Edited version of private advice

Authorisation Number: 1051803552926

Date of advice: 10 February 2021

Ruling

Subject: GST and sale of property

Question 1

Will the sale of Lot W, Lot X and Lot Y be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Is Entity D, in relation to each of Lot W, Lot X and Lot Y, required to give written notice under section 14-255 of Schedule 1 to the Tax Administration Act 1953 (TAA 1953) to the purchaser that they are required to make a payment under section 14-250 of Schedule 1 to the TAA 1953 )?

Answer

Yes

Relevant facts and circumstances

Entity D is a Charity endorsed by the Australian Taxation Office (ATO) to access tax concessions and has the status of deductible gift recipient (DGR).

Entity D registered for GST on DDXXYYYY. It is also registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). It carries on an enterprise as a charity as defined in section 9-20 of the GST Act.

Entity E is registered as a charity with ACNC and registered for GST on DDXXYYYY.

Entity F registered for GST on DDXXYYYY.

Entity E, (the Property Trust) was established as a bare trustee to hold property on behalf of various entities. The Property Trust executes various documents relating to buying, selling and leasing such properties. It also acts as the trustee for several trust funds which it administers under restrictive trust deeds.

Entity D had previously owned land in a particular area since approximately YYYY. In the YYYY's, Entity D constructed a building on this property and from YYYY to YYYY this land was used solely for the purpose of particular services. In approximately YYYY, Entity D was approached by Entity F who wished to purchase the land and Entity D agreed to the sale. Entity D received the sale proceeds (and not the Property Trust).

Entity D leased the land back from Entity F for approximately three years.

From approximately YYYY-YYYY, Entity D conducted particular services from rented premises.

The Property Trust purchased Lot M as bare trustee for Entity D on DDXXYYYY and holds legal title to the property. The purchase price was funded by Entity D (and not by the Property Trust). All property expenses are paid by Entity D.

The Property Trust purchased Lot N on DDXXYYYY as bare trustee for Entity D and holds legal title to the property. The purchase price was funded by Entity D (and not by the Property Trust). All property expenses are paid by Entity D.

Both Lot M and Lot N were vacant blocks of land at the time of purchase.

Neither the vendor of Lot M nor the vendor of Lot N was registered for GST at the time of the sale of the respective Lots to the Property Trust.

Lot M and Lot N were acquired because Entity D required a new permanent site from which Entity D could conduct its activities. It constructed a building and associated outbuildings and carpark on Lot M in approximately YYYY.

Entity D used funds from the prior sale of the previous land to enable it to purchase the respective lots. However, Entity D was required to take out a loan from Entity G to fund the construction of the building which cost approximately $X. Entity D has paid down some of this loan but still owes $X. It has been unable to generate sufficient funds from its activities to repay the balance of the loan which is now overdue.

Pursuant to the Development Application, Entity D has subdivided Lot M and Lot N in order to raise funds to reduce the debt due to Entity G.

The plan of subdivision includes Lot M and Lot N. Four new Lots will be created as follows:

•   Lot W

•   Lot X

•   Lot Y

•   Lot Z

Lots W to Y are being acquired by purchasers to have dwellings erected on them and to be occupied by the respective buyers as their residence and are not being acquired for a creditable purpose.

The building, carpark and outbuildings are located on Lot Z which will be retained by Entity D.

Where the supplies of land are taxable supplies, Entity D intends to apply the margin scheme.

Entity D has not undertaken any other subdivision or development activities in the past.

We have accepted, as a fact, for the purposes of this ruling that the Property Trust is a bare trustee as outlined in Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts. We have not endeavoured to confirm the validity of this statement.

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 subsection 184-1

A New Tax System (Goods and services Tax) Act 1999 section 195-1

Taxation Administration Act 1953 Schedule 1 section 14-250

Taxation Administration Act 1953 Schedule 1 section 14-255

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

Question 1

Will the sale of Lot W, Lot X and Lot Y be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

The GST Act provides that you must pay the GST payable on anytaxable supply that you make[1].

