Edited version of private advice

Authorisation Number: 1052185042339

Date of advice: 9 November 2023

Ruling

Subject: GST - sale of real property

Question 1

Will the sale of the property be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of the property will not a taxable sale pursuant to section 9-5.

Question 2

Is the acquisition date of the land and building the date you signed the contract for sale for the land on >date<?

Answer

Yes.

Question 3

Are you entitled to use the CGT discount method upon the disposal of the property when calculating the net capital gain?

Answer

Yes.

This ruling applies for the following periods:

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

1 July 2025 to 30 June 2026

1 July 2026 to 30 June 2027

1 July 2027 to 30 June 2028

The scheme commences on:

The date this ruling is issued.

Relevant facts and circumstances

You purchased a vacant block of land.

Your intention was to build a new house on the vacant land and on completion rent it out.

Due to the rise in interest rates, you are considering selling the house once construction has been completed.

You obtained a loan to finance the construction of the house.

The loan was secured by a registered mortgage over the property.

Paragraph 8 of the loan contract states the purpose of the loan is for the purpose of "Construction Investment House Under Construction".

You have not been involved in any previous subdivision or development activities.

You do not have an Australian Business Number (ABN) and are not registered for GST.

You signed a contract with your builder to build a new house on the land.

You only involvement in the build of the new house, was the owner obligations activities set out by the builder such as picking colours etc.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

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 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(2)

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75 (1)

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for >Name<.

This is to explain how we reached our decision. This is not part of the private ruling.

In this ruling,

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

Will the sale of the Property be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

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

Detailed reasoning

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 being carried 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.

Sale of residential premises

Under subsection 40-65(1), a sale of real property to be used predominately for residential accommodation (residential premises) is input taxed.

However, subsection 40-65(2) states that the sale is not input taxed to the extent that the residential premises are:

(a)  *commercial residential premises, or

(b)  *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything that is acquired to make the supply.

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

New residential premises is defined in section 40-75.

Subsection 40-75(1) states:

*Residential premises are new residential premises it they:

(a)  have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of 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 build, to replace demolished premises on the same land.

The proposed sale of the Property satisfies the definition of new residential premises as it has not previously been sold as residential premise therefore, what remains to be determined is whether your sale of the property will be in the course or furtherance of an enterprise that you carry on at the time of the sale and whether you are required to be registered for GST.

In the course or furtherance of 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 in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase '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 an 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 Australian Business Number (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 in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on 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.

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. Paragraphs 245 and 246 of MT 2006/1 refer to 'the badges of trade'. Paragraphs 247 to 257 follow outlining a number of factors (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.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. 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.

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

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.

The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

•         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 isolated transactions 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.

Application to your situation

In this case, you acquired the vacant land with the intention of constructing a house to be retained as an investment to generate rental income. You have not been involved in property development or subdivision previously and due to the upward movement in interest rates you are now considering selling the property when construction is complete.

Therefore, we do not consider your activities to constitute an adventure or concern in the nature of trade and as such not an "enterprise" for the purposes of GST. Therefore, the intended sale of the property would be considered a mere realisation of a capital asset.

GST Registration

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 (currently $75,000).

As we have determined you are not carrying on an enterprise when you sold the property, you would not be required to be registered for GST.

Conclusion

As discussed above, the sale of your property will not be done in the course or furtherance of an enterprise you carry on and you are neither registered nor required to be registered for GST. All of the requirements of a 'taxable supply' as listed above have not been met. Therefore, the sale of your property is not a 'taxable supply' as defined in section 9-5 and GST will not apply to the sale.

Question 2

Is the acquisition date of the land and building the date you signed the contract of sale for the land on >Date<?

Summary

Yes.

Detailed reasoning

What date was the land acquired?

Generally, the acquisition date for a CGT asset is when you become the owner of the asset, for example when you purchase it.

However, a common situation where the acquisition date might differ from the date you become the owner is when you buy an asset under contract and do not take immediate possession. This commonly happens with real estate, and in these cases, the acquisition date is the date on the contract, not when you settle.

Section 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you acquire a CGT asset when you take ownership of it. In particular, subsection 109-5(2) of the ITAA 1997 states that you acquire the asset at the time you enter into the contract.

In your situation, given you signed the purchase contract for the land on >Date<, you will be taken to have acquired the land on this date for CGT purposes.

Is the new building a separate CGT asset?

The common law principle is that anything attached to land becomes part of the land. Therefore, the land and building are a single asset.

However, exceptions to the common law principle that anything attached to land becomes part of the land are set out in Subdivision 108-D of the ITAA 1997.

In particular, section 108-55 of the ITAA 1997 sets out when a building is to be treated as a separate asset from land, and broadly, a building will be treated as a separate asset from the land to which it is affixed if the building is an asset for which a balancing adjustment must be worked out on sale, or the building is post-CGT and the land to which it is affixed is pre-CGT.

In your situation, neither of these exceptions apply and therefore, the land and building will be a single 'post-CGT asset' that comprises both the land and the building.

The cost base and reduced cost base of the building can be added to the cost base and reduced cost base of the land (see subsection 112-25(4) of the ITAA 1997).

Accordingly, a single capital gain or capital loss must be calculated on the sale of the land and building.

In addition, the acquisition date for the land and new building (when completed) will be the date you signed the purchase contract for the land on >Date<.

Question 3

Are you entitled to use the CGT discount method upon the disposal of the property when calculating the net capital gain?

Summary

Yes.

Detailed reasoning

CGT discount

Division 115 of the ITAA 1997 sets out the requirements for a capital gain to be a discount capital gain. Relevantly, to be a discount capital gain:

•         the gain must be made by, an individual, a complying superannuation entity, a trust, or a life insurance company (section 115-10 of the ITAA 1997)

•         the CGT event must happen after 11.45am on 21 September 1999 (section 115-15 of the ITAA 1997)

•         the cost base must be calculated without reference to indexation (subsection 115-20(1) of the ITAA 1997), and

•         the CGT asset must have been acquired at least 12 months before the CGT event (subsection 115-25(1) of the ITAA 1997).

In your case:

•         the requirements of section 115-10 of the ITAA 1997 are met because you are an individual.

•         the requirements of section 115-15 of the ITAA 1997 are met because the CGT events for the sale will happen after 21 September 1999.

•         the requirements of section 115-20 of the ITAA 1997 are met because the cost base of the vacant land lot is not eligible to be indexed, given that you acquired the property after 21 September 1999.

•         the requirements of section 115-25 of the ITAA 1997 are met because the respective interests in the vacant land lot were acquired by you more than 12 months before the time of the CGT event.

As such, you are entitled to use the discount method when calculating the net capital gain upon the disposal of the property.