Edited version of private advice

Authorisation Number: 1052137082778

Date of advice: 7 July 2023

Ruling

Subject: GST - property

Question 1

Was the property, a new residential property in accordance with section 40-75 when sold on 1 June 2022?

Answer 1

Yes. The property qualified as a new residential premises in accordance with section 40-75.

Question 2

Will the sale of the property be a taxable supply in accordance with section 9-5?

Answer 2

No. The sale of the property will not be a taxable supply.

This ruling applies for the following period:

Financial year ending 30 June 2022

The scheme commences on:

The date the notice of decision of private ruling issued.

Relevant facts and circumstances

•         You purchased vacant land, built a residential premises on the land and proceeded to lease the completed property once completed.

•         Your intention when building and leasing the property was to keep the property as an investment to generate income.

•         You decided to sell the property due to not being able to pay the mortgage.

•         The property was sold.

•         The property was less than 5 years old. When sold.

•         You don't hold an Australian Business Number (ABN).

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 40-75

Reasons for decision

Under section 40-75 a new residential premises is defined as:

1.    Residential premises are new residential premises if they:

a)    Have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject to 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.

Paragraphs (b) and (c) have effect subject to paragraph (a).

2.    However, the residential premises are not new residential premises if, for the period of at least 5 years since:

a)    If paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

b)    If paragraph (1)(b) applies - the premises were last substantially renovated; or

c)    If paragraph (1)(c) applies - the premises were last built;

The premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

In this case, the property was newly constructed and was leased from that date until sold. As the property had never before been sold as a residential premises, and it had not been leased for a period of more than 5 years, the property qualified as a new residential premises under section 40-75.

Next, we have to determine whether the sale of the property would be a taxable supply under section 9-5.

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

1.    is made for consideration; and is made in the furtherance of an enterprise being carried on; and

2.    is made in the furtherance of an enterprise being carried 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 property sold was located in the indirect tax zone and the supply was for consideration. Therefore, the sale of the property would satisfy two elements outlined above (1&3). Accordingly, we need to determine whether the other two elements (2&4) would be satisfied. If this were the case the sale of the property would satisfy all of the requirements under section 9-5 and would be a taxable supply.

You were carrying on a leasing enterprise and making input taxed supplies, but do not hold an ABN and are therefore not required to register for GST in relation to those supplies.

However, as the transaction of selling a property may be described as an isolated transaction, we also need to consider the extended definition of 'enterprise' and whether this activity falls in the form of 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 (MT 2006/1) provides guidance on the meaning of this expression.

An 'adventure or concern in the nature of trade' refers to transactions that have a commercial nature which are entered into for a profit-making purpose.

Paragraph 245 of MT 2006/1 refers 'the badges of trade' while paragraphs 247 and 257 consider the six badges of trade being:

•         The subject matter of realisation

•         The length of period of ownership

•         The frequency or number of similar transactions

•         Supplementary work on or in conjunction with the property realised

•         The circumstances that were responsible for the realisation; and

•         Motive.

The subject matter of realisation

You acquired the property as vacant land with the intention of building a residential property as an investment to lease long term. Due to financial difficulties you needed to sell to pay out the mortgage.

The property provides income under the lease and its nature is that of an investment asset.

The length of time of ownership

You purchased the land in June 2018 and the construction of the residential premises was completed in August 2019.

The frequency and number of similar transactions

You have never undertaken transactions of this nature in the past which involved the buying and selling of land or the development of land.

Supplementary work on or in connection with the property realised

The property has been leased since it was completed.

The circumstances that were responsible for the realisation

You have decided to sell the property in order to pay out the mortgage due to financial difficulties.

Motive

The motive for acquiring the property was as an investment and the subsequent leasing of the property supports this intention. You are only selling due to financial difficulties. Although a profit may result from the sale of the property, your intention in relation to the property shows that, on an objective assessment, the property never had the characteristics of a trade asset.

Conclusion

Given the above, we do not consider that the activity of selling the property would constitute an adventure or concern in the nature of trade and, as such, was not sold in connection with an enterprise being carried on by you. Therefore, the sale of the property does not meet the requirements under section 9-5 and was not a taxable supply.