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Edited version of private advice
Authorisation Number: 1051971224688
Date of advice: 12 April 2022
Ruling
Subject: GST - taxable supply
Question 1
Would the sale of a newly constructed property located be the sale of new residential premises and a taxable supply in accordance with section 9-5 of the A New Taxation System (Goods and Services Tax) 1999 (GST Act)?
Answer 1
Yes. The sale of this property would the sale of a new residential premises and will be a taxable supply in accordance with section 9-5 of the GST Act.
Question 2
If the sale of the property is a taxable supply under section 9-5 of the GST Act, are you eligible to use the margin scheme.
Answer 2
Yes. You will be eligible to use the margin scheme when you sell the property.
This ruling applies for the following period:
XX Month 20XX to XX Month 20XX
Relevant facts and circumstances
• You purchased a vacant plot of land as tenants in common (50/50).
• The land was purchased from a develop.
• You were granted a licence to act as an owner builder.
• Site work commenced on XXXX with the construction being completed on XXXX.
• You engaged an architect to design the residence.
• The property is listed for sale.
• You have stated that you purchased the land with the intention of building a residential property to gain building experience and to on-sell the completed property.
• You do not hold an Australian business number (ABN).
Other information
• RP Data search showed that you purchased the land from a developer, who was registered for GST.
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 9-4
A New Tax System (Goods and Services Tax) Act 1999 section 23-5
A New Tax System (Goods and Services Tax) Act 1999 section 75-5
A New Tax System (Goods and Services Tax) Act 1999 section 75-14
Reasons for decision
A sale of a new residential property will be a taxable supply if all of the requirements of section 9-5 of the GST Act are met.
Under section 9-5 of the 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
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
In your case, the property to be sold will consist of a newly constructed residential premises which, if sold, would be a property located in the indirect tax zone and the supply would be 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 also 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 a 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 phase 'carry on' in the context of an enterprise incudes 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 and enterprise for the purposes of entitlement to an Australian Business Number (MT2006/1) 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 on 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 on in a business-like manner and records kept;
• the activities are of a reasonable size and scale;
• a business plan exists;
• commercial sales 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.
Isolated transactions and sales of real property can amount to carrying on an enterprise as discussed in Miscellaneous Taxation Ruling MT 2006/1 at paragraphs 262 to 302.
Paragraph 266 of MT 2006/1 states 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.
Paragraph 270 of MT 2006/1 states in isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. 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.
Application in your case:
• You stated that your intention when you purchased the vacant plot of land was to build a residential premises to gain experience aiming to build a quality house in the future.
• You engaged an architect to design the residence.
• You obtained approvals and licences to build the premises and an owner builder.
• You obtained development approvals.
• You engaged qualified trades people to construct the residence.
• The completed property is now completed and is for sale.
• The property has not been subject to a lease.
Taking all of the above and the relevant paragraphs of MT 2006/1 into account, it is clear that you are carrying on an enterprise of property development which is in the form of a business or an adventure or concern in the nature of trade.
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 you are carrying on an enterprise of property development and when the property is sold you will exceed the GST turnover threshold. As such you will be required to be registered for GST.
As such, all of the requirements for a taxable supply will be met.
Therefore, the sale of the property will be a taxable supply and subject to GST.
Applying the margin scheme
Section 75-5 of the GST Act states that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land, selling a stratum unit or granting or selling a long-term lease, if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.
In your case, you will be making a taxable supply of a freehold property. As you purchased the vacant plot of land from a registered property developer, we have assumed that the property developer applied the margin scheme when selling the plot of land to you. You are required to confirm this before you can apply the margin scheme to the sale of your property.
How to calculate the margin
When selling a property using the margin scheme that you purchased after 1 July 2000, you must use the consideration method.
The consideration method is the difference between the property's selling price and the original purchase price, which is the sale price minus purchase price equals the margin. The sale price must include any settlement adjustments in the sales contract.
The following are not included in the calculation of the purchase price:
• Costs for developing the property
• Legal fees
• Any options you purchased
• Stamp duty; or
• Any other related purchases.
Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides clarification on how the margin scheme under Division 75 of the GST Act applies to a supply of a freehold interest of a real property)
Example 3 in GSTR 2006/8:
56. Bob is a builder. He purchases a block of vacant land for $180,000 and then constructs a house on the land. The cost of constructing the house is $100,000. Bob sells the house and land package for $400,000.
57. The margin for the supply is $220,000 ($400,000 - $180,000). The cost of constructing the house is not part of the consideration for the acquisition of the land. Instead, Bob is entitled to input tax credits for any construction acquisitions (for example, building materials and subcontractors' services) that are creditable acquisitions.