Edited version of private advice

Authorisation Number: 1051999416079

Date of advice: 20 July 2022

Ruling

Subject: GST - margin scheme

Issue 1

Question

Will any of the proceeds from the disposal of Property B be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Based on the information provided, the activities undertaken in relation to the subdivision of the Property and the construction and sale of Property B:

•         do not display the salient indicator of a business, or the commencement of the carrying on of a business, in accordance with the factors provided in Taxation Ruling TR 97/11; and

•         were not a profit-making undertaking in accordance with the principles contained in TR 92/3 given that Property B had been held for several years after the construction of the house had been completed for rental purposes, and continued to be rented out including while it was the market.

Therefore, any capital gain or capital loss made on the sale of Property B will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997 as the result of a mere realisation of a capital asset.

Issue 2

Question

Are you liable for Goods and Services Tax (GST) pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 on the sale of your rental property (Property B)?

Answer

No.

GST is payable on taxable supplies. One of the requirements of a 'taxable supply' is that the supplier is registered or required to be registered for GST. You are neither registered nor required to be registered for GST.

The sale of Property B is therefore not a taxable supply and you are not liable for GST on the sale.

This ruling applies for the following periods:

Income year ending 30 June 20XX.

Income year ending 30 June 20XX.

The scheme commences on:

1 July 2021.

Relevant facts and circumstances

You solely purchased the Property on or after 20 September 1985 which had an older house located on it and was zoned Residential.

You engaged the services of a property manager and the Property was rented out after it was purchased.

You sought advice from a professional to ascertain how you could maximise the rental potential of the Property as the council's policy had changed to allow for higher density properties in the area.

You sought advice from a financial planner in relation to developing a financial model and strategy for the use of the Property in relation to the proposed Property A and Property B, which were to be held for a significant number of years and rented out at market rates of rent for capital growth and long-term passive rental. A spreadsheet was prepared in relation to both proposed properties outlining projected amounts, such as capital growth, rental rates, rental income, annual growth rates and rental income percentage. You agreed for the model and strategies to be implemented in relation to both properties which had been applied to the properties from then.

Several years after the Property was purchased it was subdivided into two lots with:

•         the original house being located on the front subdivided lot, being Property A, with the largest land area; and

•         the other subdivided lot was located at the rear of the Property, being Property B.

Property A continued to be rented after the Property was subdivided.

You engaged the services of a professional to draw up plans in relation to the proposed house on Property B and engaged the services of a builder to construct a house on Property B with the building of the house on Property B being completed over several months.

Property A continued to be rented during the construction of the house on Property B.

Property B has been managed by the same rental agent since the construction of the house was completed.

You considered selling Property B as it was newly constructed and was a better prospect to sell.

You applied for a private ruling in relation to Goods and Services Tax (GST) implications on the sale of Property B, with the Notice of decision outlining that you would not be required to remit GST on the sale of Property B.

After the Notice of decision was issued you changed your mind in relation to your properties and decided to sell Property A and keep Property B as Property A required more maintenance and upkeep given the house located on it was an older house.

Several months later you entered a contract of sale for Property A which enabled you to pay down your debts and pay out the loan that had been originally obtained to purchase the Property.

You continued to rent out Property B after Property A was sold.

Your spouse operates a busines which requires an expensive new machine and you decided to sell Property B to meet your financial needs.

You engaged the services of a real estate agent to sell Property B.

Property B continued to be rented out until it was sold during the ruling period.

Neither you, nor any related parties, have undertaken any similar activities in the past in relation to subdivision and/or land development and neither you, nor any related parties, have any plans to undertake any similar activities in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d)

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)

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