Edited version of private advice

Authorisation Number: 1051795182770

Date of advice: 12 January 2021

Ruling

Subject: Goods and services tax and the sale of a property

Question

Will GST be payable on your sale of Duplex 2?

Answer

No. The sale of Duplex 2 will not be a taxable supply under section 9-5 of the GST Act as you are not required to register for GST. 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 and circumstances

Mr X is registered for GST and carries on an enterprise of providing taxi travel.

Mrs X has an Australian Business Number (ABN). However, she is not registered for GST.

Mr X and Mrs X ((together referred to as 'You') are not registered for GST as a partnership.

You purchased a 50% of the property situated at a specified location with your friends Mr Y Mrs Y as tenants in common.

You purchased the Property with your friend as property prices were very high and was difficult to purchase the property on your own.

Your intention, together with your friends was to demolish the existing house on the Property and construct a duplex.

Your intention was to use one of the homes (Duplex 2) as your primary place of residence and the other (Duplex 1) was to be used by your friends.

In yyyy, the Property was subdivided, and the construction of the duplex commenced. The construction was completed in yyyy.

The purchase of the Property and the construction costs were financed through a loan from a financial institution in the names of you and your friends.

During the construction period your circumstances changed. You could not move into Duplex 2 because of your children's schooling in Chatswood; therefore, you leased out Duplex 2 from xx xxxxxxxxx yyyy until x xxxxxxx yyyy.

Duplex 2 is currently vacant. With the current situation, it is hard to find another tenant making it financially difficult for you to keep Duplex 2 vacant and make loan repayments. Therefore, you decided to sell Duplex 2.

Your friends sold Duplex 1 in yyyy.

Neither you nor your friends have previously been involved in the subdivision and/or development of property.

You do not have any intention to undertake similar development activities in the future.

You have not claimed GST credits or any income tax deductions for the construction costs.

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 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for Decision

Summary

GST will not be payable on your sale of Duplex 2, as you are not registered for GST and will not be required to be registered for GST when you sell this property.

Detailed reasoning

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.

GST is payable on a taxable supply.

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

You make a taxable supply if

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

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

(c)   the sale is *connected with 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.

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

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) to 9-5(c) of the GST Act as below:

•         You will supply Duplex 2 for consideration when you sell them. Therefore, the requirement of paragraph 9-5(a) of the GST Act is met.

•         In accordance with paragraph 9-20(1)(c) of the GST Act, an enterprise includes leasing out property on a regular or continuous basis. You stated that you leased Duplex 2 and hence you are carrying on a leasing enterprise from Duplex 2. Therefore, your sale of Duplex 2 will be a supply made in the course or furtherance of an enterprise that you carry on. Therefore, the requirement of paragraph 9-5(ab of the GST Act is satisfied.

•         Your sale of Duplex 2 will be connected with Australia, as this property is located in Australia. Therefore, the requirement of paragraph 9-5(c) of the GST Act is met.

What remains to be determined is whether you are registered or required to be registered for GST for the purposes of paragraph 9-5(d) of the GST Act.

As you are not registered for GST, we need to consider if you are required to be registered for GST when you sell Duplex 2.

Are you required to be registered for GST?

An entity that carries on an enterprise is entitled to be registered for GST. However, an entity that carries on an enterprise is required to be registered for GST once their GST turnover meets the registration turnover threshold of $75,000.

An entity meets the registration turnover threshold if either:

•         their current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that their projected GST turnover is below the turnover threshold; or

•         their projected GST turnover is at or above the turnover threshold.

An entity's current GST turnover and projected GST turnover includes gross enterprise income excluding (amongst other things) input taxed supplies. The rental income you have received for renting out Duplex 2 is excluded in working out your current GST turnover and projected GST turnover as leasing out residential premises is an input taxed supply under section 40-35 of the GST Act.

When working out your projected GST turnover, sales of capital assets are also disregarded if the sales are a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

Paragraphs 31 and 32 of Goods and Services Tax Ruling GSTR 2001/7 provide guidance on the meaning of capital assets. They state:

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.

Paragraphs 258 and 259 of MT 2006/1 assist in distinguishing between trading assets and investment (capital) assets. They state:

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

While you initially intended to use Duplex 2 as your primary place of residence, you decided to carry on a leasing enterprise by renting out Duplex 2. Duplex 2 has become a capital asset of that enterprise. As it is hard to find a new tenant during the current situation, you decided to stop leasing Duplex 2 and sell it instead. We consider that the sale of Duplex 2 is a consequence of ceasing to carry on your leasing enterprise. Therefore, you would disregard the sale of Duplex 2 in working out your projected GST turnover at the time you sell it.

You do not carry on any other enterprise together at other locations and have no plans to do so in the 12-month period beginning with the start of the month in which you settle on the sale of the Duplex 2.

You projected GST turnover at the time of sale of Duplex 2 will be zero. Therefore, as you will not have a GST turnover of $75,000 or more when you sell Duplex 2, you will not be required to be registered for GST.

As you are not registered for GST and will not be required to be registered for GST when you sell Duplex 2, the sale will not be a taxable supply and will not be subject to GST. You will need to notify the purchaser of Duplex 2 that the purchaser is not required to withhold GST from the purchase price. See enclosed fact sheet, GST at settlement, for more information about this requirement.