Edited version of private advice

Authorisation Number: 1051926196515

Date of advice: 2 December 2021

Ruling

Subject: GST and the supply of new residential premises

Question 1

Is the sale (supply) of the residential premises located on a subdivided lot (Lot 1) by joint owners entity A and spouse entity B (A&B) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the Lot 1 residential premises by A&B is not a taxable supply under section 9-5 of the GST Act.

Question 2

Did the supply of the Lot 1 residential premises by A&B give rise to a GST withholding obligation under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No, as the supply of the Lot 1 residential premises by A&B is not a taxable supply, the supply does not give rise to a GST withholding obligation under section 14-250 of Schedule 1 to the TAA.

Question 3

Do A&B have an obligation to notify the purchaser as to whether or not there is a GST withholding obligation?

Answer

Yes, under subsection 14-255(1) of Schedule 1 to the TAA, as the suppliers of new residential premises, before making the supply A&B must give to the purchaser a written notice stating whether or not the purchaser is required to make a payment (withholding amount) under section 14-250 of Schedule 1 to the TAA and state the withholding amount.

Relevant facts and circumstances

A&B entered into a contract to purchase a property located in Australia (Property) as joint tenants. A&B borrowed funds (home loan) to purchase the Property.

Erected on the Property was a residential dwelling which A&B intended to occupy as their family home.

A&B decided that instead of renovating the existing dwelling they would demolish it, subdivide the land into two lots and construct a townhouse on each of the subdivided lots. A&B intended to retain one of the townhouses as the family home and sell the second townhouse to recoup some of their costs.

A&B and their children moved into the Lot 1 townhouse as their residence and sold Lot 2.

A&B are registered for GST and treated the sale of the Lot 2 townhouse as a taxable supply on which GST was payable.

No GST credits were claimed by A&B for acquisitions that related to the Lot 1 townhouse occupied by them as their home.

A&B maintain that they have not previously nor do they envisage in the future engaging in activities that involve the acquisition and subdivision of land or the construction of buildings (other than their own home) for sale or lease either separately, together or through another related entity.

A&B registered the Lot 1 townhouse as their principal place of residence for land tax purposes and changed their postal address for doctors, schools etc to the Lot 1 townhouse. Since moving into the Lot 1 townhouse A&B and their children have occupied it as their home until they sold the premises recently.

A&B, in a separate document to the contract of sale, notified the purchaser in writing that there was no GST withholding obligation in relation to supply of the Lot 1 townhouse.

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 40-75

Taxation Administration Act 1953 Schedule 1, section 14-250

Taxation Administration Act 1953 Schedule 1, section 14-255

Reasons for decision

Question 1 Is the sale of Lot 1 by A&B a taxable supply under section 9-5 of the GST Act)?

Reasoning

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make. You make a taxable supply under section 9-5 of the GST Act if:

•         you make the supply for consideration

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

•         the supply is connected with the indirect tax zone, and

•         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.

The first requirement of a taxable supply is that the joint tenants make a supply for consideration. In this regard a 'supply' is defined to include the grant, assignment or surrender of real property. The sale of each of the subdivided lots on which a townhouse was constructed would come within the definition of a supply (being real property).

Under section 40-65 of the GST Act the sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale of residential premises is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

New Residential Premises

Whether GST is payable on a sale of real property will depend on many circumstances. One of these circumstances is whether or not real property is new residential premises. Goods and services tax ruling GSTR 2003/3: when is a sale of real property a sale of new residential premises deals with the circumstances in which residential premises are new residential premises.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

•         have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

•         have been created through substantial renovations of a building; or

•         have been built, or contain a building that has been built, to replace demolished premises on the same land.

The Lot 1 townhouse meets the requirements of subsection 40-75(1) of the GST Act and therefore is new residential premises. It is not precluded from coming within the definition of new residential premises by subsection 40-75(2) of the GST Act.

As such the sale of the Lot 1 townhouse will be the supply of new residential premises and a taxable supply where the requirements of a taxable supply are otherwise satisfied. However, paragraph 11 of GSTR 2003/3 explains that the sale of a person's private residential premises will not be subject to GST, even if the premises are new residential premises, unless the sale is in the course or furtherance of that person's enterprise and the person is registered or required to be registered for GST.

The supply of the Lot 1 townhouse is connected with the indirect tax zone (as the real property is located in Australia), and will be a supply (new residential premises) made by A&B who are registered for GST for consideration (being the purchase price nominated in the sale contract) satisfying the first, third and fourth requirements of a taxable supply set out above. Further, the supply of the Lot 1 townhouse will not come within the GST-free provisions in Division 38 of the GST Act or input taxed provisions in Division 40 of the GST Act respectively.

Accordingly, the issue under section 9-5 of the GST Act is whether the supply of the Lot 1 townhouse was made in the course or furtherance of an enterprise carried on by A&B.

Carrying on an enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among 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

However, subsection 9-20(2) of the GST Act provides that the term 'enterprise' does not include, among other things, an activity or series of activities, done:

•         as a private recreational pursuit or hobby, or

•         by an individual or a partnership without a reasonable expectation of profit.

The Commissioner's view of what constitutes an enterprise is set out in Miscellaneous Taxation Ruling MT 2006/1. Goods and Services Tax Determination GSTD 2006/6states that the principles contained in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied on for GST purposes.

