Edited version of private advice

Authorisation Number: 1051777844015

Date of advice: 20 November 2020

Ruling

Subject: GST and new residential premises

Question

Will your supply of Townhouse 1 be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes.

Relevant facts and circumstances

Person A and Person B (You) are not registered for GST.

On ddmmyyyy you purchased the Property as joint tenants with the original intention of demolishing it in the future and building your dream home. Since purchase you have used the Property as a rental property.

You sold your primary residence in yyyy and moved into a small unit to save money to build your dream home on the Property.

Person B's health deteriorated from mid-yyyy and as a result you decided to build a smaller home on the Property.

Your intention changed and you decided to subdivide the Property into two lots and build a townhouse on each lot. One townhouse was be your residence and the other townhouse would be used as a rental property.

This was based on cash flow being available and Person B's business continuing to grow. However, Person B's business income is in decline.

Your intention has changed again and you will sell the other townhouse to reduce debts as it is no longer feasible to financially retain it.

The Property has been subdivided into two lots Townhouse 1 and Townhouse 2.

You will sell Townhouse 1 and reside at Townhouse 2.

The key dates for the development of the Property are:

•         mmyyyy - Lodged plans to council for demolition, subdivision of title.

•         mmyyyy - Demolished house.

•         mmyyyy - Land is officially subdivided.

•         mmyyyy - Plan to submit to council for Development Approval by a private certifier.

•         mmyyyy - Plan to start build (assuming Development Approval is received by council by end of mmyyyy):

-   Stage 1 - Completion of Site Preparation - mmyyyy

-   Stage 2 - Completion of Footings and Foundations - mmyyyy

-   Stage 3 - Completion of wall and roof frame - mmyyyy

-   Stage 4 - Lock up - mmyyyy

-   Stage 5 - Fit-out - mmyyyy

-   Stage 6 - Practical Completion and handover - mmyyyy.

The cost of the development will be approximately:

•         $X for the subdivision

•         $ for the build of each townhouse.

You will finance the subdivision and development with savings, a loan of $X from the bank, and the remainder from family.

As you are unable finance both townhouses at the same time you will initially complete Townhouse 1 and partially complete Townhouse 2. You will then sell Townhouse 1 which will finance the completion of Townhouse 2.

You estimate the selling value of Townhouse 1 without a dwelling is approximately $X and with the townhouse is approximately $X.

You have previously subdivided property and built a house for rental and the house remains a rental property.

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

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 Section 40-75

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

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1

Reasons for decision

In this reasoning, please note:

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

You are liable for GST on any taxable supplies 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 Townhouse 1 to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

You will sell Townhouse 1 in Australia for consideration and therefore satisfy paragraphs 9-5(a) and 9-5(c). Further, the supply of Townhouse 1 in your situation will neither be GST-free or input taxed.

Accordingly, we must determine whether:

(a) your sale of Townhouse 1 is in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

In your case, there are several factors present that indicate that your activities are an adventure or concern in the nature of trade, including:

•         a coherent plan to demolish the existing premises on the Property, subdivide the land, and build a townhouse and sell Townhouse 1

•         borrowing funds to finance the development which is expected to cost $X for the subdivision and $X for Townhouse 1

•         the building of Townhouse 1 with an estimated sale value of $X.

Your situation is similar to example 29 in MT 2006/1 (reproduced below), including carrying out the necessary steps to develop and sell the Property with a reasonable expectation of profit or gain:

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

We consider that the sale of Townhouse 1 is in the course of an enterprise you are carrying on, therefore you will satisfy paragraph 9(b) in addition to satisfying paragraphs 9-5(a) and 9-5(c).

New Residential Premises

If you proceed with your intention to sell Townhouse 1 you will make a supply of 'new residential premises', defined in section 40-75 to include, in summary, premises that have not previously been sold as residential premises.

A sale of new residential premises will be taxable where all the requirements of section 9-5 are satisfied.

GST Registration

You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

We have already established you are carrying on an enterprise.

Your expected proceeds from the sale of your 'new residential premises' will be relevant in determining whether you meet the registration turnover threshold, as you will need to calculate your 'projected GST turnover'.

Under section 188-20 your 'projected GST turnover' at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months, subject to the exclusion of certain types of supplies. Section 188-25 disregards the transfer of ownership of capital assets.

To determine if you are required to be registered for GST the Property must be classified as either a capital or revenue asset.

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. That is, a disposal of an asset as part of an adventure or concern in the nature of trade will be a revenue asset.

The Property is a revenue asset and its supply is not excluded from your projected GST turnover. The sale proceeds from your proposed sale will be included when calculating whether your turnover meets the GST registration turnover threshold.

As your proposed sale of Townhouse 1 (located in Australia) will exceed $75,000, your turnover will meet the GST registration turnover threshold.

You are required to be registered for GST, satisfying paragraph 9-5(d). Therefore, you satisfy all the requirements of a taxable supply under section 9-5.

Your sale of Townhouse 1 will be a taxable supply and you will be liable for GST on the sale.

Entity

The term 'you' applies to an entity, and it is an entity that makes a taxable supply and is liable for GST on a taxable supply it makes. An 'entity' includes a partnership. A partnership for GST purposes is defined by reference section 995-1 of the Income Tax Assessment Act 1997:

partnership means:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

In your specific circumstance, you are an association of persons (Person A and Person B) that is not in business, but that is nevertheless in receipt of ordinary income jointly, being the proceeds from the sale of Townhouse 1.

Therefore, you, the partnership of Person A and Person B will be liable for GST if you proceed with your intention to sell Townhouse 1.