Edited version of private advice

Authorisation Number: 1051789938853

Date of advice: 15 December 2020

Ruling

Subject: GST and the sale of property

Question

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 when you sell Unit 1, Unit 2 and Unit 3 (the Units)?

Answer

No.

For the sale of the Units to be a taxable supply section 9-5 of the GST Act requires that:

(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.

You satisfy the requirements of paragraphs (a) to (c) in section 9-5 of the GST Act. As you are not registered for GST, it needs to be determined in this case whether you are required by registered.

Relevantly, section 23-5 of the GST Act provides that an entity is required to be registered for GST if it's carrying on an enterprise and its annual turnover meets the registration turnover threshold (which is $75,000 unless you are a non-profit body).

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

(a)          your current annual turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected annual turnover is below the turnover threshold; or

(b)          your projected annual turnover is at or above the turnover threshold.

Your current annual turnover is below $75,000. Therefore, provided your projected annual turnover is below $75,000 you will not be required to register for GST.

Subsection 188-20(1) of the GST Act states:

Your projected annual turnover at a time during a particular month is the sum of the *values of all supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a)          supplies that are *input taxed; or

(b)          supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c)           supplies that are not made in connection with an *enterprise that you *carry on.

In this case the sale of the Units causes your turnover to exceed $75,000. However, section 188-25 of the GST Act provides that the following types of supplies should be disregarded in calculating your projected turnover:

(a)          any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)          any supply made, or likely to be made, by you solely as a consequence of:

(i)            ceasing to carry on an enterprise; or

(ii)           substantially and permanently reducing the size or scale of an enterprise.

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 (GSTR 2001/7) discusses the meaning of the terms 'likely to make', 'likely to be made', 'in connection with', 'transfer of ownership', 'capital asset', 'solely as a consequence of', and 'substantially and permanently' as used in Division 188.

Consistent with the discussion in GSTR 2001/7 the Commissioner accepts that as an isolated transaction, the supply of the Units by you is made, or likely to be made, as a substantial and permanent reduction in size and scale of your leasing enterprise. On this basis, the supply of the sale of the Units is excluded when calculating your projected GST turnover.

According, your projected annual turnover would not exceed $75,000 and you are not required to be registered for GST under section 23-5 of the GST Act when you sell the Units.

Relevant facts and circumstances

X (You) are not and have never been registered for GST.

You are a property investor owning multiple residential rental properties.

You purchased residential property in 20XX consisting of a residential dwelling that has been rented for over XX years, at which point you demolished the existing residential dwelling with the intention of constructing three residential townhouses for rental purposes (the Units).

Construction costs were funded by bank loan as a construction loan which was to be converted to a standard principle and interest investment home loan. Under the financial institution's terms, the loan was to be converted upon Practical Completion.

During the conversion process, which took place over XX years after the commencement of construction, the financial institution advised that they were not prepared to refinance the full loan.

The financial institution advised that this was a result of changes to lending criteria requirements including your ability to service the original loan amount. The financial institution also advised that they now apply principle and interest rates rather than interest only and have increased the rate percentage margin across all borrowings. The financial institution also advised that they have also decreased the percentage of rental income that they include as income.

As a result, you ended up selling the three Units that had been constructed.

You have provided written communications between you and your bank regarding the Units and the loan arrangements. These communications evidence your purpose that you intended to hold the Units for lease and not sale.

It was never your intention to sell any of the Units as originally you believed the financial institution would refinance the full construction loan amount.

Your primary source of income is generated as a salary and wage earner and you do not work in the building or property development industry.

You have a history of acquiring properties to hold as rentals and you have never previously been involved with the construction of new premises.

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 188-10

A New Tax System (Goods and Services Tax Act) 1999 section 188-15

A New Tax System (Goods and Services Tax Act) 1999 section 188-25