Edited version of private advice

Authorisation Number: 1051876436044

Date of advice: 27 July 2021

Ruling

Subject: Is the sale of the property a taxable supply for GST purposes

Question 1

Are you carrying on an enterprise for the purposes of GST and therefore, required to be registered for goods and services tax (GST)?

Answer

Yes, you are carrying on an enterprise for the purposes of GST however, you are not required to be registered for GST.

Question 2

Would the sale of the property be a taxable supply?

Answer:

No, the sale of the property would not be a taxable supply, as you are not registered or required to be registered for GST.

Relevant facts and circumstances

•                 You jointly own piece of undeveloped land (the property).

•                 You purchased the property in XXX for $SSSS.

•                 You lease the property to another entity,

•                 There is no house on the property and neither of you live on the property.

•                 You have been approached by a developer who wishes to purchase the property in order to sub-divide it and sell the blocks as residential home sites.

•                 Neither of you are registered for goods and services tax. (GST)

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

Reasons for decision

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply where the supply:

1.               is made for consideration; and

2.               is made in the furtherance of an enterprise that you carry on; and

3.               is connected with the indirect tax zone; and

4.               is made by a supplier who is registered, or required to be registered, for GST.

The supply of the property is located in the indirect tax-zone and the supply will be made for consideration. Therefore, the sale of the property would satisfy two of the elements outlined above (1&3). Accordingly, we need to determine whether the other elements 2 and 4 would be satisfied. If this were the case, the supply of the property would satisfy all requirements of section 9-5 of the GST Act and would be a taxable supply.

Are you carrying on an enterprise?

The term enterprise is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or series of activities done:

•                 in the form of a business (paragraph 9-20(1)(a)) or

•                 in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 (MT 2006/1) provides the ATO view on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: 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, provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

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 97/11 Income tax: am I carrying on a business of primary production lists indicators of carrying on a business:

•                 a significant commercial activity;

•                 an intention of the taxpayer to engage in commercial activity;

•                 an intention to make a profit from the activity;

•                 the activity will be profitable;

•                 the recurrent or regular nature of the activity;

•                 the activity is systematic, organised and carried out in a business-like manner and records kept;

•                 a business of product; and

•                 the entity has relevant knowledge and 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.

Application in your case

Given the facts of this case, we consider that the activity you have been carrying on is a leasing enterprise in which you lease the property to a third party. The income derived from this enterprise is commercial in nature. Therefore, we need to determine if the proposed sale of the property would be as part of your existing enterprise or a sale of a capital asset or revenue in nature.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' while paragraphs 247 to 257 consider the six badges of trade being:

•                 The subject matter of realisation

•                 The length of period of ownership

•                 The frequency or number of similar transactions

•                 Supplementary work on or in connection with the property realised

•                 The circumstances that were responsible for the realisation; and

•                 Motive.

The subject matter of realisation

You acquired the land in XXXX and have leased it to a third party. You are anticipating selling the property as you have been approached by a developer. You have not actively sought to sell the property.

The length of time pf ownership

You acquired the property in XXXX and other than leasing the property you have not made any improvements. A trading asset is generally dealt with within a short period of time after acquisition. The length of time you have held the property shows that this asset was not a trading asset.

The frequency of period of ownership

You are not in the business of buying and selling land and have held this land for a long time.

Supplementary work on or in connection with the property realised

You purchased a vacant block of land in XXXX and leased it to a third party. This could be seen as an element of trade; however, all other aspects of the transaction need to be considered.

The circumstances that were responsible for the realisation

The purchase of the land and the leasing of the property was not done with the intension of selling the property to a developer. The circumstances behind your decision to sell the property have been brought about by the developer approaching you and the length of time you have held this property does not indicate it to be revenue in nature.

Motive

Your motive in relation to selling this property has come about as a result of the developer approaching you. Although a profit will be made, history has indicated that the property was leased and the intension to sell was a recent one.

Sale of real property.

Paragraphs 262 -270 of MT 2006/1 discuss whether an enterprise is being carried on when there are 'one-off' sales of real property. This issue to be decided is whether the sale of the property is of a revenue nature as they are considered to be the activities of carrying on an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Based on the facts of this case, the proposed sale of the property would be the realisation of a capital asset as the land was not bought with the intention of resale and will be an isolated transaction.

Given the above, we do not consider the activity of selling the property to be a part of your leasing enterprise and would not constitute an adventure or concern in the nature of trade.

GST registration

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

The current turnover from the leasing enterprise does not exceed the registration threshold of $75,000. We need to look at whether the sale of the property would need to be included in the turnover for the enterprise to establish whether there would be a requirement to register for GST in the event that the property is sold.

Section 188-25 of the GST Act provides which supplies are disregarded in calculating projected turnover.

Section 188-25 transfer of capital assets, and termination etc. of enterprise, to be registered

In working out your projected GST turnover, disregard:

(a)             Any supply made, or likely to be made, 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.

As it is considered that the sale of the property would be the sale of a capital asset and not a taxable supply the proceeds of the sale would not be included in the turnover of the enterprise and therefore there is no requirement to be registered for GST. Therefore, you are not required to be registered for GST.