Edited version of private advice

Auhtorisation Number: 1051977218637

Date of advice: 9 May 2022

Ruling

Subject: Sale of property - taxable supply

Question 1

Will the sale the property by the Partnership be a taxable supply in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the property will be a taxable supply by the Partnership in accordance with section 9-5 of the GST Act.

Question 2

In working out the projected GST turnover of the Partnership, is the consideration for the sale of the property disregarded under subsections 188-25 (a) or (b) of the GST Act?

Answer

No, the consideration from the sale of the property will not be disregarded in the working out of the projected turnover under subsections 188-25(a) & (b) of the GST Act.

Question 3

Can the partnership apply the margin scheme in relation to the sale of the property?

Answer

Yes, the Partnership are able to apply the margin scheme to the sale of the property.

This ruling applies for the following period

Financial year ending 30 June 20XX

The scheme commences on:

The date the ruling is issued

Relevant facts and circumstances

The property was purchased by the Partnership as tenants in common on in XXXX.

The property was purchased from an unregistered vendor.

The property was vacant land.

Included in the purchase of the property was the existing development approval for xx townhouses.

At the time of purchase, the Partnership's intention was to develop the land, build townhouses and sell the townhouses as house and land packages.

In XXXX the Partnership made a development application to develop XX townhouse lots, which was approved.

In XXXX, the Partnership obtained a modification to the development application to allow the inclusion of an access gate.

The partnership has an Australian business number (ABN) but has not registered for goods and services tax (GST).

The Partnership has now decided to sell the property.

The Partnership has entered into a contract of sale.

The contract of sale shows that both parties to the contract of sale have agreed that the margin scheme will be used in the making of a taxable supply.

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 188-20

A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-25(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-25(b)

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

Reasons for decision

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 this case, the property to be sold will consist of land which is located in the indirect tax zone and the supply of the property 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 be satisfied. If this were the case, the supply of the property would satisfy all the requirements under section 9-5 of the GST Act.

Are you carrying on an enterprise?

An enterprise is defined in section 9-20 of the GST Act and includes an activity or series of activities, done:

•         in the form of a business

•         in the form of an adventure or concern in the nature of trade.

Paragraph 31 of Goods and Services Tax Ruling: general law partnerships GSTR 2003/13, provides:

31. 'Under paragraph 9-20(1)(a), an enterprise includes an activity or activities done 'in the form of a business'. Enterprise has a wider meaning than the concept of 'carrying on a business' in the definition of a partnership. A general law partnership, therefore, carries on an enterprise and may register for GST from the time of its formation.'

In this case:

•         the Partnership applied for an ABN and at that time made a declaration that they were carrying on an enterprise of property development,

•         the Partnership acquired the property with an intention of subdividing it, constructing townhouses and selling them as house and land packages,

•         development approval was already approved for the property and was included as part of the initial purchase of the property,

•         the Partnership made a further development application which was approved,

•         the Partnership obtained a modification to the development application to allow the inclusions,

•         the partners in the Partnership have the experience and expertise to develop the property.

Taking these activities and the relevant paragraph of GSTR 2003/13 into account, it is considered that the Partnership is carrying on an enterprise of land development which is in the form of a business or an adventure or concern in the nature of trade. As such, the sale of the property is in the course or furtherance of the enterprise the Partnership is carrying on.

It does not matter that the partnership has decided to on-sell the property prior to commencing the development or the construction of the townhouses. The land was originally bought with intention of development and resale. The gaining of the various development approvals indicates that the property was always intended to be developed and was not used for any other purpose.

GST turnover

The second factor to consider under section 23-5 of the GST Act is whether your GST turnover meets the registration turnover threshold. The registration turnover threshold (for entities other than non-profit bodies) is $75,000.

Subsection 188-10(1) of the GST Act is relevant for working out whether your GST turnover meets a turnover threshold. An entity has a GST turnover that meets a particular turnover threshold under subsection 188-10(1) when:

•         their current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that their projected GST turnover is below the turnover threshold; or

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

In this case, there is no current turnover as the property has not been sold. Therefore, the projected turnover of the Partnership needs to be looked at.

