Edited version of private advice

Authorisation Number: 1051890505780

Date of advice: 25 August 2021

Ruling

Subject: GST and sale of new residential property

Question 1

Will your sale of the residential property (Property A) be a taxable sale under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, your sale of Property A will not be a taxable sale under section 9-5 of the GST Act as you will not be carrying on an enterprise under section 9-20 of the GST Act and you will not be required to register for GST under section 23-5 of the GST Act. Thus, paragraphs 9-5(b) and 9-5(d) of the GST Act will not be satisfied at the time of sale is done. Your sale will be outside the scope of GST and therefore no GST will be collected.

You will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the Australian Taxation Office (ATO) when purchasing Property A. This can be included in the sale contract or in a separate document prior to settlement.

Question 2

If the sale of Property A will be a taxable sale, can you register for GST now or as soon as the ruling confirms that it is a taxable supply (even if after the sale contract is exchanged but before settlement) and sell the Property A using the margin scheme?

Answer

As per the answer to question 1 you do not need to register for GST. Your sale of Property A will not be a taxable sale and will be outside the scope of GST; thus, the margin scheme provision under the GST law will not apply to your sale.

Question 3

If the sale is deemed to be a taxable sale and margin scheme applies, are the GST calculations included in the private ruling application correct?

Answer

There is no need to consider the calculations you included in the private ruling application as the margin scheme does not apply to a non-taxable sale of residential property.

Information on how to calculate a sale made under a margin scheme is available in the fact sheet 'GST and the margin scheme' at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?anchor=GSTandthemarginscheme#GSTandthemarginscheme

Relevant facts

In December 20XX you purchased a residential house (property) located in Australia.

The property was purchased subject to existing tenancies and you did not pay any GST on the purchase. You rented the property after the purchase until July 20XX.

In June 20XX you entered a building contract with a builder for the construction of two duplex units (Property A and Property B) on the property.

In August 20XX the house was demolished. The construction of Property A and Property B was completed in June 20XX and you received the certificate for occupancy for the two properties in June 20XX.

Your intention when building Properties A and B was to rent them after the construction. Unfortunately, the cost of building the two properties has gone over the budget and Covid 19 has seen your small business take a significant revenue hit. As a result, you are now considering selling Property A and rent Property B.

Property A is listed on the market for sale now. You have a draft sale contract available for completion whenever a buyer is found.

You have listed Property B for rent. An agreement has been reached in principal with a tenant but a formal tenancy agreement is yet to be signed.

You took loan for the purchase of the property and building of the duplex. Part of the loan will be repaid from the proceeds of the sale received for Property A. The balance of the loan will remain outstanding and paid back to the bank as per the loan agreement. These funds will come from the rental income on the remaining investment property and supplemented by your salary income.

You have claimed interest deduction in your tax returns as you believe you would continue to rent the property out upon completion of Properties A and B.

You are not registered for GST and you are not in the business of selling new dwellings and it was not your intention to sell either.

In the event that you are required to register for GST and your sale will be a taxable sale, you would consider using the margin scheme for the sale of Property A. You have provided a scenario where the figures are assumed and did some calculation of the amount of GST payable under the margin scheme.

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

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

Summary

GST will not be payable on your sale of Property A as your sale is not a taxable sale under section 9-5 of the GST Act.

Detailed reasoning

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 the indirect tax zone; 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.

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you will sell Property A for consideration; and the sale will be connected with Australia since the property is located in Australia.

Therefore, what remains to be determined is whether your sale of Property A will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as currently you are not registered for GST.

Whether the sale will be made in the course or furtherance of an enterprise that you carry on

In accordance with section 9-20 of the GST Act, an enterprise includes, amongst other things:

•         an activity or series of activities done in the form of a business

•         an adventure or concern in the nature of trade

•         leasing out property on a regular or continuous basis.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for the purpose of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for the purposes of determining whether an entity carries on an enterprise for GST purposes.

