Edited version of private advice

Authorisation Number: 1052073804747

Date of advice: 22 December 2022

Ruling

Subject: GST and sale of residential premises

Question

Will you be liable for GST on your sale of the property situated in the indirect tax zone under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No.

Relevant facts and circumstances

Person A (You) are not registered for GST.

On DD/MM/YYYY, your self-managed superannuation fund (SMSF) purchased a vacant block of land over two titles (the Land) for investment purposes. The Land was purchased as Certificate of Title Volume X Folio X (approximately X square metres) and Certificate of Title Volume X Folio X (approximately X square metres).

A boundary realignment was undertaken and the titles converted to Certificate of Title Volume X Folio X and Certificate of Title Volume X Folio X each approximately X square metres.

The cost base of the Land was $X.

The residential addresses for each title allotment are as follows:

• Certificate of Title Volume X Folio X: Property A
• Certificate of Title Volume X Folio X: Property B

The intentions for the use of the Land changed and it was decided to no longer use it for investment purposes, so the Land was transferred out of the SMSF into your name via an in-specie distribution on DD/MM/YYYY.

Your intention for the use of the Land at that time was to build a house on Property A and Property B.

One house was going to be for you and your spouse to live in and the other was going to be for your two children to live in.

Construction of the two houses commenced on DD/MM/YYYY.

Your family trust paid the construction costs on your behalf as repayment of amounts owing to you. The cost of building each house was approximately $X. Construction was completed on DD/MM/YYYY. Each house is estimated to be valued at $X.

The houses are both two-storey townhouses that are approximately X square metres in size. They each comprise of X bedrooms, an open plan kitchen, dining, living area, X bathrooms, a powder room, upstairs balconies and a double garage. Both properties are zoned residential.

You provided a floorplan of both houses on the Land.

When construction of the houses was completed on DD/MM/YYYY, your two children were both interested in moving in and you decided you would prefer to stay in the family home.

Your two children each live in one of the two properties. Property A has been occupied by your child since completion in YYYY. Property B was vacant for some time and is now occupied by your other child (moved in late YYYY). You do not receive rent from your children and the properties are still owned by you. The properties have never been rented or listed for rent and you do not have any intentions currently to lease the properties.

Your child living in Property A would like to move and you wish to sell this property to contribute funds towards the purchase of their new home. There is currently no intention to sell Property B.

You have not engaged in activities relating to the subdivision and/or development of property in the past and you do not intend to engage in similar activities in the future.

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

Reasons for decision

Section 9-40 provides that you are liable to pay GST on any taxable supply that you make.

Section 9-5 provides that 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 (Australia); and

(d)   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.

In this case, the supply of Property A (if settled) will be for consideration. Such consideration will consist of the sale price specified in the sale contract for the property. Hence, the first requirement of a taxable supply listed above will be met. As the property is located in Australia, the third requirement of a taxable supply will also be met.

The issue in this case is whether your supply of Property A is in the course or furtherance of an enterprise that you carry on (second requirement). If so, as you are not registered for GST, we will consider whether you are required to be registered (fourth requirement). All four requirements must be satisfied for a supply to be a 'taxable supply' (subject to the negative limbs of section 9-5).

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 series of activities done:

(a)   in the form of a business; or

(b)   in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Subsection 9-20(2) specifically excludes a number of activities from being an enterprise including, among other things, an activity, or series of activities done:

•          as a private recreational pursuit or hobby; or

•          by an individual or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain.

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 guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of 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 guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business 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.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' 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.

Paragraph 266 of MT 2006/1 provides in part that 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 and there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Paragraphs 271 to 287 of MT 2006/1 set out examples of subdivisions that are enterprises whilst paragraphs 288 to 302 set out examples of subdivisions that are not enterprises.

Example 32 in paragraphs 288 to 290 of MT 2006/1 illustrates a scenario with some similarities to the circumstances in your case:

Example 32

288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live.

289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house.

290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter.

In your case, you constructed Property A (and Property B) for private purposes. Originally one of the townhouses was to be used as your principal place of residence for you and your spouse and your children would reside in the other townhouse. The situation changed which resulted in you and your spouse remaining in your existing residence. Each of your children subsequently moved into a townhouse each.

You have not charged or received rent from your children since construction was completed and they moved into the townhouses. The child currently residing at Property A is contemplating moving out and you are considering selling the house to help purchase their new property.

The construction of the townhouses did not possess any commerciality or profit-making intention and as in Example 32 above, is part of a private or domestic arrangement within your family to provide suitable accommodation and assistance to your children.

Given the facts, we consider your activities were done for personal reasons and without a reasonable expectation of profit. Should you sell Property A, we consider the sale will not be made in the course or furtherance of an enterprise that you carry on. On this basis, paragraph 9-5(b) is not satisfied.

Section 23-5 provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000 for businesses (and $150,000 for non-profit entities). As you are not considered to be carrying on an enterprise you are not required or entitled to be registered for GST.

Conclusion

You will not have a liability for GST pursuant to section 9-40 should you sell Property A.