Edited version of private advice

Authorisation Number: 1052098100571

Date of advice: 15 March 2023

Ruling

Subject: GST and CGT - transfer of title in property

Question 1

Will GST be payable on the supplies of Property A and Property B under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Is the consideration to be paid by an associated entity for the transfer of titles for Property A and Property B ordinary income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will CGT event A1 arise as a result of the transfer of property titles to an associated entity?

Answer

Yes.

Question 4

Is any capital gain or loss you make due to the transfer of titles to an associated entity disregarded?

Answer

Yes.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

On DD MM YYYY, Person A (You) signed an expression of interest to purchase vacant land located at XXXX. You paid a deposit to reserve the lot.

The property is a corner block at the intersection of XXXX and XXXX and the size of the land is Xm².

A contract for the purchase of the land was entered into on DD MM YYYY for XXXX. Settlement of the sale occurred on DD MM YYYY. You are the sole owner of the property.

Your original intention when you acquired the land was to build a duplex and rent the units (the Units) out on a long-term basis for a positive return on investment.

To finance the development, you and your spouse, Person B, took out a loan with XXXX. The loan term is X years with X years of interest only repayments followed by interest and principal repayments for the remainder of the loan term.

You and your spouse also obtained a loan from Lender B for XXXX, using equity extracted from your family home located at XXXX. The loan term is X years with X years of interest only repayments followed by interest and principal repayments for the remainder of the loan term.

On DD MM YYYY, you entered into a contract with a builder to construct the Units for XXXX Following negotiations, a variation to the contract was signed on DD MM YYYY, with construction costs increased by XXXX.

A Development Application was lodged with the Council on DD MM YYYY for dual occupancy and strata subdivision. The Council approved the plans on DD MM YYYY.

On DD MM YYYY, you applied to the Council for a Subdivision Certificate for two lots known as Property A and Property B.

Construction of the Units was completed in MM YYYY and Occupation Certificates have been issued.

Each unit has X bedrooms, X bathrooms, a kitchen, living/dining area, alfresco and a garage.

The Units were advertised for rent on DD MM YYYY.

On DD MM YYYY, you entered into residential tenancy agreements to lease each of the Units for XXXX per week, starting DD MM YYYY. You and your spouse are both listed as landlords on the tenancy agreements.

You have sought advice from several mortgage brokers concerning your serviceability to acquire another similar investment for long term hold and rent. Some mortgage brokers indicated to you that you could only borrow up to an additional XXXX. Another mortgage broker indicated to you that you could sell the Units to a separate associated trust or company to increase your borrowing capacity. This would then allow you to acquire another property for development and investment.

Provided your finances are approved and once the subdivision has been finalised, you are proposing to transfer each of the Units to a separate newly created associated entity set up by your Tax Agent in the form of a Trust or a Company (one entity for each property). You intend to complete both transfers within XXXX.

The existing lease agreements will also be transferred to the newly created entities.

The newly created entities will not be registered for GST or required to be registered for GST.

Your primary purpose for transferring the Units is to increase your personal borrowing capacity.

You have been advised that there will be capital gains tax and stamp duty on the transfer of the assets from your name to an associated entity.

If you choose to transfer the titles in the properties to a Company, you will own X% of the shares of the Company immediately after the transfer.

You will receive ordinary shares from company in consideration for the property titles.

You will choose the roll over under Subdivision 122-A of the ITAA 1997 in respect of the transfer of the property to the company.

You do not have an ABN and you have never been registered for GST.

You have not claimed any input tax credits for the development of the Units.

You have never held any other investment properties or development assets in your own name.

You have not undertaken any business of buying and selling land or property development in the past.

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 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

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

A New Tax System (Goods and Services Tax Act) 1999 section 188-10

A New Tax System (Goods and Services Tax Act) 1999 section 188-15

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

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

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 116-10(2)

Income Tax Assessment Act 1997 subdivision 122-A

Income Tax Assessment Act 1997 section 122-15

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 section 122-25

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 section 122-40

Reasons for decision

Question 1

Section 9-40 provides that you are liable for GST on any taxable supplies 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.

Section 9-10 provides that a supply includes a grant, assignment or surrender of *real property or a creation, grant, transfer, assignment or surrender of any right. Accordingly, the transfer of the Units to an associated entity will come within the definition of a supply.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively.

In this case, there are no provisions in the GST Act under which the sale of the Units would be a GST-free supply.

We will now consider whether the supplies will be input taxed.

Subsection 40-65(1) states:

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 occupation).

However, subsection 40-65(2) provides that the sale is not input taxed to the extent that the residential premises are *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

New residential premises are defined in subsection 40-75(1) to mean premises that:

(a)          have not previously been 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.

