Edited version of private advice

Authorisation Number: 1051786148388

Date of advice: 2 December 2020

Ruling

Subject: GST and sale of new residential property

Question

Will the sale of your property located in Australia be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of your property located in Australia will not be a taxable supply under section 9-5 of the GST Act as the sale will not be made in the course or furtherance of an enterprise that you are carrying on. Therefore, you will not be liable for GST on the sale of the property.

You will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the Australian Taxation Office (ATO) when purchasing the property. This can be included in the sale contract or in a separate document prior to settlement.

Relevant facts

You are a sole trader and carry on an enterprise as a handyman and painter. You are not registered for GST as your annual turnover is below the GST registration threshold.

After your marriage breakdown you purchased a block of vacant land located in Australia in January 20xx to build a house which would be your principal place of residence for you.

The land is zoned residential and you are the sole owner of the land.

You engaged a builder to build a house on the land. The first deposit and plans for the house were done in December 20xx. The physical construction of the house began in August 20xx. The building of the house is not yet completed. Completion is expected to be in March 20xx.

You have decided to sell the new house now. The reason to sell the house is to make funds available to buy and live in a property jointly with your girlfriend/partner.

After deciding to sell the house you immediately put it on the market. The house is currently advertised for sale.

You are not in the business as a builder and you did not purchase the land and build the house with the purpose of making a profit.

You currently own another property which was purchased in March 20xx as an investment property. You intended to live there until the new property is finished.

You previously owned properties in your own name prior to your marriage and during your marriage. The properties were either investment properties or live in and you owned none of them now.

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

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

Section 9-5 of the GST Act states 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.

For the purpose of paragraph (b) above, the sale will not be in the course or furtherance of the enterprise that you carry on as a handyman and painter. Therefore, it must be determined whether your activities of purchasing the vacant land and constructing a house on the land constitute an enterprise; and thus, the subsequent sale of the new property after its construction will be done in the course or furtherance of that enterprise. If so, we will need to consider whether you are required to be registered for GST for the purpose of paragraph (d) above.

Subsection 9-20(1) of the GST Act provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•         in the form of a business; or

•         in the form of an adventure or concern in the nature of trade; or

However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity, or series of activities, done by an individual without a reasonable expectation of profit or gain.

The question of whether an entity is carrying on an enterprise is examined in Miscellaneous Taxation Ruling MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

The Goods and Services Tax Determination GSTD 2006/6: Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? lists indicators of carrying on a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a businesslike manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 180 of MT 2006/1 discusses that an enterprise may be carried on a small scale stating:

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

In this case, based on the facts given we consider that you are not carrying on an enterprise in the form of a business because your activities by themselves are not a commercial activity. Your intention is not to undertake a commercial activity but a private activity of building your principle place of residence.

Next we will consider whether your activities are an activity in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•         the subject matter of the realisation;

•         length of period of ownership;

•         frequency or number of similar transactions;

•         supplementary work on or in connection with the property realised;

•         circumstances that were responsible for the realisation;

•         motive

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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 this case:

•         your activities were motivated by your desire to use the newly constructed premise as your principal place of residence;

•         your activities were not done with the expectation of generating a profit;

•         You are not in the business as a builder;

•         Due to change to your circumstances you have decided to sell the new house after its construction in order to make funds available to buy and live in a property jointly with your girlfriend/partner.

After weighing up all the facts of this case, we do not consider your activities carried on in relation to the property constitute an adventure or concern in the nature of trade. The activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes.

Conclusion

The activities you have undertaken regarding the purchase of the vacant land, construction of the new residential premise and the subsequent sale are not considered to be done in the course of an enterprise that you carry on.

The sale of the new house will not satisfy paragraph 9-5(b) and as such will not be a 'taxable supply' under section 9-5 of the GST Act.

Please note that the sale of the Property is not a taxable supply in this instance; however if you carry on similar activities in the future, the outcome for GST purposes may be different.

Other information

GST at settlement

From 1 July 2018, purchasers of residential properties may be required to withhold an amount from the contract price and pay it directly to the ATO. The remainder of the sale price is paid to the property supplier. This potentially applies to:

•         New residential premises

•         Land that could be used to build residential buildings

Suppliers must notify purchasers in writing as to whether they have a withholding obligation or not when they sell (subject to certain exceptions).

Suppliers must determine if they are running an enterprise. Even a one-off property sale could mean they have a GST obligation.

More information on GST at settlement is available at ato.gov.au

As we have determined that you will have no GST liability when you sell the new property, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sales contract or in a separate document prior to settlement.