Under section 9-5, you make a taxable supplyif:

(a)  you make the supplyfor * consideration; and

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

(c)   the supplyis * connected with the indirect tax zone; and

(d)  you are • registered,or * required to be registered.

However, the supplyis not a * taxable supply to the extent that it is * GST-freeor * input taxed.

Section 195-1 states that if a provision of the GST Act uses the expression 'you', it applies to entities generally, unless its application is expressly limited.

In this case, the legal owner of Lot M and Lot N (together, the Property) is the Property Trust. However, the Property Trust purchased the Property as bare trustee for Entity D.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3)discusses the role of a bare trustee in a bare trust arrangement. Paragraph 30 provides that in applying the GST Law to a dealing in real property held on bare trust, the question arises as to which entity makes the relevant taxable supply, the trustee or the beneficiary.

For a supply to be a taxable supply under section 9-5, the entity making the supply must do so in the course or furtherance of an enterprise it carries on.

Subsection 184-1(1) treats a trust as an entity. Subsection 184-1(2) goes on to note that the trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time. Subsection 184-1(3) confirms that a legal person can have a number of different capacities in which the person does things and in each of those capacities the person is taken to be a different entity.

The activities of a bare trustee are essentially passive in nature. A trustee of a bare trust has either no active duties to perform or only minor active duties. A bare trust does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

A beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. Paragraph 11 of GSTR 2008/3 provides an example which aligns with your situation. In that example, despite legal title to the property being held by T, the property is used by B in carrying on its enterprise. Paragraph 11 states:

An entity (B) that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is used in its enterprise to be acquired by another entity (T) to hold on bare trust for B - that is, subject to an obligation to transfer legal title to the asset to B, or to a third party if B so directs, and with no other active duties to perform.

If an asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

The definition of' 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T transfers legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

In this case, the Property Trust holds the Property as bare trustee for Entity D. Consequently, it is the activities of Entity D, the beneficiary, that must be examined.

Entity D will make a taxable supply of Lot W, Lot X and Lot Y [the subdivided Lots] to third party purchasers where all the requirements specified in section 9-5 are satisfied.

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively. Where a supply is GST-free or input taxed, GST will not be payable on the sale.

We consider Division 38 and 40 do not apply to the sale of the subdivided lots. This means, where all the requirements specified in paragraphs 9-5(a), (b), (c) and (d) are satisfied, GST will be payable on the supply of the subdivided lots.

In this case, the subdivided Lots are being sold for consideration and are located in Australia, that is, paragraphs 9-5(a) and (c) are satisfied.

Paragraph 9-5(b) requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

Paragraph 9-20(1)(e) provides that an enterprise includes an activity, or a series of activities, done:

(e)  by a charity

Further, 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 provides at paragraph X that the activities done by a particular institution are an enterprise.

Entity D is a particular institution and is therefore carrying on an enterprise for GST purposes.

For the sale of the Lots to be made in the course or furtherance of your enterprise, the sale of the Lots must have a connection to your enterprise. The explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361[2]

Paragraph 30 of GSTR 2004/8 identifies the following characteristics of a thing which indicates that the sale of thing has a connection with your enterprise:

•   at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•   at the time of sale it was applied in carrying on your enterprise to at least some extent; and

•   it is sold as a transaction of your enterprise.

Paragraph 30 of GSTR 2004/8 provides further factors that tend to indicate that a sale is a transaction of the enterprise, including:

•   the proceeds of sale are deposited into an enterprise bank account; and

•   enterprise book accounts are used to record the transaction.

In this case, Lot W, Lot X and Lot Y have been subdivided from the original property comprising Lot M and Lot N (the Property). Entity D conducted its enterprise from the Property. Further, the purpose in subdividing and selling the Lots was to raise funds to reduce the loan from Entity G. This loan had been used to fund the construction of the building, which cost approximately $X. Paragraph 9-5(b) is therefore satisfied.

GST will be payable on the sale of the subdivided Lots if the remaining requirement specified in paragraph 9-5(d) is also satisfied.

Paragraph 9-5(d) requires that an entity is registered for GST or required to be registered for GST.

In this case, Entity D is registered for GST.

