Edited version of private advice

Authorisation Number: 1052054349230

Date of advice: 2 November 2022

Ruling

Subject: GST and carrying on an enterprise

Question 1

Will the sale of the house at the Property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Can you choose to apply the margin scheme under Division 75 of the GST Act, in working out the amount of goods and services tax (GST) on sale of the Property?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are registered for GST.

You have another registered business name. You have not conducted business in this entity.

You jointly purchased a property in xx/xxx. The existing residential premises on this property has been leased since your purchase. The purchase was not taxable.

Your work issued a letter advising that some roles would become redundant.

The redundancy letter prompted you to lodge a dual occupancy permit to build a second residential premises at the property to give you a new dwelling to lease.

You applied for a position and you were not made redundant.

On xx/xxxx, the Council issued a determination giving consent for dual occupancy on the property and demolition/relocation of the existing carport.

In xx/xxxx, you requested a loan for construction of an investment property. A letter of offer for investment loan, was issued dated xx/xx/xxxx.

In xx/xxxx, you engaged a project home builder to construct a second premises on the property.

Due to the uncertainty with interest rates, you lodged a development application for strata subdivision in xx/xxxx.

Certificate of occupancy for the Property was issued in xx/xxxx.

You signed an agency agreement to list the Property on xx/xx/xxx.

You accepted an offer to sell the Property on xx/xx/xxx for $x.

Strata subdivision occurred on xx/xx/xxxx.

Settlement is due to occur on xx/xx/xxx.

The contract has checked the box indicating that the margin scheme will be used in making the supply of the Property.

You own other properties:

•         your principal residence,

•         residential investment property in x purchased in xx/xxxx; and

•         the original residential investment premises at x.

You have not previously undertaken any subdivision or development activities.

You intend to use the proceeds of the sale to reduce the home loan for your principal residence.

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 9-40

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 75

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

Reasons for decision

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5, you make a taxable supply if:

•         you make the supply for consideration; and

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

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

•         you are registered, or required to be registered

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Co-owners of property are considered partners where they are in receipt of income jointly in accordance with the view in Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6). Paragraph 25 of this ruling states a tax law partnership exists if there is an association of persons in receipt of income jointly.

Paragraphs 81-84 of GSTR 2004/6 state:

Tax law partnerships involving family members

81. The acquisition of property for income producing purposes by family members is ordinarily made by them under an arrangement or agreement. The acquisition is often made by them as joint tenants out of joint funds or borrowings, and under a single contract. The property is usually acquired for the mutual benefit of all the family members, including any children.

82. The appointment of an agent or manager to manage the leasing of the property is a joint decision of all members, or by one member acting on behalf of and with the express or implied authority of the other members. Frequently, the person managing the property is a family member. Rental income is deposited into a joint bank account. Outgoings in relation to the property are also paid out of the same account.

83. A case where these features were present is McDonald. In that case, a husband and wife entered into an agreement to invest in income producing properties; they borrowed funds to finance the purchase, the properties were purchased as joint tenants, and the income was paid into a joint bank account from which outgoings were also paid.

84. In our view, the weight of factors present in these types of cases means that the leasing enterprise is carried on by a tax law partnership.

As you purchased the original property jointly, jointly borrowed money to fund construction and will jointly receive the income from the sale of the Property, we consider you are a tax law partnership. We consider that the relevant entity making the supply of the Property for the purpose of the above provision is the tax law partnership.

Therefore, where the partnership satisfies the requirements of section 9-5 of the GST Act, it will make the supply.

The sale of the Property by the partnership, is not GST-free under the GST Act. Therefore, the sale is not excluded from being a taxable supply on account of it being GST-free.

We now consider whether such a sale is input taxed.

Input taxed

Subsection 40-65(1) states:

A 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 (regardless of the term of occupation).

However, subsection 40-65(2) provides that the sale is not input taxed to the extent that the residential premises are new residential premises. The Property is new residential premises. Therefore, its sale is not input taxed.

Accordingly, the sale is not excluded from being a taxable supply on account of it being input taxed.

You need to satisfy paragraphs 9-5(a), (b), (c) and (d) in order for the supply to be taxable. Paragraph 9-5(a) is satisfied because the supply is for consideration. Paragraph 9-5(c) is satisfied because the property is located in Australia.

We now consider whether paragraph 9-5(b) is satisfied.

Enterprise

We need to evaluate whether your intended supply will be made in the course or furtherance of an enterprise that you carry on.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT2006/1) provides information on whether an enterprise exists.

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things;

an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Activities done in the form of a business

Although you are leasing residential premises, we do not consider that any proceeds from leasing activities would be derived in the course of carrying on a business in accordance with paragraph 9-20(1)(a).

Activities done in the form of an adventure or concern in the nature of trade

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. It refers to 'the badges of trade' and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted 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. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are ordinary income.

The term isolated transaction refers to:

those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

those transactions entered into by non-business taxpayers.