Section 188-20 of the GST Act defines projected GST turnover. Projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months.

There are exclusions in section 188-15 and 188-20 of the GST Act where certain supplies are not included in the calculation of current and projected GST turnover. However, based on the information provided, none of these apply to the Partnerships circumstances.

Section 188-25 of the GST Act requires the following to be disregarded in working out an entity's projected turnover:

(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 supplies 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.

In an AAT decision Collins & Anor AFT The Collins Retirement Fund v FC of T 2022 ATC 10-627

Senior Member Robert Olding stated the following:

Paragraph 20

"In the income tax context, in determining whether the proceeds of sale of an asset are on the revenue or capital account, attention is focused upon whether the seller had an intention, at the time of acquisition of the asset, that the asset would be sold at a profit. The Commissioner submitted that s188-25(a) purposes, the character of an asset must be determined at the time of the supply, describing this as a key point of distinction from the income tax framework."

Paragraph 21

"As the Commissioner pointed out, the expression 'capital asset' does not appear elsewhere in the GST Act. Further, the context of the characterisation of the supply of an asset as a transfer of ownership of a capital asset in s188-25(a) - in determining an entity's projected turnover - is quite different to the role played by the revenue/capital distinction in determining the accessibility of receipts or deductibility of outgoings or losses..."

Paragraph 24

"These considerations point to whether the taxpayer had a profit-making intention or object at the time the relevant asset is acquired being of less significance than it is for the purposes of the capital vs revenue dichotomy in the income tax context. Accordingly, the Commissioner submitted that whether the taxpayer had a profit-making intention at the time of acquisition of an asset is not determinative for s 188-25(a) purposes. The focus must be on the time a supply of the asset is made or is likely to be made."

Paragraph 26

"I respectfully adopt the proposition that for s188-25(a) the character of an asset must be determined at the time the supply is made (or I would add, likely to be made)."

Paragraph 64

"...that the applicant chose to sell vacant land and, as the applicant expressed it, left further profits on the table by not constructing and selling houses on the lots for further profit, in my view provides little assistance to the applicant. Every operator of a land development business that chooses to sell allotments rather than house and land packages has made such a choice.

In a Federal court decision, Aurora Developments Pty Ltd v FC of T 2011 ATC 20-250, Greenwood J stated the following:

261. 'By the date of the contract Aurora was no longer engaged in the development of the land according to the "Development Material" as defined. It was engaged in an en globo sale of the land as a part of its general business undertaking and it was assumed a contractual obligation to undertake the Annexure C works required to be done by Australand. ... The disposal of the lands fell within the business undertaking of Aurora.'

262. 'It was a supply for the purposes of s9-10 of the GST Act and a taxable supply for the purposes of s9-5 of the GST Act.'

In this case, it is clear that when the property was purchased by the Partnership, it was with the intention of development and the construction of townhouses with the end result being the selling of house and land packages.

Therefore, the property is not a capital asset, but a revenue item. Importantly the decision to on-sell the property with the development approvals to another entity and the decision to not construct the townhouses and sell as house and land packages does not change the characteristics of the property from revenue to capital.

As a result, paragraph 188-25(a) of the GST Act will not apply in this case and the sale of the property cannot be excluded from the projected turnover calculation.

In relation to whether the sale of the property falls under paragraph 188-25(b), the property being sold was always intended to be sold (albeit as house and land packages) and is a revenue item. The sale of the property is a natural progression or part of the development enterprise being carried on.

As a result, paragraph 188-25(b) of the GST Act will not apply in this case and the sale of the property cannot be excluded from the projected turnover calculation under this provision.

As detailed above, it is considered that the Partnership is carrying on an enterprise of property development and when the property is sold the Partnership will exceed the GST turnover threshold. (currently $75,000)

As such, all 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 the Partnership's case, a taxable supply of a freehold property will be made and both parties to the taxable supply have agreed in writing that the margin scheme is to apply to the sale. Therefore, the Partnership is eligible to apply the margin scheme to the taxable supply of the property.

How to calculate the margin scheme

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 Division 75 of the GST Act applies to a supply of a freehold interest of real property.