Paragraph 153 of MT 2006/1 provides that the term 'activity, or series of activities' for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operation of the entity. The relevant activity or series of activities should be identified in order to determine whether an enterprise is being carried on.

In the form of a business

An enterprise includes an activity or series of activities done in the form of a business. To determine whether an activity or series of activities, amount to a business, the activity needs to be considered against the indicators of a business established by case law.

According to MT 2006/1, although the phrase 'in the form of a business' is broad it requires a focus on and understanding of the concept of a business. Section 195-1 of the GST Act defines 'business' to include: any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997. According to MT 2006/1, to determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

Where an entity repeatedly develops and sells property there is a strong case that the entity is carrying on a business. This is because, in such circumstances, there is both an intention to resell the property at the time of purchase and a repetition of similar transactions, both of which are important indicators of carrying on a business.

More contentious is whether a business is carried on where an entity bought property without an intention to resell it and subsequently undertakes an isolated development which is then sold.

In the form of an adventure in the nature of trade

In MT 2006/1 there is no definition of 'in the form of an adventure or concern in the nature of trade. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. MT 2006/1 indicates that an adventure in the nature of trade has strong similarities to the term 'profit making undertaking or scheme' (paragraph 237 of MT 2006/1).

In relation to isolated transactions and the subdivision of land, paragraphs 262 and 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities 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 an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:¹⁰⁷

•         there is a change of purpose for which the land is held;

•         additional land is acquired to be added to the original parcel of land;

•         the parcel of land is brought into account as a business asset;

•         there is a coherent plan for the subdivision of the land;

•         there is a business organisation - for example a manager, office and letterhead;

•         borrowed funds financed the acquisition or subdivision;

•         interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•         there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•         buildings have been erected on the land.

Following on from this, paragraph 266 of MT 2006/1 explains that in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

An isolated transaction that involves activities of selling land that was purchased with the intention of resale at a profit (which would be ordinary income) is considered to be an enterprise (paragraph 270 of MT 2006/1). This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade

Example 29 in MT 2006/1 gives an example of a subdivision of land that is an enterprise:

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

The sale of Lot 1 was not made in the course or furtherance of an enterprise that A&B carried on as it is the sale of their private home. As such, the sale is not a taxable supply.

Question 2 Does the supply of the Lot 1 townhouse by A&B give rise to a GST withholding obligation?

Paragraphs 14 to 18 of Law Companion Ruling LCR 2018/4 at: http://ato.gov.au/law/view/document?DocID=COG/LCR20184/NAT/ATO/00001&PiT=99991231235958 provides an overview of a GST withholding obligation as follows:

14. A purchaser has a GST withholding obligation if:

(a) they are the 'recipient' of a 'taxable supply'

(b) the supply is by way of sale or long-term lease

(c) the supply is of

(i) new residential premises (apart from some exclusions) - this is explained in paragraphs 17 and 18 of this Ruling, or

(ii) potential residential land where particular requirements are met - this is explained in paragraphs 19 to 34 of this Ruling.

15. A purchaser only has a GSTwithholding obligation when a vendor is making a taxable supply. A vendor will not be making a taxable supply in situations including:

•         where the vendor is not registered for GST and not required to be registered for GST as the sale is not in the course or furtherance of an enterprise

•         the sale of residential premises is input taxed because they are not new residential premises (refer to paragraph 18 of this Ruling), or

•         the sale is a GST-free supply, for example as part of a GST-free supply of a going concern or GST-free farmland.

16. We consider that 'sale', in this context, similar to the GSTAct, includes transfers for monetary or non-monetary consideration.

17. A purchaser may have a GST withholding obligation under section 14-250 of Schedule 1 to the TAA for acquisitions of new residential premises. The term new residential premises has the meaning given in the GST Act.

According to the overview an essential requirement for a GST withholding obligation is that the purchaser is the recipient of a taxable supply.

As determined in question 1 above the sale of Lot 1 townhouse was not a taxable supply. On that basis the sale of the Lot 1 townhouse will not give rise to a GST withholding obligation because the essential requirement that the purchaser is the recipient of a taxable supply is not satisfied.

Question 3 Do A&B have an obligation to notify the purchaser as to whether or not there is a GST withholding obligation?

Under section 14-255(1) of Schedule to the TAA, the obligation of A&B as the suppliers of residential premises is to give to another entity (purchaser), before making the supply, a written notice stating:

•         whether the other entity will be required to make a payment under section 14-250 of Schedule 1 to the TAA and

•         if the other entity will be required to make such a payment in relation to the supply

(i)      the name and ABN of the entity that is liable to pay the GST on the supply and

(ii)     the amount that the other entity will be required to pay to the Commissioner under section 14-250of Schedule 1 to the TAA and

(iii)    when the other entity will be required to pay that amount

(iv)    if some or all of the consideration for the supply will not be expressed as an amount of money the GST inclusive market value of so much of the consideration as will not be expressed as an amount of money and

(v)     such other matters as are specified in the regulations.

A&B notified the purchaser that there is no requirement to make a payment under section 14-250 of Schedule 1 to the TAA to the ATO in relation to the supply of the Lot 1 townhouse.