Edited version of private advice

Authorisation Number: 1051876744416

Date of advice: 29 July 2021

Ruling

Subject: GST and the sale of a new residential property

Question

Was the sale of the new residential property not a taxable supply and therefore did not attract GST?

Answer

No. The sale of the new residential property was a taxable supply and therefore attracted GST.

Relevant facts and circumstances

The taxpayers bought a piece of land privately and built a house on it.

The intention was to use the property as a rental investment.

After building the taxpayers decided not to rent the property out but to sell it.

The property was never lived in by anyone.

The taxpayers also run a business which is registered for GST.

The land was purchased with no GST included in the purchase price.

The house was developed and sold with no GST included in the sale price.

The taxpayers engaged architects, surveyors, real estate agents in the course of building and selling the property.

The taxpayers did not put the land to any use from the time of purchase to the time of construction.

After making enquiries the taxpayers changed their mind from renting to selling the property as they decided being landlords was undesirable.

The taxpayers did not consider whether it was more profitable to sell than to rent the property.

The taxpayers did not subdivide part of the land they purchased prior to building the property on the land.

The taxpayers do not have a history of buying and profitably selling properties.

The taxpayers have not been previously involved in land development, buying, building and selling properties in the past.

It is not the taxpayers' intention to buy, build and purchase properties in the future.

The taxpayers financed the acquisition and development of the property for sale via a private bank loan.

Neither currently nor in the past has any entity that the taxpayers, own, control, or are controlled or owned by their associates, been involved in any aspect of land development.

The taxpayers did not receive any advice in relation to the land, its acquisition, its development and the sale of the developed property.

Relevant legislative provision

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 111-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Reasons for decision

Taxable supply

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply you make.

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a)          the supply is made for consideration;

(b)          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.

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

All the requirements under section 9-5 of the GST Act need to be satisfied for a supply to be taxable.

In this case the supply of the new residential property was made for consideration and is connected with Australia.

Further, the supply is neither GST-free nor input taxed.

Therefore, in this case, what needs to be determined is:

•                    whether the sale of the new residential property was made in the course or furtherance of an enterprise that the taxpayers carried on; and

•                    whether the taxpayers were registered or required to be registered.

New residential premises

Section 40-65 of theGST Act provides that the sale of real property (residential premises) is input taxed. However, the sale of residential premises is not input taxed to the extent that the residential premises are new residential premises.

Section 40-75 of theGST Act provides that residential premises are new residential premises if they have not previously been sold as residential premises and have not previously been the subject of a long term lease, or have been created through substantial renovations, or have been built or contain a building that has been built to replace demolished premises on the same land.

However, the premises are not new residential premises if for the period of at least five years the premises have been used for making supplies that are input taxed.

From the facts provided the sale of the taxpayers' new residential property was made for consideration and the supply is connected with Australia. Therefore, the requirements listed in paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied.

As such, what remains to be considered is whether the sale of the taxpayers new residential property was made in the course or furtherance of an enterprise that they carry on (paragraph 9-5(b) of the GST Act) and whether the taxpayers are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Carrying on an enterprise

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

Paragraph 244 of MT 2006/1 states:

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.

The information provided does not indicate that the taxpayers are engaged in developing properties on a regular or continuous basis. Therefore, we do not consider they are carrying on a property development business. However, it remains to be considered whether their property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

In relation to motive MT 2006/1 provides that motive is not relevant if an objective assessment of the activities of the entity indicates that the activities are in the nature of the trade. However, motive is relevant where the evidence is not conclusive or where there is a change in the character of the asset.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transaction and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case.

A trading asset is generally dealt with or traded within a short time after acquisition. However, 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.

It is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa.

In this case the taxpayers acquired the land with the intention to build a property for renting purposes.

Therefore, the taxpayers' intention was always to carry on an enterprise of renting in relation to their new residential property.

Although the taxpayers' original intention was to build a residential unit for rental purposes, after making enquiries they changed their mind from renting to selling the property as they decided being landlords was undesirable.

The steps that they took indicate that their intention changed when they decided to sell. Therefore, there was a change of purposes for which the property was held. The taxpayers' activities changed the character of their property into a trading asset as their activities have the characteristics and appearance of a commercial deal and are of a kind undertaken by property developers.

QC 56252 and QC 21960 are available on our website at www.ato.gov.au

QC 56252 provides the following:

Examples of an enterprise

Examples of activities that may be regarded as an enterprise include when you:

•                     buy property with the intention of immediate resale at a profit

•                     develop property to sell.

Even a one-off property transaction may be an enterprise.

QC 21960 provides that if you are a supplier and build new residential premises for sale:

•                     you're liable for GST on the sale

•                     you can claim GST credits for your construction costs and any purchases you make related to the sale.

Therefore, according to the facts provided, the taxpayers' activities amount to an adventure or concern in the nature of trade. The sale of the new residential property is a sale of an asset made in the course or furtherance of an isolated property development enterprise pursuant to paragraph 9-20(1)(b) of the GST Act.

Consequently, the sale of the new residential premises satisfies the condition in paragraph 9-5(b) of the GST Act, as it is a supply made in the course or furtherance of an enterprise that the taxpayers carry on.

Whether the taxpayers are required to be registered for GST

Section 23-5 of the GST Act provides that you are required to be registered for GST if you:

(a)          are carrying on an enterprise; and

(b)          you meet the registration turnover threshold.

As determined above, the taxpayers are carrying on a property development enterprise. Hence, they satisfy the requirement in paragraph 23-5(a) of the GST Act.

The next step is to determine whether the taxpayers GST turnover meets the registration turnover threshold, which in this case is $75,000.

Currently the registration turnover threshold is $75,000 ($150,000 for not for profit organisations).

In this case the taxpayers are registered for GST as a partnership. In the event the property sold is not part of the partnership's asset then they are required to be registered for GST (in relation to the sale of the new residential premises) as they meet all the requirements of section 23-5 of the GST Act.

Entitlement to input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if you acquire anything solely or partly for a creditable purpose, the supply of the thing to you is a taxable supply, you provide, or are liable to provide consideration for the supply and you are registered, or required to be registered.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, however, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature.

The taxpayers informed that once the construction was completed, they decided to sell the new residential property.

Please note that an entity is entitled to input tax credits where all the conditions of a creditable acquisition are satisfied.

Margin Scheme

Where a sale of a real property is a taxable supply, the sale may be made under the margin scheme if certain conditions are met.

Please note that when the GST is calculated on the margin, the amount payable is smaller relative to the GST calculated as 1/11^th of the selling price, as follows:

the GST is based on the difference between:

•                     the price paid for the property when first purchased, and

•                     the subsequent sale price of the property.

For further information on margin scheme, please refer to the following publication at www.ato.gov.au:

Margin scheme - made easy (NAT 73740)