Further, subsection 40-75(2) provides that premises is not new residential premises if the premises has only been used for making input taxed supplies because of paragraph 40-35(1)(a) for a continuous period of at least 5 years since:

(a)          the premises first became residential premises; or

(b)          the premises were last substantially renovated; or

(c)           the premises were last built, as applicable.

Paragraph 40-35(1)(a) refers to supplies that you make by way of lease, hire or licence will be input taxed where the supply is of residential premises, and not commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises.

In your case, the Units that you have built and are proposing to supply to an associated entity have not previously been sold as residential premises. Further, prior to the supply, the Units will not have been used for making input taxed supplies of residential rental for the period of at least 5 years since the premises first became residential premises. Therefore, the Units will be new residential premises. Accordingly, your supplies of the Units to the newly created entities will not be input taxed.

As you are not currently registered for GST, we will now consider whether you are required to be registered for GST.

Section 23-5 states that you are required to be registered for GST if:

(a)          you are *carrying on an *enterprise; and

(b)          your *GST turnover meets the *registration turnover threshold (in your case the threshold is $75,000).

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 on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)).

The definition of 'carrying on' an enterprise can be found in section 195-1 of the GST Act:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

The leasing of a property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes. This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

As set out in the facts, you are the sole owner of the Units. Although you and your spouse are listed as joint mortgagors for the Units, you are the only person named on the title and therefore, the only person able to lease the Units and receive rent. We therefore consider that you are carrying on a leasing enterprise in your own right and not in partnership with your spouse.

Your activities of leasing and the subsequent supply of the Units are considered to be activities done in the course or furtherance of (including the termination of) your enterprise that you carry on. As such, your supply of the Units will satisfy paragraph 23-5(a).

GST registration

As discussed above, your activities fall within the scope of 'carrying on an enterprise', thus satisfying paragraph 23-5(a) above.

The next issue to consider is whether your GST turnover meets the registration turnover threshold of $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)           your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)           your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are not taken into account when calculating your current and projected turnovers respectively.

Section 40-35 provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) is input taxed.

Therefore, your turnover generated from the rental of your residential units is not included in the calculation of your current or projected GST turnover.

In addition, section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) provides relevant guidelines.

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

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

•                     any supply made, or likely to be made, by you solely as a consequence of:

-                      ceasing to carry on an enterprise; or

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

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53 of this Ruling.)

Note: the legislative reference of paragraphs 188-25(a) and 188-25(b) in paragraph 30 above refer to the first and second dot points respectively in paragraph 29 above.

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of GSTR 2001/7.

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. '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' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. 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 the character of an asset must be determined at the time of expected supply.

Paragraphs 258 and 259 of 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 contain guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

•                     Assets can be categorised as trading/revenue assets or capital/investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•                     Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Current GST turnover

As stated above, your 'current GST turnover' is the sum of the values of all of your supplies made in a particular month and the preceding 11 months, excluding, among other things, supplies that are input taxed.

In your case, the rental income received from the lease of the Units is an input taxed supply and therefore excluded from your GST turnover.

Based on the facts, your current GST turnover is $0 (which is below the GST registration turnover threshold) and it is relevant to determine your projected GST turnover pursuant to subsections 188-10(1) and 188-10(2).

Projected GST turnover

As stated above, your 'projected GST turnover' is the sum of the values of all of your supplies made in a particular month and the following 11 months, excluding, among other things, supplies that are input taxed or capital assets.

We are therefore required to determine whether the value of your supplies of the Units to the associated entities should be included in your projected GST turnover.

In your case, your original purpose for purchasing the vacant land located at XXXX was to build a duplex and rent the Units out on a long-term basis. You did not acquire the property as a trading asset for the primary purpose of resale.

Your sale of the Units will be excluded from the calculation of projected GST turnover as these supplies will be the sale of capital assets, being structural assets that make up the profit yielding subject of your leasing enterprise.

Taking into account the facts of this case, we consider the sale of the Units would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating your projected GST turnover.

You are not carrying on any other enterprise aside from leasing residential premises and the sale of the Units.

Given the above, your GST turnover does not meet the $75,000 registration turnover threshold. Therefore, you are not required to be registered for GST under section 23-5.

Conclusion

On the basis of the facts provided, you are neither registered nor required to be registered for GST; therefore, your supply of the Units to the newly created entities will not be taxable supplies and GST will not be payable on these supplies.

Question 2

Section 6-5 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Ordinary income generally includes income that arises in the ordinary course of a taxpayer's business. However, in certain circumstances proceeds not within the ordinary course of the taxpayer's business may form part of their ordinary income.

The transfer of the property titles is outside the ordinary course of the activities from which you derive your income, and you have no experience as a property developer. Therefore, the activity under consideration would be best described as an isolated transaction.

The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693)(MyerEmporium case).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

•                     those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•                     those transactions entered into by non business taxpayers.