If a taxpayer is not carrying on a business but makes a profit from an isolated transaction or operation, that profit is assessable ordinary income if both of the following elements are present:

the intention or purposes of the taxpayer in entering into the transaction or operation was to make a profit or gain; and

the transaction or operation was entered into and the profit was made in carrying out a business operation or commercial transaction.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

The cases of Statham & Anor v Federal Commissioner of Taxation [1989] ATC 4070 and Casimaty v FC of T [1997] ATC 5135 established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

•         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.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. A taxpayer can embark on a profit-making scheme after property was acquired for a different purpose.

In determining whether activities relating to isolated transactions that are one-off developments are an enterprise, 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.

Application to your situation

In this situation, the original property was purchased in xx/xxxx. You have decided to construct a second premises, subdivide the land and sell the new residential premises at x.

In this case, you acquired the original property in xx/xxxx and have leased the existing residential premises since purchase.

In the context of considering the above authorities and factors when determining whether your project would be viewed as an enterprise, the following general observations have been made:

•         there is a coherent plan for the subdivision of the property and construction of an additional house, which is more complex than to subdivide the property and sell a block as vacant land;

•         the Property has been contracted for sale and not for personal use or investment purposes. There has been a change in the purpose of owning the original property;

•         the subdivision and construction costs we relatively substantial;

•         there is an intention to profit from the subdivision of the property and pay loan amounts for the principal residence;

•         the transaction has been undertaken in a commercial manner;

•         you obtained necessary council approval to construct the premises and to subdivide the lot;

•         you demolished and relocated an existing carport to facilitate the construction of the new premises;

•         you engaged a builder, other contractors to undertake activities, such as landscaping and a real estate agent;

•         you have obtained a planning permit.

A balanced view of these observations, with no one feature being determinative in isolation, leads to a conclusion that the intention for holding and leasing the Property has changed to an enterprise in the form of an adventure or concern in the nature of trade.

Although the original property was purchased as a rental property and the intent was to build a new rental premises, the intention in relation to the original property changed when it was decided to subdivide and sell the Property.

Whilst you contend the potential redundancy made you build the new premises to provide more rental income, you have undertaken the option of borrowing more funds in order to build the house on the lot. The decision to pursue the subdivision and construction of a premises shows a choice to engage in exposure to the risks of the development, including any associated profits and losses. Your purpose was to maximise the potential profit made on the sale of the Property, whether that was from the extension of your leasing enterprise or the subsequent decision to sell the Property.

It is acknowledged that the subdivision is not on a large scale and the original premises will be retained as a residential rental. However, you have a coherent plan and a profit-making purpose in the activities.

A number of entities were engaged to sub-divide, construct the house and market the Property. It is viewed that your subdivision activity has the characterisation of a commercial or profit-making undertaking.

You made a choice to demolish a carport and construct a house on the original property. The over-riding factor is that you have decided to demolish, subdivide, build and subsequently sell.

As stated above, no single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. We have also considered examples contained in MT 2006/1.

Paragraphs 284 to 287 (Example 31) of MT 2006/1 illustrates a scenario with some similarities to the circumstances in your case:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

•         their house to be demolished;

•         the land to be subdivided;

•         a builder to be engaged;

•         two houses to be built;

•         water meters, telephone and electricity to be supplied to the new houses; and

•         a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

In your circumstance, whilst you have not lived at the Property or the original property, or demolished a house, you have owned the property since xxxx. However, you have demolished a carport, subdivided the land, engaged a builder, constructed a new dwelling, including provision of services, and engaged an agent to market the Property for sale.

By way of contrast, we refer to examples 32 and 33 contained in MT 2006/1 illustrating circumstances that are not considered an enterprise. Example 32 illustrates either a private or non-commercial purpose, and example 33 illustrates where the taxpayer has merely subdivided the property into two and sold the land, without development.

We consider that your activities fall within the scope of an isolated transaction of real property and have gone beyond the mere realisation of a capital asset as discussed in MT 2006/1. Your activities will therefore be considered an 'enterprise', being an activity or a series of activities, done in the form of an adventure or concern in the nature of trade as defined in subsection 9-20(1)(b).

As such, you satisfy paragraph 9-5(b).

We now consider whether you satisfy paragraph 9-5(d).

As you are registered for GST, this means you will satisfy paragraph 9-5(d) of the definition of 'taxable supply'.

You satisfy all four paragraphs in section 9-5. Your sale of the Property, will be a taxable supply.

GST will be payable on the sale of the Property.

Question 2

You can choose to apply the margin scheme if:

•         you and the recipient of the supply have agreed in writing that the margin scheme is to apply; and

•         such an agreement is made on or before the making of the supply; and

•         you did not acquire the freehold interest through a taxable supply on which the GST was worked out without applying the margin scheme.

You advised that you satisfy all the conditions above.

Therefore, you can choose to apply the margin scheme in working out the amount of GST on sale of the Property.

As you are selling the Property subdivided from the original property, you will need to apportion the purchase price to the subdivided lot. 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 at paragraphs 58-68 provides guidance on apportionment methods.