Edited version of private advice

Authorisation Number: 1052059746577

Date of advice: 25 November 2022

Ruling

Subject: GST and the sale of residential premises

Question

Are you carrying on an enterprise for the purposes of section 9-20 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and as a consequence required to be registered for GST?

Answer

No, you are not carrying on an enterprise for the purposes of GST Act and therefore are not required to be registered for GST.

This ruling applies for the following periods:

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commences on:

The date this ruling is issued.

Relevant facts and circumstances

You do not have an Australian Business Number (ABN) are not registered for GST.

You purchased a property containing an existing residential premises.

The property has been your primary residence since purchase. However, due to personal circumstances you decided to demolish the existing residential premises and rebuild new residential premises to live in.

The property was vacated in XXXX, and demolition work commenced in XXXX.

Due to unforeseen circumstances the new residential premises were completed in XXXX.

For personal reasons, you never lived in the new premises once completed.

On completion, you entered into a contract to sell the property due to personal reasons.

You have bought and sold investment properties in the past. You have never been involved in property development prior to this.

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 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 Section 40-75 (1)

Reasons for decision

Section 9-5 of the GST Act provides you make a taxable supply if:

(a)          you make the supply for consideration; and

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

(c)           the supply is connected with the indirect tax zone; and

(d)          you are 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.

Section 40-65 of the GST Act provides that sales of residential premises are input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale is not input taxed to the extent that the residential premises are 'commercial residential premises' or 'new residential premises' other than those used for residential accommodation before 2 December 1998.

The term 'new residential premises' is defined under subsection 40-75(1) of the GST Act, and it includes premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.

In your case, the residential premises that you built on your property is considered to be 'new residential premises' because the premises were built on the same land after removing the existing premises and was sold after completion.

Therefore, the newly constructed residential premises fall within subsection 40-75(1) of the GST Act. The supplies of the residential premises are not input taxed.

The sale of the new residential premises would be subject to GST if all the requirements of a taxable supply under section 9-5 of the GST Act are satisfied.

From the information provided, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you sold the property for consideration; and the sale will be connected with Australia since the property is located in Australia.

Therefore, what remains to be determined is whether your sale of the property will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

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 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 phrase 'carry on' in the context of an enterprise includes 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 an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) 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 in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on the 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 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.

Application in your case

Given the facts of this case, we consider the activities you have undertaken do not display the indicators of a 'business' as listed above.

In the form of an adventure or concern in the nature of trade

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

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.

Paragraphs 247 to 261 of MT 2006/1 outline some factors to determine whether the sale of an asset could be considered as a mere realisation of a capital or investment asset. The factors are:

•                    length of period of ownership

•                    frequency or number of similar transactions

•                    supplementary work on or in connection with the property

•                    circumstances that were responsible for the realisation, and

•                    motive

Paragraph 266 of MT 2006/1 provides 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. 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.

You purchased the property in XXXX, which became your principal residence since then. In XXXX, you made the decision to demolish the existing residential premises and build new residential premises. Due to unforeseen circumstances the property was not completed until XXXX. Upon completion, you did not move into the new residential premises.

Given the facts of this case, we do not consider your activities to constitute an adventure or concern in the nature of trade and as such are not an 'enterprise' for the purposes of GST. Therefore, the sale of your property would be considered a mere realisation of a capital asset.

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 mentioned above it is considered that the sale of the property would be a mere realisation of a capital asset and would not constitute an enterprise for GST purposes. As such you are not required to be registered for GST.

Conclusion

The sale of the property will not be done in the furtherance of an enterprise being carried on. You are not required to register for GST. As such the sale of the property will not be a taxable supply and you will not be liable for GST on the sale of the property in accordance with section 9-5 of the GST Act.