Edited version of private advice

Authorisation Number: 1051770830104

Date of advice: 29 October 2020

Ruling

Subject: Goods and services tax (GST) and sale of residential premises

Question 1

Was the sale of A by individual X and individual Y a taxable supply for GST purposes?

Answer

No. Therefore, GST is not payable on the sale.

Question 2

Did the sale of A give rise to a GST withholding obligation under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No. Therefore, the purchaser was not required to make a GST payment to the Australian Taxation Office (ATO) on the sale under that provision.

Question 3

In the GST withholding notice for the sale of A issued by the vendors under section 14-255 of Schedule 1 to the TAA, should individual X and individual Y have notified the purchaser under paragraph14-255(1)(a) that the purchaser was required to make a payment under section 14-250 in relation to the sale of the property?

Answer

No. Individual X and individual Y should have instead notified the purchaser in writing that the purchaser was not required to make a payment under section 14-250 in relation to the sale of A.

Relevant facts and circumstances

Individual X and their relative (individual Y) purchased a property located in mainland Australia (the property) under a contract that settled on (date). Individual X (and their family) and individual Y moved into the property on that date and used the property as their main residence only.

On (date), a DA approval was granted by the council which permitted individual Y and Individual X to knock down the original dwelling and build two duplexes on the property. On (date), all parties moved out of the property as demolition and construction began.

Entity Z built the two duplexes which are now known as A and B which were both owned by individual Y and individual X 50% each.

On (date), an interim occupation certificate was received and individual Y, individual X and their family moved into A with the intention to live in the property and use it as their main residence for the foreseeable future and share the mortgage repayments. The mortgage for the purchase of the original property and construction of the duplex was taken out for a period of decades. There was no intention to resell A when the mortgage was taken out.

There was no rent paid between the parties. A was only used as individual X's (and their family's) and individual Y's main residence. It was not used by individual X or individual Y for enterprise purposes.

On (date), all three parties moved out of A.

Reasons for this are twofold:

·         They could not afford to keep paying off the mortgage.

·         There was a fallout between individual X's spouse and individual Y.

On (date), A was listed for sale through a real estate agent.

On (date), contracts for the sale of A were exchanged.

On (date), it became apparent that individual Y's solicitor, (name), made an error on the contract of sale, incorrectly indicating that GST was payable on the sale.

The purchaser's solicitor responded on (date) stating that the GST paid on settlement (amount) is to be held in an interest-bearing account pending a taxation ruling from the ATO.

The vendors solicitor agreed to hold the amount in the firm's trust account until a ruling is obtained from the ATO.

On (date), the contract for the sale of A settled. The purchaser withheld GST.

As of (date), a firm was appointed tax agents for individual Y to assist with the ATO ruling.

On (date), the tax agents were successful in obtaining an amended land tax assessment which shows that A was individual Y's principal place of residence and was therefore exempt from land tax.

Individual X and individual Y are not registered for GST.

In regard to B, this property had always been rented out as intended, however, individual X and individual Y ultimately sold B for the same reasons highlighted above in relation to A.

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 9-20

Taxation Administration Act 1953 Schedule 1, section 14-250

Taxation Administration Act 1953 Schedule 1, section 14-255

Reasons for decisions

Question 1

GST is payable on taxable supplies.

An entity makes a taxable supply if they meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a)  you make the supply for *consideration; and

(b)  you make the supply in the course or furtherance of an

*enterprise that you *carry on; and

(c)   the supply is *connected with the indirect tax zone; and

(d)  you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is

*GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

In accordance with section 9-20 of the GST Act, an enterprise includes, amongst other things:

·         an activity or series of activities in the form of a business

·         an adventure or concern in the nature of trade

·         leasing out property on a regular or continuous basis.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise. Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for the purposes of determining whether an entity carries on an enterprise for GST purposes.

Paragraph 244 of MT 2006/1 states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 262 and 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Goods and Services Tax Ruling GSTR 2009/2 considers the GST consequences of the partitioning of real property among joint tenants.

In accordance with Example 6 in GSTR 2009/2, where an individual purchases a block of land to build their primary residence on and they use the building for that purpose, the property development activity does not amount to an enterprise, as the purpose of the arrangement is private and domestic in nature.

Based on the information provided, individual X and individual Y purchased the property with the intention of developing it to build a duplex, live in one unit as their primary residence and rent out the other. Regardless of whether the development constituted an enterprise, individual X and individual Y carried on a leasing enterprise when they rented out B. Individual X and individual Y used A as their main residence and not for any enterprise they carry on individually or together. As such we consider that the sale of A was the mere realisation of a private asset. It did not have a commercial character to it. The sale was not made in the course or furtherance of an enterprise carried on by individual X and/or individual Y; thus, the requirement of paragraph 9-5(b) of the GST Act is not met. Accordingly, the sale was not a taxable supply under the GST Act and was not subject to GST.

Question 2

In accordance with section 14-250 of Schedule 1 to the TAA, where an entity makes a taxable sale of residential premises, under the GST Act, the purchaser may be required to withhold GST at settlement and remit it to the Australian Taxation Office (ATO), depending on the situation.

As the sale of A is not a taxable supply of residential premises, the purchaser was not required to withhold an amount for GST at settlement and remit it to the ATO.

The fact that the sale contract purported that the sale was subject to GST did not trigger a requirement for such a payment to be made.

Question 3

In accordance with section 14-255 of Schedule 1 to the TAA, where an entity sells residential premises (other than commercial residential premises), the entity must notify the purchaser in writing as to whether or not the purchaser is required to make a payment to the ATO under section 14-250 of Schedule 1 to the TAA.

As individual X and individual Y did not make a taxable supply of residential premises when they sold A, they were not required to notify the purchaser in writing that the purchaser was required to pay GST to the ATO under section 14-250.

Individual X and individual Y were required to notify the purchaser in writing that the purchaser was not required to make a GST payment to the ATO under section 14-250, as individual X and individual Y were making a sale of residential premises other than commercial residential premises and the purchaser was not required to make a GST payment to the ATO under section 14-250.