Edited version of private advice

Authorisation Number: 1051880460541

Date of advice: 4 August 2021

Ruling

Subject: GST and sale of residential property

Question 1

Will the sale of townhouse 1 by the vendor be a taxable sale under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of townhouse 1 will not be a taxable sale under section 9-5 of the GST Act and therefore is not subject to GST.

The vendor will need to notify the purchaser in writing that they do not have a withholding obligation and they 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.

Question 2

Will the sale of townhouse 2 by the vendor be a taxable sale under section 9-5 of the GST Act?

Answer

No. The sale of townhouse 2 will not be a taxable sale under section 9-5 of the GST Act and therefore is not subject to GST.

The vendor will need to notify the purchaser in writing that they do not have a withholding obligation and they 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

You currently are registered for GST.

In 19XX you and your partner jointly purchased a residential property. The residential property was the principal place of residence for you and your partner.

In 20XX you purchased your partner's share in the property.

In 20XX you received a building permit for the construction of two double storey townhouses on the property.

The house was demolished and the building of the two townhouses commenced in 20XX and were completed in 20XX. The two townhouses received new addresses from the local council after the completion.

Your intention when building the two townhouses was to use one for your principal place of residence and the other one to be an investment property.

You moved into townhouse 1 and used it as your principal place of residence as soon as possible after occupancy was permitted in 20XX.

You entered into a residential tenancy agreement for townhouse 2 as soon as occupancy was permitted in 20XX. Tenants moved in the property in January 20XX. You report the rental income received in your tax return.

You separated with your partner in 20XX and are now in divorce proceedings. The Family Court of Australia in your state has instructed you do all things necessary to sell the two townhouses.

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 23-5

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

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

Reasons for decision

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.

Question 1

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act provides 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 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.

All the requirements in section 9-5 of the GST Act must be met for your sale of the townhouse to be a taxable sale.

When you sell the townhouse, you will satisfy paragraphs (a) and (b) in section 9-5 of the GST Act as you will make the sale for consideration and the sale is connected with Australia as the townhouse is in Australia.

We will now consider whether the sale will be made in the course of an enterprise that you will carry on and whether you will be required to register for GST when making the sale.

Paragraph 9-5 (b) of the GST Act

An enterprise is defined in section 9-20 of the GST Act as an activity or series of activities done in a certain manner or by certain entities and this includes an adventure or concern in the nature of trade.

According to paragraph 244 in Miscellaneous Tax Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business number, 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.

Paragraph 247 in MT 2006/1 further states that if the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. Paragraph 259 in MT 2006/1 states that the mere disposal of investment assets does not amount to trade and provides examples of investment assets which include rental properties, business plant and machinery, family home, family cars and other private assets.

The townhouse is your family home and is your principal place of residence; thus, the sale of the townhouse will be a sale of a private asset. As such, you will not be carrying on an enterprise in the form of an adventure or concern in the nature of trade under section 9-20 of the GST Act when selling the townhouse. Accordingly, paragraph 9-5(b) of the GST Act will not be satisfied.

Since all the requirements in section 9-5 of the GST Act will not be met, your sale will not be a taxable sale. The sale will be outside the scope of GST and no GST will be payable on the sale.

Question 2

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make under section 9-5 of the GST Act.

When you sell the townhouse, you will satisfy paragraphs (a), (b) and (c) of section 9-5 of the GST Act as:

•         you will make the sale for consideration;

•         the sale will be made in the course of the lease enterprise that you currently carry on; and

•         the sale will be connected with Australia as the townhouse is in Australia.

We will now consider if you need to register for GST when you will sell the townhouse for the purpose of paragraph 9-5(d) of the GST Act.

Currently you are not registered or required to be registered for GST as the rental income from the residential property are input taxed supply and therefore are not included in the calculation of annual turnover for GST registration purposes.

The townhouse you will sell is a new residential premise under section 40-75 of the GST Act as it was built in 2019 and has been leased for less than 5 years. In this instance the sale will be subject to GST if you are required to be registered for GST at the time the sale is done.

GST Registration

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

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for a non-profit body).

According to subsection 188-10(1) of the GST Act, your GST turnover meets a particular turnover threshold if:

a)    your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

b)    your project GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Section 188-25 of the GST Act provides that in working out your projected GST turnover, disregard:

a)    any supply made, or are likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

b)    any supply made, or are 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.

Generally, the term 'capital assets' refers to the profit yielding subject of an enterprise. 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.

When you sell the townhouse that you currently lease you will be selling a capital asset; therefore, you will not include the proceeds from the sale of this capital asset when calculating your projected annual turnover in accordance with section 188-25 of the GST Act. Since you do not have any other asset from which you will derive rental income that will increase your projected annual turnover and meet the registration turnover threshold, you will not be required to be registered for GST.

Paragraph 9-5(d) of the GST Act will not be satisfied as you will not be required to register for GST. Your sale of the townhouse will not be a taxable sale.