Edited version of private advice

Authorisation Number: 1051920406992

Date of advice: 11 November 2021

Ruling

Subject: GST - taxable supplies

Question

Will the saleof 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:

The financial year ending 30 June 20XX

Relevant facts and circumstances

You have an Australian Business Number (ABN) and are registered for GST. You are a practicing XXX and practice under your own name.

You purchased a property in 2xxx. At the time of purchase there was an existing 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 units in the future.

The existing residential property purchased in 2xxx was leased up until 2xxx.

Demolition of the residential house situated on the land commenced in 2xxx.

In 2xxx the redevelopment of the property with the three units was completed.

Your intention was to keep the units and rent them. The units have been continually leased since completion.

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

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 three properties being 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 are for consideration and the supplies will be 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 properties would satisfy all requirements of section 9-5 of the GST Act and would be taxable supplies.

You have an ABN and are registered for GST as you are a practicing XXXXX trading under your own name. Your intention in relation to the initial properties was for investment purposes, 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 three units 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 2xxx. The existing residence was then demolished to make way for the three 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 not previously undertaken similar developments of this nature.

Supplementary work on or in connection with the property realised

You consulted with council on various plans for the property in relation to the type of development however your intention was always to keep the units for investment purposes. 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 three separate units 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 three units 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 three properties. Therefore, the sale of the are not taxable supplies. The sale of these three properties is considered the mere realisation of capital assets.

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 three units is a mere realisation of capital assets and would not constitute an enterprise for GST purposes. The enterprise you carry on and are registered for is not related to the properties sold.

Conclusion

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