Edited version of private advice

Authorisation Number: 1051925885640

Date of advice: 26 November 2021

Ruling

Subject: GST and sale of display home

Question

Will your sale of the residential property (the Property) 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 the Property will not be a taxable sale under section 9-5 of the GST Act as you will not be required to register for GST under section 23-5 of the GST Act.

This ruling applies for the following period:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

•                 A and B (you) acquired a vacant piece of land located at X (the Property).

•                 You engaged C to build a residential dwelling on the Property on [date] 20XX.

•                 You entered into a Commercial Lease with C in respect of the Property to be used as a display home. The lease commenced from [date] 20XX with an initial term of 47 months and with an option to extend the term subject to negotiation.

•                 C has notified you that they do not intend to exercise the option to extend the lease, which is due to expire on [date] 20XX.

•                 Your intention was always to hold the property as a long-term investment, but are now considering options including selling the property, given that rental returns to the general public would be significantly less in comparison and would be insufficient to cover the borrowing and holding costs.

•                 You are not registered for GST.

•                 You are not carrying on an enterprise (apart from leasing the Property to C).

•                 You did not claim input tax credits on the purchase of vacant land or on the costs associated with constructing the residence.

•                 You have not been involved in any similar dealings in the past in relation to property development, construction or buying and re-selling properties at a profit.

•                 You consider this to be a capital asset for income tax purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - section 9-5, 9-20, 9-40, 23-5, 23-15, 188-10, 188-15, 188-20, 188-25,195-1

Reasons for decision

Question

Will your sale of the Property be a taxable sale under section 9-5 of the GST Act?

Summary

The sale of the Property will not be a taxable sale under section 9-5 of the GST Act. The sale of the property will be the sale of a capital asset, which is excluded from your projected GST turnover and you will not be required to register for GST.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides that 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.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this case, paragraphs (a) and (c) would be satisfied and it is only necessary to consider the remaining criteria.

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

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Section 195-1 provides that "carrying on" an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

You are carrying on an enterprise as you have been leasing the display home to C on a regular and continuous basis. The sale of the property will be a sale made in the course or furtherance of an enterprise that you carry on.

Based on the facts provided, we do not consider that you are carrying on an enterprise of property development.

Whether you are registered or required to be registered

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise, and your annual turnover meets the registration turnover threshold. Subsection 23-15(1) of the GST Act provides that your registration turnover threshold (other than a non-profit body) is $75,000.

As explained above, you are carrying on an enterprise of leasing.

GST turnover threshold

Subsection 188-10(1) of the GST Act provides that you have a GST turnover that meets a particular turnover threshold if:

•                 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

•                 your projected GST turnover is at or above the turnover threshold.

The current GST turnover is the value of all the supplies made by you during the current month and previous eleven months. Projected GST turnover is the value of all the supplies made or likely to be made by you in the current month and the next eleven months.

Under subsections 188-15(1) and 188-20(1) of the GST Act, input taxed supplies such as residential rent are excluded from current and projected GST turnover. The rental income from the lease of residential properties is not included in the calculation GST registration turnover.

In addition, the following types of supplies are disregarded from projected GST turnover under section 188-25 of the GST ACT:

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

(b)            any supply made, or 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.

Goods and Services Tax Ruling GSTR 2001/7 explains the meaning of GST turnover and provides guidance on the meaning of 'capital assets'. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

We note that, over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

On the facts as they currently exist, we consider that the sale of the property would be the sale of a capital asset. As such, your GST turnover will not meet the registration turnover threshold and you will not be required to be registered for GST at the time of your sale of the property. Therefore, the requirement of paragraph 9-5(d) of the GST Act will not be met.

As not all the requirements of a taxable supply under section 9-5 of the GST Act will be met at the time of sale, the sale will not be a taxable supply.

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).

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 the Property, 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.