Paragraph 8 of the ruling explains that it is not necessary that the intention or purpose of profit-making be the sole or even the dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Paragraph 15 of TR 92/3 provides that if a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayer's business but

•                     the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

•                     the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

At paragraphs 56 and 57 the ruling explains that a profit is income where it is made in any of the following situations:

•                     a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose,

•                     or a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit, or

•                     a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) and McCorkell v FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell's case) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

In applying these principles to your case, the following facts have been considered:

•                     You have not been involved in any property development previously.

•                     The activity is designed only to enable you to increase your borrowing capacity for future investment and that there was no intention to make a profit.

•                     The properties were acquired with the intention of long-term rental.

In your case, the original plan was to acquire land for the purpose of building a rental property for long term investment. You have stated that the only reason for the proposal to transfer the titles to a Company is to enable you to increase your borrowing capacity with a view to acquiring in the future further investment properties.

As a consequence, the proceeds from the transfer of the titles to the Company will not be considered to be ordinary income under section 6-5.

Question 3

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that you can make a capital gain or loss if and only if a capital gains tax (CGT) event happens to a CGT asset that you own.

A capital gain or a capital loss may arise if a CGT event happens to a capital gains tax asset. A CGT asset is any kind of property, or a legal or equitable right that is not property (Section 108-5).

The disposal of a property causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity.

In your case, when the title is transferred by you to the associated entity, CGT event A1 will happen.

The market value substitution rule takes effect if you do not deal at arm's length with another entity in connection with the event. This also applies in your case as you have not received any capital proceeds from the CGT event. The market value substitution rule, broadly, is when the capital proceeds are replaced with the market value of the asset (sub-section 116-10(2)).

In your situation, you will be taken to have received the market value for your interest in the property on the date you transfer the title to an associated entity and the other party will be taken to have paid the market value to you.

The cost base of a CGT asset consists of five elements:

1.             money or property given for the asset

2.             incidental costs of acquiring the CGT asset or that relate to the event

3.             costs of owning the asset

4.             capital costs to increase or preserve the value of your asset or to install or move it

5.             capital costs of preserving or defending your ownership of or rights to your asset.

Ordinarily you calculate the amount for each element and then add them all together to determine your cost base.

If you are affected by the market value substitution rule your cost base will need to be modified. The first element of your cost base is substituted with the market value of the asset at the time of the CGT event.

Question 4

Section 122-15 provides that an individual can choose to obtain a roll-over if a specified CGT event (including CGT event A1) occurs involving the individual and a company in the circumstances set out in sections 122-20 to 122-35. It should be noted that section 122-35 relates to the discharge of a liability, and is not relevant to the current scheme.

Where there is a disposal of a CGT asset, or all the assets of a business, to a company by an individual (event A1), subsection 122-20(1) requires that the consideration received by the individual for the CGT event must only be shares in the company, or shares in the company and the company undertaking to discharge liabilities in respect of the asset or assets (the current scheme does not include the discharge of a liability).

The shares received by the individual cannot be redeemable (subsection 122-20(2)), and the market value of the shares received from the disposal of the CGT asset must be substantially the same as the market value of the CGT asset disposed of (subsection 122-20(3)).

Section 122-25 also requires:

•                     the individual must own all the shares in the company just after the disposal of the CGT asset (subsection 122-25(1)),

•                     the CGT asset disposed of cannot be an excluded CGT asset under subsections 122-25(2) to (4) - such as collectables, personal use assets, bravery or valour awards, trading stock, registered emissions units, rights, options, convertible interests or exchange interests,

•                     the company must not be an exempt entity (subsection 122-25(5)), and

•                     relevantly, the individual and the company must both be Australian residents at the time of the disposal of the CGT asset (subsection 122-25(6)).

Under the proposed scheme, you will transfer the titles in the properties to a Company and will own X% of the shares of the Company immediately after the transfer.

The property titles are CGT assets for the purposes of section 108-5, and the transfer of the titles to the company will be a disposal of a CGT asset (CGT event A1) for the purposes of section 104-10.

You will receive ordinary shares from company in consideration for the property titles. The market value of the shares will substantially be the same as the titles you plan to transfer as the company will have no assets or liabilities other than the property titles.

As such, the roll-over in Subdivision 122-A will be available to you provided that the other requirements for the roll-over are satisfied.

The company is not an exempt entity, and the property titles are not excluded CGT assets for the purposes of subsections 122-25(2) to (4).

Following the transfer of the titles, you will be sole shareholder in the company. The company and you are Australian residents.

Conclusion

If you transfer the titles to the company as described, you will be able to choose the roll-over in Subdivision 122-A. Under subsection 122-40(1) any capital gain or loss from the disposal of the property titles to the company will be disregarded.