As all the requirements of section 9-5 are met, the sale of Lot W, Lot X and Lot Y to third party purchasers, will be a taxable supply by Entity D.

Question 2

Is Entity D, in relation to each of Lot W, Lot X and Lot Y, required to give written notice under section 14-255 of Schedule 1 to the Tax Administration Act 1953 (TAA 1953) to the purchaser that they are required to make a payment under section 14-250 of Schedule 1 to the TAA 1953 ?

Guidelines on GST withholding at settlement are available in Law Companion Ruling LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4). The explanations in LCR 2018/4 include:

Overview of when a purchaser has a GST withholding obligation

14. A purchaser has a GST withholding obligation if:

(a) they are the 'recipient' of a 'taxable supply'

(b) the supply is by way of sale or long-term lease

(c) the supply is of

(i) ...

(ii) potential residential land where particular requirements are met - this is explained in paragraphs 19 to 34 of this Ruling...

Purchaser liability for taxable supplies of potential residential land

19. A purchaser may have a GST withholding obligation under section 14-250 if each of the following requirements are satisfied:

•         the property is 'potential residential land'

•         the property is included in a 'property subdivision plan'

•         the property does not contain any building that is in use for a commercial purpose, and

•         the purchaser is not registered for GST or is registered but does not purchase the property for a creditable purpose.

Note: the reference to section 14-250 in the above paragraph is a reference to section 14-250 of Sch1, TAA 1953.

Meaning of potential residential land

23. The GST Act defines 'potential residential land' as 'land that it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises'.⁶

24. It is permissible to use land for residential purposes if the land use and planning laws that apply to the land allow residential use of the land...

...

28. Land will still be permissible to use for residential purposes even if that use is subject to local government requirements, such as obtaining approval or a permit. For example, it may be necessary to obtain local government development approval before a particular dwelling can be constructed. Despite the requirement for development approval, the residential zoned land is still land that is permissible to use for residential purposes.

29. 'Residential purposes' is not defined in the GST Act. It covers potential use of land for a residence or for residential accommodation. While 'residence' may suggest permanent or long-term occupation, 'residential accommodation' means living accommodation which does not require any degree of permanence of occupation.⁷

^...

Meaning of property subdivision plan

32. The GST Act defines 'property subdivision plan' as a plan:⁸

(a) for the division of real property, and

(b) that is registered (however described) under an Australian law.

Note: Examples are strata title plans and plans to subdivide land.

33. State and Territory laws provide for registration of plans relating to subdivision of land.⁹ These plans may be referred to as a survey plan or plan of survey, which in some jurisdictions is referred to as a deposited plan once registered. Plans like strata plans and community plans may also be registered. Broadly, a new plan is required if the division or physical description of a parcel of land is changed, for example, because of subdivision.

34. A parcel of land is 'included in a property subdivision plan' if it is described or identified in a registered plan of this kind. When the plan was registered or its purpose is not relevant. For example, if an entity is developing a parcel of land by subdividing the land into a number of smaller lots, those smaller lots will be 'included in a property subdivision plan' when the plan describing the newly subdivided lots is registered.

In this case, each of the subdivided Lots satisfy the meaning of 'potential residential land' and are included in a property subdivision plan. The purchasers will not purchase the land for a creditable purpose.

Accordingly, in relation to each of the subdivided Lots, the vendor will be required to give a written notice to the purchaser that they are required to make a payment under section 14-250 of Schedule 1 to the TAA 1953 and remit the amount withheld to the Commissioner.

Additional information

LCR 2018/4 explains:

Vendor notification requirements

58. A vendor of residential premises or potential residential land must give a written notice to the purchaser before making the supply.²⁵ The notice must state whether the purchaser is required to make a payment under section 14-250 in relation to the supply.

59. This requirement applies to all vendors of residential premises and potential residential land, not only those who are registered or required to be registered for GST. If the vendor is not registered or required to be registered for GST, they simply state that the purchaser is not required to make a payment.

Note: the reference to section 14-250 in paragraph 58 is a reference to section 14-250 of Sch 1, TAA 1953.