Edited version of private advice

Authorisation Number: 1052089899523

Date of advice: 27 February 2023

Ruling

Subject: GST and sale of new residential premises

Question

Will the sale of one duplex which originally formed part of an existing residential property be a taxable supply in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and as a consequence would you be required to register for goods and services tax (GST)?

Answer

Yes.The sale of one duplex will be a taxable supply in accordance with section 9-5 of the GST Act and as a consequence you will be required to be registered for GST.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences:

The date this ruling is issued.

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have an Australian Business Number (ABN) however you are not registered for the GST.

You purchased the property containing an existing house which is your principal place of residence and you have lived there ever since purchase.

After living at the property for X years, you are looking at demolishing the existing house and building a duplex.

You will sell one duplex off-the-plan to reduce your financial burden.

You will appoint a builder who will manage all trades and the project.

You will work with your town planner and architect to submit plans.

You intend to fund the development through borrowed funds via bank loan.

You have not been involved previously in any subdivisions or development activities.

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 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 section 188-20(a)

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

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

(a)  is made for consideration; and

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

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

(d)  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 your case, the proposed sale of the duplex will be made for consideration. The sale will be connected with the indirect tax zone as the duplex is located in Australia. Therefore, the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act above will be satisfied.

What we need to determine is whether the proposed sale of the duplex will be made in the course or furtherance of an enterprise that you carry on [paragraph 9-5(b)] and whether you are required to be registered when you sell the unit [paragraph 9-5(d)].

Whether the sale will be made in the course or furtherance of an enterprise that you carry on

In accordance with section 9-20 of the GST Act, an enterprise includes, amongst other things:

•         an activity or series of activities done in the form of a business

•         an adventure or concern in the nature of trade

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 provides guidance on what activities will amount to an enterprise.

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 for GST purposes.

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.

In your case, your intention to demolish the existing house, subdivide the land and build a duplex and sell one off-the-plan will be activities of an isolated transaction. We must determine if these activities will be of an adventure or concern in the nature of trade (profit-making undertaking or scheme), or whether they are the mere realisation of a capital asset.

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

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 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making undertaking or scheme. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

These factors are as follows:

•         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.

In determining whether activities relating to an isolated transaction 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. 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. 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.

In your case, you purchased the property containing an existing house. This has been your principal place of residence. There will be change in purpose for which you held the property as you intend to demolish the existing house and subdivide the land. There is a level of development beyond that is necessary to secure council approval as you intend to build a duplex on the property. You will work with your town planner and architect to submit plans and appoint a builder to manage all trades. You intend to obtain funding via a bank loan for the development. You intend to sell one duplex off-the-plan to reduce your financial burden and the other duplex will be remain as your principal place of residence.

Example 29 in MT 2006/1 provides an example which is similar to your situation:

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

Based on the information that you provided, we consider that your intended activities that will lead to the sale of the duplex amount to an adventure or concern in the nature of trade; thus, you will be carrying on an enterprise as defined in section 9-20 of the GST Act. The sale of the duplex will be in the course of an enterprise that you carry on thus the requirement in paragraph 9-5(b) will be satisfied.

As you are not currently registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to your activities.

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that you are required to be registered if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for a non-profit body).

According to subsection 188-10(1) of the GST Act, your GST turnover meets a particular turnover threshold if:

(a)  your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b)  your project GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Section 188-25 of the GST Act provides that in working out your projected GST turnover, disregard:

(a)  any supply made, or are likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)  any supply made, or are likely to be made, by you solely as a consequence of:

                      i.        ceasing to carry on an enterprise; or

                     ii.        substantially and permanently reducing the size or scale of an enterprise.

Generally, the term 'capital assets' refers to the profit yielding subject of an enterprise. Capital assets can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income.

Capital assets are distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of an enterprise.

Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

You purchased the property in XXXX and you are looking to demolish the existing house and build a duplex. While you are keeping one to live in, you do not intend to hold onto the other duplex as an investment asset and you will not use it as a capital asset to produce income. The other duplex will be a revenue asset at the time of sale. Therefore, the sale of the duplex is not disregarded in calculating your projected GST turnover.

Under paragraph 188-20(a) of the GST Act, input taxed supplies are also disregarded in calculating your projected GST turnover.

Section 40-65 of the GST Act provides that 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 occupancy). However, the sale of 'new residential premises' is not input taxed.

Residential premises are 'new residential premises' if they:

(a)  have not been previously sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease; or

(b)  have been created through substantial renovations of a building; or

(c)   have been built, or contain a building that has been built, to replace demolished premises on the same land.

The duplex that you intend to sell will be new residential premises; thus, the sale will not be input taxed. The sale will be included in calculating your projected turnover.

It is reasonable to assume that the sale of the duplex will be more than $75,000 and your projected GST turnover will be above the threshold; as such, your GST turnover will meet the registration turnover threshold. Paragraph 23-5(b) of the GST Act will be satisfied and you will be required to register for GST.

The sale will not be an input taxed supply as determined above. There is no provision in the GST Act under which the sale will be GST-free. Therefore, as all the requirements in section 9-5 of the GST Act will be satisfied, the sale of the duplex unit will be a taxable supply. Accordingly, you will be liable to pay GST on the sale.