Edited version of private advice

Authorisation Number: 1052036040921

Date of advice: 20 September 2022

Ruling

Subject: GST property

Question 1

Are the sales of the adjacent residential properties located at <property addresses> with development approval, taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

<date>

Relevant facts and circumstances

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

The <entity name> (You), registered for GST from <date>. You were set up for property investment purposes. Your main business activity as listed in the trust tax return for the year ending <date> is land development and subdivision.

The trustee is <entity name>.

On <date> (settlement date) you purchased a residential property located at <property address> (Property 1) for <$ amount>. This property is formally known as Lot <number> in Deposit Plan <number> being the whole of the land in Certificate of Title Volume <number> Folio <number>.

When purchased, Property 1 consisted of approximately <number>m² in size, was zoned low density residential (R2) and contained a four-bedroom, two-bathroom house with formal lounge, dining plus study, kitchen with meals area, covered outdoor entertaining area, below ground pool and three car spaces.

Since acquiring Property 1, it has been leased and used exclusively to generate rental income.

On <date> (settlement date) your purchased the adjacent property located at <property address> (Property 2) for <$ amount>. This property is formally known as Lot <number> in Deposit Plan <number> being the whole of the land in Certificate of Title Volume <number> Folio <number>.

At the time of purchase, Property 2 consisted of approximately <number>m² in size, was zoned low density residential (R2) and contained a five-bedroom, four-bathroom house with formal lounge, dining plus study, kitchen with meals area, veranda, tennis court, below ground pool and two car spaces.

Since acquiring Property 2 it has since been used exclusively for family/private use of the beneficiaries.

Both Property 1 and 2 (the Properties) were purchased to hold for long term investment purposes.

Both Properties have retained their original physical characteristics. You have not made any alternations, renovations or any construction work since they were purchased.

In <month> <year> you, together with the owner of Property 2 at the time, applied to the <City Council> for the subdivision of the Properties to create <number> residential lots including demolition and were granted consent on <date> subject to several conditions. You supplied a copy of the 'Notice of determination of a development application' reference <number> dated <date> (the Development Approval).

According to this notice, consent to subdivide the Properties, lapses unless the development is physically commenced within five years of the determination date (<date>). Therefore, if not physically commenced consent to subdivide the Properties will lapse on <date> unless the date the consent lapses is otherwise varied under section 95 of the Environmental Planning and Assessment Act 1979 (NSW).

You advise that the subdivision/development application was made purely to increase the intrinsic value of the Properties. You did not plan to and never have carried out any physical subdivision/partitioning activities on the Properties. Other than submitting the development application you have not taken any physical actions to affect the development/subdivision of the Properties.

You self-funded any costs you incurred in submitting the development application.

You recently engaged a real estate agent - <entity name>, to sell the Properties in order to realise the capital gain on the Properties.

On <date>, you entered into a contract of sale for the Properties under a single contract to purchasers - <individual name> and <individual name> for <$ amount>. The contract of sale shows that Property 1 is being sold subject to existing tenancies whilst Property 2 is being sold as vacant possession.

The date of completion of the contract is listed as <number> weeks after the date of the contract.

You confirmed that no works required under the development approval issued by the <City Council> will be carried out prior to or on settlement date. The Properties will remain in their current physical state until settlement date.

The proposed <number> subdivided lots provided for under the development approval issued by the <City Council> will not be registered as separate titles prior to settlement date.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

In this reasoning, please note:

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO's website ato.gov.au.

Taxable supplies

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which provides:

You make a taxable supply if:

(a)  the entity makes the supply for consideration

(b)  the supply is made in the course or furtherance of an enterprise that the entity carries on

(c)   the supply is connected with Australia, and

(d)  the entity 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.

All of the requirements of section 9-5 must be satisfied in order for your supply (the sale of the Property 1 and 2) to be a taxable supply.

The issue to be determined in this case is whether the sale of the Properties constitute input taxed supplies.

Input taxed supplies

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything that is acquired to make the supply.

Relevantly subsection 40-65(1) provides a supply of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) states that the sale of real property is not input taxed to the extent that the residential premises are:

(a)  commercial residential premises, or

(b)  new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998

Based on the information supplied, the characteristics of the Properties and how these premises have been used (private use of the beneficiaries and to provide residential accommodation), satisfy the definition of 'residential premises' and do not meet the requirements to be 'commercial residential premises' or 'new residential premises' as defined in section 195-1 and section 40-75 respectively.

Consequently, the sale of the Properties situated at <property addresses> are input taxed supplies under subsection 40-65(1) of the GST Act and not subject to GST. The fact that the sale includes a development approval does not alter the GST status of the sale in this case.

The Development Approval

In your application you have advised that the sale of the Property will include the Development Approval (reference <number>).

The GST treatment of development approvals that are sold together with a residential premises is dealt with in ATO Interpretative Decision ATO ID 2004/303 Goods and Services Tax: GST and supply of residential premises together with assignment of development consent (ATO ID 2004/303).

ATO ID 2004/303 provides that a development consent is attached to the land belonging to the residential premises and runs with that land. Upon the sale of the residential premises, the development approval is automatically transferred to the purchaser as a natural consequence of the sale. This transfer takes place regardless of any formal assignment in a sale contract. Assignment of a development consent does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the land itself.

Therefore, if you sell the Properties, you will not be supplying anything more than the residential premises. Even a formal assignment of the Development Approval will not amount to a separate supply because it will not affect the transfer of anything that will not already be transferred to the purchaser as a direct and natural consequence of the sale of the Property.

As such, you will not be making a separate taxable supply of the Development Approval under section 9-5 of the GST Act when you sell the Property with the Development Approval. The sale will be a single input taxed supply of the Property (a residential premises), which includes the Development Approval.