Edited version of private advice

Authorisation Number: 1052060691274

Date of advice: 23 November 2022

Ruling

Subject: GST - property development

Question

Is the entity entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 when it undertakes construction on two properties?

Answer

Yes, as the entity is carrying on an enterprise in relation to the constructions, it is entitled to input tax credits on creditable acquisitions that it makes in relation to the construction of the two premises.

This ruling applies for the following periods:

All tax periods ending on or after 1 September 20XX

The scheme commences on:

1 September 20XX

Relevant facts and circumstances

The entity is registered for GST with effect from 1 September 20XX.

The entity owns vacant land.

A related entity also owns vacant land.

Both properties were acquired under the margin scheme.

The entity intends to construct residential premises on the properties and has entered into a development agreement with the related party. The entity has engaged a third party to build the two houses as well as contracting with others to provide associated goods and services.

The agreement between the entity and the related party provides that the entity will finance all construction costs. Upon sale of the property owned by the related party, the entity will be paid for its construction services. The amount paid by the related party will be the amount of the construction costs plus 50% of the proceeds of the sale that exceed the total cost of the development.

Both the entity and the related party intend to sell the properties once they are complete and the entity will act as agent for the related party to sell the property.

The entity intends to buy and sell property in future and anticipates making profit from selling the two properties.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

Reasons for decision

Summary

As the entity is carrying on an enterprise and is registered for GST, it is entitled to the input tax credits on any creditable acquisition that it makes when it constructs the two residential premises.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is entitled to the input tax credits on any creditable acquisition that it makes and section 11-5 of the GST Act explains that an entity makes a creditable acquisition if:

•         the entity makes an acquisition that is for a creditable purpose; and

•         the supply to the entity was a taxable supply (ie subject to GST); and

•         the entity provides, or is liable to provide consideration (ie payment) for the acquisition; and

•         the entity is registered, or required to be registered for GST.

An acquisition is made for a creditable purpose in accordance with section 11-15 of the GST Act if the acquisition:

•         is made in the course of carrying on an enterprise (by the entity making the acquisition); and

•         the acquisition does not relate to making supplies that would be input taxed; and

•         is not of a private or domestic nature (to the entity making the acquisition).

Enterprise

An enterprise is defined by section 9-20 of the GST Act to include an activity, or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The Miscellaneous Taxation Ruling, 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) explains the meaning of enterprise for GST purposes and, in relation to activities done 'in the form of a business', it states that the 'definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own'. Paragraph 178 of MT 2006/1 provides a list of indicators of a business that have been established by case law:

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a businesslike manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

The activities of the entity satisfy many of the indicators of a business. Although the agreement with the related party to construct the premises on its land is with a related party, it is still done in a businesslike manner with an intention to make a profit and appears to have been entered into on a commercial basis. Furthermore, the construction of the premises on land owned by the entity for the purpose of selling the land at a profit further indicates that the activities undertaken by the entity amount to carrying on an enterprise for GST purposes.

Input taxed supplies

Generally, the sale or rent of residential premises may be input taxed. This means that any acquisitions that are made by the entity that relate (directly or indirectly) to the sale of residential premises are not made for a creditable purpose and the entity is not entitled to input tax credits. However, the sale of 'new residential premises' is not input taxed - it is a taxable supply. 'New residential premises' is defined by section 40-75 of the GST Act as residential premises that was created within the past five years and:

•         has not previously been sold as residential premises; or

•         has been created through substantial renovations of a building; or

•         has been built, or contain a building that has been built, to replace demolished premises on the same land.

As the entity intends to sell its property once construction is completed, the sale will be of new residential premises and will not be input taxed. This means that acquisitions such as those from the building company are not related to making input taxed supplies and are made for a creditable purpose. Similarly, acquisitions that the entity makes in relation to the related party's property relate to the taxable supply of property development services that the entity makes to the related party and also doesn't relate to input taxed supplies.

As the entity doesn't make input taxed supplies, its acquisitions in relation to the construction of the two premises are made for a creditable purpose.

Private or domestic nature

Although the acquisitions themselves will eventually be used for private purposes (ie residential accommodation), the entity itself will not use any acquisitions related to the construction of the two premises for private purposes. The acquisitions made by the entity relate to either making a taxable supply of property development services to the related party and/or the taxable supply of the property it owns.

Conclusion

As the entity is registered for GST and the acquisitions are made for a creditable purpose, it will be making creditable acquisitions of goods and services where the supply was a taxable supply and the entity pays for those acquisitions. Consequently, under section 11-20 of the GST Act, the Trust is entitled to the input tax credits on the creditable acquisitions it makes.