Edited version of private advice

Authorisation Number: 1051777911617

Date of advice: 12 November 2020

Ruling

Subject: GST and sale of a new residential property

Question 1

Was Goods and Services Tax ("GST") payable on the sale of the Property?

Answer

No. GST was not payable on the sale of the Property.

Question 2

Are the taxpayers entitled to apply for a refund of the amount withheld by the purchaser of the Property in purported compliance with section 14-250 of Schedule 1 to the Taxation Administration Act 1953 ("TAA 1953")?

Answer

Yes. As the supply of the Property was not taxable the GST at settlement rules did not apply to their supply. The Taxpayers are entitled to apply for a refund of the amount withheld and remitted by the purchaser in error.

Relevant facts and circumstances

Two entities (the Taxpayers) built two new residential properties and rented them for a period.

One of the properties (the Property) was subsequently sold after being rented for less than the relevant period of five years.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5; 9-20; 23-5; 40-65; 40-75 and 188-10, 188-15; 188-20; 188-25 and195-1

Taxation Administration Act 1953 section14-250

Reasons for decision

Summary 1

No. GST was not payable on the sale of the Property.

Detailed reasoning

Section 9-5 provides that you make a taxable supply if:

(a)  you make the supply for consideration; and

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

(c)   the supply is connected to the indirect tax zone (Australia); and

(d)  you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case, the sale of the Property will be made for consideration and is located in Australia. As such we will consider whether the sale of the Property is made in the course or furtherance of an enterprise that the Taxpayers carry on and if so, as they are not registered for GST, whether they are required to be registered.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)). The leasing of the Property would constitute an 'enterprise' under this limb of the definition in section 9-20.

The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise. The demolition of the old house, construction of two dwellings, rental and subsequent sale of the Property would all be considered to be done in the course or furtherance of an enterprise.

Registration

Section 23-5 states that you are required to be registered for GST if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed previously the Taxpayers activities fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above.

The next issue to consider is whether the Taxpayers GST turnover is $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)  your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)  your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. The Taxpayers rental of the Property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises). As such, rental proceeds in relation to the rental of the Property are not included in the calculations of the Taxpayers 'current GST turnover' or their 'projected GST turnover'.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

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 discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. 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. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Taking into account the facts of this case we consider the sale of the Property would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating the Taxpayers projected GST turnover. The Property was not intended to be acquired for the primary purpose of resale. Furthermore, the Taxpayers have derived rental income from the use of the Property as opposed to the trading of properties.

Given the above, the Taxpayers GST turnover does not meet the registration turnover threshold and they are not required to be registered for GST.

Conclusion

The sale of the Property will be made in the course or furtherance of an enterprise the Taxpayers carry on, made for consideration and is located in Australia. However, the Taxpayers are neither registered nor required to be registered for GST.

Consequently, the Taxpayers will not be making a 'taxable supply' when they sell the Property.

Summary 2

Yes. As the supply of the Property was not taxable the GST at settlement rules did not apply to their supply. The Taxpayers are entitled to apply for a refund of the amount withheld and remitted by the purchaser in error.

Detailed reasoning

A requirement for GST withholding at property settlement was that the supply or sale of a property is a taxable supply, for example taxable new residential premises: refer to section 142-250 under Schedule 1 of the TAA 53 and Law Companion Ruling LCR 2018/4: Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property. In this case, the supply or sale of the Property was not considered to be a taxable supply. As such, the GST withholding at property settlement rules did not apply in this case.

It is noted that the Taxpayers were required to have given the purchaser written notice pursuant to section 14-255 of Schedule 1 to the TAA 1953 stating whether the purchaser was required to withhold (and remit to the Commissioner) GST in respect of the supply of the Property. The Taxpayers informed they provided, as part of their Section 32 Statement, a document headed "Notice to Purchaser (GST Withholding Regime)" marked in such a way as to indicate that the Taxpayers understood that no amount was required to be withheld by the purchaser. However, the purchaser took a different view.

As the Taxpayers supply was not taxable the GST at settlement regime did not apply to the Taxpayers supply and the amount remitted by the purchaser was remitted in error. Therefore, the Taxpayers are entitled to a refund of the amount remitted in error.