You purchased the property as an investment property and derived rental income from that property until the subdivision of the property started. In that rental period you were carrying on a leasing enterprise and the property was a capital asset.

The leasing enterprise ceased when the subdivision started and a duplex unit was built on each lot (Property A and Property B). The purpose of the subdivision and the building of the duplex on each lot was for rental purposes. In this instance the two duplexes were not built for trading purposes and would be capital assets that you would hold in these circumstances.

However, your circumstances changed due to financial difficulty, and you decided to sell property A and rent Property B.

According to Miscellaneous Tax Ruling MT 2006/1, assets can change their character from a capital/investment asset or a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

In this instance we need to determine if the sale of Property A will be made in the course of an enterprise that you carry on.

In the form of a business

Paragraphs170 to 232 discuss the 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 refence to Taxation Ruling TR 97/11 Income tax am I carrying on a business of primary production? lists indicators of carrying on a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other business in the same or similar trade;

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

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge and skill.

Based on the facts provided, we do not consider that your actions of subdividing the property, building Property A and Property B on each lot and selling property A constitute activities done in the form of a business.

In the form of an adventure or concern in the nature of trade

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions.

•         The subject matter of the realisation;

•         Length of period of ownership;

•         Frequency or number of similar transactions

•         Supplementary work on or in connection with the property realised

•         Circumstances that were responsible for the realisation

•         Motive.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

In your case:

•         you originally purchased the property for investment purposes and derived rental income from that property;

•         your activities of ceasing the leasing enterprise, subdividing the land into two lots and building Property A and Property B on each lot were still for the purpose of renting the two properties after their constructions;

•         You are not in the business of property development;

•         Due to a change to your circumstances (financial difficulty) you have decided to sell Property A and lease Property B in order to improve your cash flow and ease your financial difficulty.

After weighing up all the facts of this case we consider that your sale of Property A will be the sale of a capital asset rather than a sale of a trading asset of a business or is an adventure or concern in the nature of trade.

Conclusion

Your sale of Property A will not be a supply made in the course of furtherance of an enterprise that you carry on under section 9-20 of the GST Act. Further, a sale that is not made in connection with an enterprise is not included in calculating the GST turnover for registrations purposes; therefore, the sale will not increase your GST turnover for you to be required to register for GST Your sale of Property A will not be a taxable supply under section 9-5 of the GST Act as paragraphs 9-5(b) and 9-5(d) will not be satisfied. Your sale will be outside the scope of GST and no GST will be payable on the sale.

Please note that the sale of Property A will not be a taxable supply in this instance; however, if you carry on similar activities in the future, the outcome for GST purposes may be different.

Other information

GST at settlement

From 1 July 2018, purchasers of residential properties may be required to withhold an amount from the contract price and pay it directly to the ATO. The remainder of the sale price is paid to the property supplier. This potentially applies to:

•         New residential premises

•         Land that could be used to build residential buildings

Suppliers must notify purchasers in writing as to whether they have a withholding obligation or not when they sell (subject to certain exceptions).

Suppliers must determine if they are running an enterprise. Even a one-off property sale could mean they have a GST obligation.

More information on GST at settlement is available at ato.gov.au

As we have determined that you will have no GST liability when you sell Property A, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sale contract or in a separate document prior to settlement.

Questions 2 and 3

We have determined in question 1 that the sale of Property A will not be a taxable sale.

Thus, the margin scheme provision in the GST Act will not apply to your sale. There is no need to consider your calculation of GST when the margin scheme will not apply to the sale of property A.

The following information on margin scheme may be assistance to you:

•         GST and the margin scheme at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/

•         Eligibility to use the margin scheme at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?page=2#Eligibility_to_use_the_margin_scheme

•         Written agreement to use margin scheme at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?page=3#Written_agreement_to_use_margin_scheme

•         Methods to calculate the margin at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?page=4#Methods_to_calculate_the_margin

•         Calculating the GST payable at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?page=4#Methods_to_calculate_the_margin

•         Valuations at https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-the-margin-scheme/?page=6#Valuations