Edited version of private advice

Authorisation Number: 1051900577798

Date of advice: 20 September 2021

Ruling

Subject: Requirement to be registered for GST

Question

Are you carrying on an enterprise and, therefore, required to be registered for GST?

Answer

No, you are not carrying on an enterprise and, therefore, are not required to be registered for GST.

Relevant facts and circumstances

•         You are individuals who are not registered for GST.

•         You purchased a residential property which was intended to be your primary place of residence however you leased it out initially.

•         You sought and obtained approval to demolish the existing residence and build two separate dwellings in which you reside in one and you sold the other.

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 new residential 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 elements outlined above (1&3). Accordingly, we need to determine whether the other two elements (2&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 undertaken in purchasing a property in which to either renovate and live in as your primary residence or to lease as an investment property, then demolishing the existing property and building two new properties, one of which you were planning to live in and the other to hold as an investment property could be seen as the indicators of an 'business' as listed above. Other factors in this case need to be considered.

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 property with the intention of either renovating the existing property and then residing in it as your primary place of residence or as an investment property. This shows that the purchase was initially for personal enjoyment with the possibility of it being for investment purposes. You did lease the property after settlement in xxx until xxxx when the existing residence was demolished.

The length of time pf ownership

You acquired the property in xxxxx and leased it. The existing residence was then demolished to make way for the two new residences. At this stage you were still expecting to live in one residence and lease the second. A trading asset is generally dealt with within a short period of time after acquisition. The leasing of the property and the length of time it took to decide on how the property would be dealt with shows that this asset was not a trading asset.

The frequency of period of ownership

You have not previously undertaken a development of this nature.

Supplementary work on or in connection with the property realised

You consulted various authorities to determine the best course of action in relation to this property with your initial intention being to renovate and reside in the property as your primary residence. Based on the advice provided and a number of years later, you decided to demolish the existing property and build two separate properties, one of which to reside in and one as an investment. Due to the extra costs incurred in relation to this decision you decided to sell the front property after completion to recoup costs. This could be seen as an element of trade in relation to the property that was going to be leased, however, all other aspects of the transaction need to be considered.

The circumstances that were responsible for the realisation

The demolition of the residence and the construction of two separate properties was done due to you not being able to renovate the existing residence. The circumstances behind this decision and the length of time you held this property does not indicate it to be commercial in nature.

Motive

Your motive in relation to the initial purchase of the property and the subsequent development and on selling of one property. The length of time you held the property and your initial intentions in relation to the property does not indicate that your initial intention in relation to this property was a profit making one.

Given the above, we do not consider your activities to constitute an adventure or concern in the nature of trade and, as such, you are not carrying on an 'enterprise' for the purposes of GST. Therefore, the sale of the property would not be a taxable supply.

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).

As it is considered that the sales of the property would not constitute an enterprise for GST purposes, you are not required to be registered for GST.

Conclusion

Your activity of demolishing the existing property and building two new residences was not done in the furtherance of an enterprise. You are not required to be registered for GST. As such the sale of front property will not be a taxable supply and you will not be liable for GST on the sales in accordance with section 9-40 of the GST Act.