Currently you are not registered for GST and you are carrying on a rental enterprise when leasing property A. The next step is to consider if you will be required to be registered for GST when selling Property A where its lease is less than 5 years.

Where Property A has been leased continuously for five years, its sale will be an input taxed supply under section 40-65 of the GST Act.

Are you required to register for GST?

Under section 23-5 of the GST Act you are required to register for GST if you are carrying on an enterprise and your annual turnover is AU$75,000 or more (AU$150,000 for non-profit organisation).

You reach the GST turnover threshold if either:

·         your 'current GST turnover' (your turnover for the current month and the previous 11 months) totals $75,000 or more ($150,000 or more for non-profit organisations); or

·         your 'projected GST turnover' (your total turnover for the current month and the next 11 months) is likely to be $75,000 or more ($150,000 or more for non-profit organisations).

Your GST turnover is your total business income (not your profit). The following supplies are excluded from the calculation of current and projected GST turnover:

·         Supplies that are input taxed;

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

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

·         supplies that are not connected with Australia;

·         supplies of rights or options that are connected with Australia because of paragraph 9-25(5)(c) (unless the right or option is supplied to an Australian consumer, is not GST-free and relates to the acquisition of an intangible);

·         supplies (other than those mentioned in the immediately preceding two dot points) of a right or option to use commercial accommodation in Australia where the supplies are not made in Australia and are made through an enterprise that the supplier does not carry on in Australia;

·         supplies made from one member of a GST group to another member of that GST group; and

·         GST free supplies made by a non-resident supplier that are not made through an enterprise they carry on in Australia

Further section 188-25 of the GST Act excludes certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

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

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

·         ceasing to carry on an enterprise; or

·         substantially and permanently reducing the size or scale of an enterprise.

According to Miscellaneous Taxation Ruling MT 2006/1 certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other 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 and private 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.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover including the effect of section 188-25 on projected GST turnover provides the following example regarding ceasing to carry on an enterprise

Example 1: Ceasing to carry on an enterprise

48. James, a grazier, aged seventy, decides to retire from his farm. He holds a clearing sale and sells all his livestock, machinery and implements to various buyers. He receives $80,000 from the sale that will be included in his current GST turnover. He is not registered for GST, as his GST turnover from selling livestock is usually around $35,000.

49. If James has a GST turnover of $75,000 or more he is required to be registered for GST. Although he normally would have sold some of this livestock in his day to day operations, the whole herd has been sold at this time solely as a consequence of ceasing to carry on his enterprise. The effect of subparagraph 188-25(b)(i) is that the $80,000 is excluded from his projected GST turnover.

50. An objective assessment of James' projected GST turnover is below $75,000 taking into account his age and the permanent nature of his decision. His current GST turnover is above $75,000 but because his projected GST turnover is below $75,000, his GST turnover does not meet the registration turnover threshold. Thus, James is not required to register for GST.

From the facts given you currently derive rental income from Property A. The lease of a residential premise is an input taxed supply. In your case the rental incomes you receive are not included when calculating your current and projected annual turnover for GST registration purposes.

Further Property A is a capital asset from which you derive income. Where you are still carrying on this rental enterprise, you will be selling a capital asset when you sell the property as a new residential premise. The turnover of this sale will not be included in your projected annual turnover under section 188-25 of the GST Act.

Accordingly, you will not be required to be registered for GST when selling Property A while carrying only a rental enterprise.

In this instance your sale of Property A will not be a taxable sale and will be outside the scope of GST.

Question 3

If a supplier is selling a new residential property or potential residential land, they must work out if they are carrying on an enterprise. This may be the case, even for one-off transactions.

From 1 July 2018, most purchasers are required to pay a withholding amount from the contract price at the date of settlement for taxable sales. This applies to:

·         new residential property

·         land that could be used to build new residential property (potential residential land).

The purchaser pays the withholding amount directly to the Australian Taxation Office (ATO) rather than to the property supplier.

Suppliers must notify purchasers in writing as to whether or not they have a withholding obligation when they sell either:

·         residential premises

·         land that could be used to build new residential property ('potential residential land) to a purchaser who is not a GST registered entity acquiring the land for a creditable purpose.

For further information, refer to our website ato.gov.au and search GST at settlement.

As determined in question 1 your sale will not be a taxable sale when selling the asset of your rental enterprise and therefore no GST is payable on the sale. However, you must notify the purchaser in writing that they do not have a withholding obligation when selling the asset of your rental enterprise.

Question 4

The margin scheme is a way of working out the GST payable when you sell property as part of your business.

You can only apply the margin scheme if:

·         the sale of the property is taxable; and

·         you are eligible to use it.

As a supplier you must have made a written agreement with the purchaser before the settlement date to sell the property using the margin scheme.

You cannot use the margin scheme if, when you first purchased the property, the sale to you was fully taxable and the margin scheme was not used.

Generally, if the previous owner of the property was not eligible to use the margin scheme, you will also not be able to use the margin scheme.

You must work out your eligibility to use the margin scheme before you sell the property. For information on eligibility for the margin scheme go to https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?anchor=workingout#workingout

As determined in question 1 your sale of Property A will not be a taxable sale. You will therefore not be eligible to use the Margin Scheme.