Edited version of private advice

Authorisation Number: 1051730253409

Date of advice: 4 August 2020

Ruling

Subject: GST and sale of new residential property

Question

Is the sale of the Australian residential property (Property 2) 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 2 is not subject to GST as the sale of Property 2 is not a taxable sale under section 9-5 of the GST Act since the vendor is not required to register for GST.

The vendor is required to notify the purchaser in writing that they do not have a withholding obligation when purchasing Property 2.

Relevant facts

You are an Australian citizen and have been working overseas for several years. While working overseas you are deemed to be a non-resident of Australia for income tax purposes. You currently are not registered for GST

You own a residential property and it is being leased as a holiday house. With the Covid 19 and due to border closures and public unwilling to travel, you currently are having a loss in revenue from the lease of this property.

While overseas you purchased another Australian property. The previous owners of the XX property had received approval for the subdivision of the property into 2 plots. This was the reason you purchased the property as you were considering that after the purchase you would have the subdivision done and have 2 villas built on them - one for you and your family to live in when you come back to Australia and the other one for your parents and brother to live in.

After the purchase you subdivided the property into 2 equal lots - Property 1 and Property 2, and have a villa constructed on each property. Both properties are zoned for residential purposes.

The subdivision and construction of the two villas started on xxx 20XX and were officially finished in month/20XX. The final approval certificate was issued to you in mid-February 2016.

Property 1

After the construction of property 1 you leased it as an Air BNB. However due to Covid-19, your rental income for property 1 has been reduced to nil.

Property 2

On xx February 20XX the property was marketed for rent. You leased it as an AIR BNB. However, by the end of xx month/20XX you did not receive any rental income due to Covid 19.

You and your family would also in between the leases stay on the property when in Australia since this was the primary reason you built this property. Your parent, brother and grandchildren would several times come and stay on the property as well.

Due to Covid 19 your employer requested that you take leave without pay. You were having financial hardship with the decrease in your pay and decrease in rental income to pay for the mortgages on the houses.

You decided to put property 2 on the market to ease your financial hardship. The property was sold with a purchase price GST exclusive recently.

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 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.

Detailed reasoning

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

a)    The supply is made for consideration; and

b)    The supply is made in the course of an enterprise that you carry on; and

c)    The supply is connected with Australia; and

d)    The supplier is registered for GST or required to be registered for GST.

However, the supply is not a taxable supply where the supply is GST-free or input taxed.

Based on the information given your sale of Property 2 satisfies paragraphs (a) to (c) in section 9-5 of the GST Act as:

a)    the sale of Property 2 is for consideration; and

b)    the sale of Property 2 is made in the course of the rental enterprise that you carry on under paragraph 9-20(c) of the GST Act since Property 2 was one of the assets you used to derive rental income; and

c)    the sale of Property 2 is connected with Australia since Property 2 is in Australia.

Currently you are not registered for GST. We will now consider whether you are required to register for GST for the purpose of paragraph (d) 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 derive rental income from the lease of several residential properties including Property 2. The lease of a residential premise is an input taxed supply. In your case the rental incomes you receive from the residential premises are not included when calculating your current and projected annual turnover for GST registration purposes.

Further Property 2 is a capital asset from which you derive rental income. You have sold a capital asset when you sold property 2 as a new residential premise (since the premise has not been leased for more than 5 years). The turnover of this sale is not included in your projected annual turnover under section 188-25 of the GST Act since the sale of this asset is reducing the scale of your rental enterprise. Accordingly, you are not required to be registered for GST when selling Property 2 while carrying only a rental enterprise.

In this instance your sale of Property 2 is not a taxable sale and is outside the scope of GST.

Other information

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 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 www.ato.gov.au and search GST at settlement.

As determined in question 1 your sale of Property 2 is not a taxable sale when selling one of the assets 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 Property 2 (the asset of your rental enterprise).