Edited version of private advice

Authorisation Number: 1051919092168

Date of advice: 11 November 2021

Ruling

Subject: GST - taxable supplies

Question

Will the sale of the properties be taxable supplies when sold, in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 20XX

Relevant facts and circumstances

You purchased a residential property 2xxx. At the time of purchase there was an existing older residential property situated on the land.

Your intention when you purchased the property was for investment, with the intention of developing the property and building townhouses in the future, subject to council approval and leasing the townhouses.

The existing residential property purchased in 2xxx was leased up until XXXX 2xxx, when it was demolished to make way for the development.

In 2xxx, you completed the development of the four town houses and commenced leasing all the townhouses.

The townhouses have been leased since completion.

You have not claimed any input tax credits in relation to the development of this property.

You have held an Australian Business Number (ABN), however, you only recently applied o be registered for goods and services tax (GST).

Due to the property boom you decided to sell two of the four townhouses.

The contracts of sale for both properties state that there is no GST in the selling price, however, both contracts state that the purchaser has a requirement to withhold an amount under section 12-425 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

In relation to one unit an amount was withheld and remitted to the ATO. This amount represents 7% of the sale price of the property.

In relation to the second property no amount has been remitted to the ATO as at the date of this ruling.

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

Section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

•         is made for consideration; and

•         is made in the course or furtherance of an enterprise that you carry on; and

•         is connected with the indirect tax zone; and

•         is made by a supplier who is 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 this case, the two properties sold meet three of the provisions set out in section 9-5 of the GST Act. They are, the supplies consist of properties located in an indirect tax zone, they were for consideration and the supplies were made by a supplier that is registered for GST.

Therefore, we are required to determine whether the supply is being made in the course or furtherance of an enterprise that you carry on. 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 taxable supplies.

You hold an ABN; however, you only added a GST role recently. Prior to registering for GST, your intention was to lease the properties and not sell them. The properties have been leased since construction and you have not claimed any credits in relation to the construction of these properties in any activity statements.

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 Tax Office 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 the 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 on in a business-like manner and records kept;

•         the activities are of a reasonable size and scale;

•         a business of product; and

•         the entity has relevant knowledge or 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 sale of the two properties by you do not display the indicators of a 'business' as listed above.

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 in 2xxx on which a residential property was situated, with the intention of initially leasing the property and potentially developing the property at a future time, again with the intension of retaining the new builds as residential rentals. The development did not occur until 2xxx. This shows that the purchase was initially for residential rental investment purposes.

The length of time pf ownership

You acquired the property in 2xxx. The property was leased until the existing residence was then demolished to make way for the four new units. At this stage you were keeping all of the units for investment purposes. 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 previously undertaken two similar developments of this nature all of which you have retained as investment properties. You may in the future develop another property.

Supplementary work on or in connection with the property realised

You consulted with council in relation to the development however your intention was always to keep the properties for investment purpose. It was when the market boomed in the area these properties were located in, that you decided to sell two of the four units. This could be seen as an element of trade in relation to the properties that were sold 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 four separate properties was done with investment in mind not the on selling for profit; however, this would be a reasonable outcome when selling a property. 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 two properties was not initially with a view to profit. Although a profit may result from the sale of the two properties, the length of time you held the properties and your initial intentions in relation to the properties does not show 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 in relation to the sale of these two properties. Therefore, the sale of the properties are not taxable supplies. The sale of these two properties is considered the mere realisation of a capital asset.

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 detailed above, it is considered that the sale of the two units is a mere realisation of a capital asset and would not constitute an enterprise for GST purposes. As such you are not required to be registered for GST.

Conclusion

Your activity of purchasing the original residential property, leasing it for XX years until building four new units and then leasing all four, then selling two of the units was not done in the furtherance of an enterprise. You are not required to be registered for GST. As such you will not be liable for GST on the sales in accordance with section 9-40 of the GST Act.