Edited version of private advice

Authorisation Number: 1052065858942

Date of advice: 3 January 2023

Ruling

Subject: Taxable supplies

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless specifically noted.

Question

Were the sale of the properties by the Partnership taxable supplies in accordance with section 9-5.?

Answer

Yes, the sale of the properties were taxable supplies in accordance with section 9-5.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

The date the Private Ruling is issued

Relevant facts and circumstances

The Partnership entered into a contract of sale to purchase properties in 20XX.

These properties were vacant land when purchased and no improvements have been made.

The vendor of the property was registered for goods and services tax (GST).

The properties were purchased for a GST inclusive amount $XXXX. The settlement statement issued showed a GST amount of $XXXX.

A Tax Invoice was issued by the vendor to the Partnership.

The Partnership has an Australian business number (ABN) and has been registered for GST.

The Partnership lodged an activity statement for the quarterly tax period ending XX XXX XXXX, with an amount of $XXXXX at label G10 (capital acquisition) and an amount of $XXXX at label 1B (GST credit).

This activity statement was lodged on XX XXX XXXX.

The Partnership has not reported income on any activity statements and has not claimed any other GST credits.

The Partnership entered into a contract of sale on XX XXX XXXX with purchasers, to sell the properties for a total of $XXXXX GST exclusive.

In the contract of sale under the heading "Tax information (the parties promise this is correct as far as each party is aware)" the box is crossed that refers to the properties as being input taxed because the sale is of eligible residential premises (sections 40-65, 40-75(2) and 195-1)

Clause XX of the contract of sale provides:

•         The vendor and purchaser agree that the consideration expressed in this contract is exclusive of GST.

If the vendor serves a letter from the Australian Taxation Office (ATO) stating that the vendor has to pay GST on the supply, the purchaser must pay the vendor on demand the GST assessed, within 28 days of receipt of the ATO letter.

The vendor will also supply the purchaser a tax invoice.

The purchaser agrees that this clause is an essential condition of the contract and shall not merge on completion.

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 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75 (2)

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

Reasons for decision

Under section 9-5, an entity makes a taxable supply where the supply:

1.    is made for consideration; and

2.    is made in the furtherance of an enterprise that you carry on; and

3.    is connected with the indirect tax zone; and

4.    is made by a supplier who 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.

In this case, the properties sold consisted of properties located in the indirect tax zone, the supply was for consideration and the Partnership, as the supplier of the properties, is registered for GST. Therefore, the sale of the properties would satisfy three elements outlined above (1, 3 & 4).

Accordingly, we need to determine whether the last element, being whether the sale of the properties is as part of the enterprise being carried on, would also be satisfied. If this were the case, the supply of the property would satisfy all requirements of section 9-5 and would be a taxable supply.

Are you carrying on an enterprise?

The term enterprise is defined for GST purposes in section 9-20 and includes among other things, an activity or a series of activities done:

•         in the form of a business (paragraph 9-20(1)(a)).

•         In the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phase '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 and 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: does 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 on MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied upon for 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.

In this case, the Partnership purchased two properties in XXXX. These purchases may not indicate a significant commercial activity, however, the fact that at the time of purchase the Partnership was registered for GST and claimed a GST credit in their activity statement, equal to the amount of GST paid on the properties purchased, shows that there was an intention to engage in commercial activity.

The Partnership has an ABN and is registered for GST. As part of applying for an ABN, the Partnership accepted the Terms of Service, which included that the Partnership agreed that they meet the requirements of a business and that the Partnership is entitled to an ABN. The Partnership has remained registered for GST even though they have not claimed any additional GST credits or reported any income on subsequent activity statements.

As such, the Commissioner is of the opinion that the Partnership is conducting a business of property investment.

In the relevant section of the contract of sale it is indicated that the properties are input taxed supplies due to being eligible residential premises under sections 40-65, 40-75(2) and 195-1.

This is not correct in this case. The properties sold were vacant residential land. The sections stated above provide that the sale of residential premises is input taxed to the extent it is used predominantly for residential purposes (40-65), that the residential premises are more than 5 years old and are therefore not new residential premises (40-75 (2)). Additionally, the property is not residential premises unless it is occupied as a residence or for residential accommodation or intended to be so (195-1). Therefore, these sections of the act are not applicable in this case.

Further, Law Companion Ruling LCR 2018/4 Purchasers' obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4) is about GST notification and withholding requirements for vendors and purchasers of residential premises and potential residential land.

Paragraphs 23 - 30 of LCR 2018/4 provide the meaning of potential residential land.

Meaning of potential residential land

23.  The GST Act defines 'potential residential land' as 'land that it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises.

24.  It is permissible to use land for residential purposes if the land use and planning laws that apply to the land allow residential use of the land. It is not permissible to use land for residential purposes if the land use and planning laws that apply to the land prohibit residential use of the land. Where the land use and planning laws permit a number of uses for the land, one of which is residential use, then the land will be potential residential land.

25.  Land use and planning laws typically categorise land by zones. These define the potential uses of the land and say what the land may be used for.

26.  For example, residential zonings typically allow 'dwelling use', meaning the land may be used for residential purposes. Commercial or business zoning may also permit use of land for residential purposes. Similarly, agricultural or rural zoning may allow use of land for a residential purpose like a residence on farmland. On the other hand, land may be zoned for industrial use which may prohibit, or not permit, use of the land for residential purposes.

27.  Whether it is permissible to use land for residential purposes is not determined by any restrictions imposed by a land owner, for example, by way of a permitted use under a lease or covenant.

28.  Land will still be permissible to use for residential purposes even if that use is subject to local government requirements, such as obtaining approval or a permit. For example, it may be necessary to obtain local government development approval before a particular dwelling can be constructed. Despite the requirement for development approval, the residential zoned land is still land that is permissible to use for residential purposes.

29.  'Residential purposes' is not defined in the GST Act. It covers potential use of land for a residence or for residential accommodation. While 'residence' may suggest permanent or long-term occupation, 'residential accommodation' means living accommodation which does not require any degree of permanence of occupation.

30.  The definition of 'potential residential land' excludes land 'that contains any buildings that are residential premises'. In addition, section 14-250 does not apply where the land contains any building that is in use for a commercial purpose. What will be a 'building' depends on statutory purpose and context. Whether or not something is a 'building' which may satisfy subparagraph 14-250(2)(b)(ii) is a matter of fact and degree. To be a 'building' there must be a substantial structure having a roof, floor and walls which provides protection from the elements. It must be of sufficient permanence and be installed on and integrated to the site in question. Prefabricated and transportable structures may qualify, but a common metal shed without more does not meet these requirements.

In this case, the properties sold are vacant residential land. There were no improvements or structures on the properties at the time of sale. As a result, the land would be classed as potential residential land.

As the properties were purchased as part of an enterprise being carried on and sold by an entity in the course of that enterprise, the supplies of the properties are taxable supplies in accordance with section 9-5.