Edited version of private advice

Authorisation Number: 1051841758664

Date of advice: 20 May 2021

Ruling

Subject: Sale of a capital asset in a leasing enterprise

Question

Is the sale of a newly constructed second townhouse subject to GST?

Answer

No. The Taxpayer is not registered or required to be registered.

Relevant facts and circumstances

1.           The Taxpayer has recently immigrated to Australia.

2.           The Taxpayer is not nor has ever been registered for GST.

3.           The Taxpayer is an employee not associated with the property development industry.

4.           The Taxpayer has no history of property development.

5.           The Taxpayer acquired a parcel of residential land with an existing residential premises (the Property) in the indirect tax zone.

6.           This is the first property that the Taxpayer has purchased in Australia.

7.           At the time of the acquisition of the Property, the Taxpayer's intention was to demolish the existing building on the Property and construct two new townhouses, one to be used as the Taxpayer's main residence with his family and the other as a rental property for additional income (the Second Townhouse).

8.           Following the acquisition of the Property, the existing residential premises was leased for 12 months while the Taxpayer applied for permits to subdivide the land for construction of the townhouses.

9.           During the 12-month period following the purchase, the Taxpayer could not obtain further funding from financial institutions in Australia due to limited employment history in Australia to fund the construction of the townhouses. The Taxpayer obtained private loans from several individuals on commercial terms. It was the Taxpayer's intention to repay the private loans using refinanced bank debt at the end of construction. The private lenders are related parties or friends who reside overseas.

10.        After the tenant vacated the Property at the end of the 12-month lease, the Taxpayer engaged a builder to demolish the existing building and commence construction of the two new townhouses.

11.        However, due to a change of circumstances, one of the private lenders called for repayment of the loan between themselves and the Taxpayer.

12.        After failing to obtain additional bank funding to repay the private loan, the Taxpayer decided to sell the Second Townhouse that was intended to be held for rental purposes.

13.        As part of the private ruling application, the Taxpayer provided contemporaneous documents showing:

•                 an intention to build the Second Townhouse for lease in loan documentations,

•                 the request for repayment of loans by one of the private lender, and

•                 confirmation from mortgage broker that the Taxpayer sought but was not able to obtain further funding.

14.        The Taxpayer started marketing the Second Townhouse for sale after they were advised that it was not possible to obtain further funding. The Taxpayer entered into a contract of sale for the Second Townhouse.

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 23-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

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

Reasons for decision

GST is only payable on taxable supplies. Section 9-5 outlines the requirements of a taxable supply and 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 with the indirect tax zone; and

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

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

One-off sales of new residential premises may be a taxable supply if all the requirements of a taxable supply are met. In the Taxpayer's case, the requirement to be carrying on an enterprise and whether they are required to be registered for GST are matters that requires greater examination in determining whether GST is applicable to the sale of the second townhouse.

Enterprise - an adventure or concern in the nature of trade

The term "enterprise" in section 9-5 includes an activity or activities "in the form of an adventure or concern in the nature of trade". 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 explains the phrase "in the form or an adventure or concern in the nature of trade" for the purposes of acquiring an Australian Business Number but is also applicable to the definition of enterprise for GST purposes:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

We consider that one-off and isolated property transactions can fall within something done in the nature of trade. This is particularly in the circumstances where the property was purchased, developed (although this may not be necessary) with the intention to resell at a profit. Paragraph 237 of MT 2006/1 provides

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal....

Alternatively, in some circumstances, one-off property transactions are mere realisation of capital asset and therefore not considered supplied as part of an adventure in the nature of trade.

MT 2016/1 provide detailed guidance and examples on isolated property transactions:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Examples of subdivisions of land that are enterprises

Example 28

271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit.

272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner.

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

Enterprise - in the form of a lease

The term "enterprise" in section 9-5 also includes an activity or activities "an activity, or a 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'". The leasing of residential premises is therefore a supply made in the course of an enterprise.

Requirement for registration

Under section 23-5, you are required to be registered for GST if you carry on an enterprise and your GST turnover is at or more than $75,000. GST turnover includes both current turnover and projected turnover.

Your current GST turnover is the values of all the supplies (that is gross income less GST) you make for the current month and the previous 11 months. Your projected turnover is is the values of all the supplies (that is gross income less GST) you make for the current month and the next 11 months.

You are required to register if you current turnover is at or below $75,000 but the Commissioner is not satisfied that your projected turnover is at or below $75,000. Therefore, your projected turnover must be at $75,000 or more before you are required to register.

There are exclusions to both current and projected GST turnovers such as input taxed supplies which includes the lease of residential premises. Section 188-25 provides that certain supplies are excluded in working out your projected turnover. You do not include supplies in relation to a sale of a capital asset or any sale that is likely or made solely as a consequence of ceasing or substantially and permantntly reducing the size or scale of an enterprise.

Assets that are the subject of an adventure or concern in the nature of trade are included in both the current and projected GST turnovers provided they don't fall within other exclusions, as they are not capital assets but revenue assets.

Application to the facts

The supply of the Second Townhouse by the Taxpayer clearly satisfies paragraphs 9-5(a) and (c). The sale of townhouse located in Australia is for consideration and connected to the indirect tax zone. The sale of newly constructed residential premises is not input taxed or GST-free.

We consider that the sale of the Second townhouse is made in the course of an enterprise. The sale of the Second Townhouse is the sale of a capital asset or supply made solely as a consequence of ceasing to carry on an leasing enterprise. We do not consider that the sale of the townhouse as made as part of an adventure or concern in the nature of trade.

The objective assessment of the circumstances surrounding the sale shows that the intention of the Taxpayer was to carry out an enterprise of leasing the residential premises which was thwarted when a private lender sought repayment of substantial amounts of the loans funds. As a result, the Taxpayer could not continue to hold the Second Townhouse for leasing as they were not able to obtain additional funds from other sources. These circumstances were evidenced by contemporaneous documents.

The fact that the leasing of the Second Townhouse has not yet to commence is not a barrier to this characterisation. The Taxpayer had already leased the original residential premises on the Property. Further the term "carrying on an enterprise" includes anything done in the course of commencement or termination of the enterprise. We consider that the purchase of the property, developing and construction of the Second Townhouse has sufficiently progressed the leasing enterprise that it would fall within the definition of the commencement of a leasing enterprise.

Given the circumstances and evidence provided, we also consider that it is not appropriate to characterise the sale of the Second Townhouse as part of an adventure or concern in the nature of trade. The circumstances do not show that the Taxpayer intended to purchase the property with aim to resale at a profit. Circumstances arose to force the sale of the Second Townhouse.

The characterisation has important implications in relation to the calculation of the Taxpayer's GST turnover. As the Taxpayer is determined to be carrying on a leasing enterprise, the sale of the Second Townhouse will be excluded in the calculation of his projected GST turnover and as it is a sale of a capital asset or a supply made solely as a consequence of terminating the leasing enterprise. Moreover, the input taxed rental proceeds from the lease of the original residential premises would always be excluded in the calculation of both current and projected GST turnover despite the characterisation of the enterprise. The means that the Taxpayer will not have a GST turnover at or above $75,000.

As the Taxpayer is not registered nor required to be registered for GST, the sale of the Second Townhouse does not meet all the requirements of a taxable supply and therefore GST is not applicable to the sale.