Edited version of private advice

Authorisation Number: 1052192130666

Date of advice: 14 November 2023

Ruling

Subject: GST - property

Question

Will the sales of <address 1> and <address 2> (Duplex 1 Units), be taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following period:

DD/MM/YYYY to DD/MM/YYYY

The scheme commenced on:

DD/MM/YYYY

Relevant facts and circumstances

Person A and Person B, collectively referred to as 'you', are not registered for GST as a partnership or individually, nor have you been registered for GST in the past.

On DD/MM/YYYY, you purchased a property located at <address> (the Property) for <amount>. The Property included a dwelling (house) and was not acquired as a taxable supply.

You purchased the Property with the intention of demolishing the existing house, building two duplexes comprising two residential dwellings each and leasing all four units on a long-term basis.

You leased the Property between MM/YYYY to MM/YYYY. During this time you also engaged various service providers to undertake the relevant design and approval processes for the construction of the duplexes.

The demolition of the existing house commenced on DD/MM/YYYY.

The new residential premises are described as Duplex 1 Units and Duplex 2 Units.

You have provided a breakdown of the expenses incurred for the subdivision and development.

Duplex 2 Units

To finance the construction of the Duplex 2 Units, you refinanced your existing home loan for your main residence.

The construction of the Duplex 2 Units commenced on DDMMYYYY and an Occupation Certificate has been issued.

Both of the Duplex 2 Units are currently tenanted under leases. You do not intend to sell the Duplex 2 Units. The Duplex 2 Units are not the subject of this private ruling.

Duplex 1 Units

To finance the construction of the Duplex 1 Units, you took out an investment loan for <amount>. Your Broker stated in your loan application that you will be receiving rental income from your investment properties upon completion of both dwellings (Duplex 1 Units).

The loan was approved on DDMMYYYY. The facility was interest only until the final construction payment was made on DDMMYYYY, at which point, the loan changed to principal and interest. The total loan term is <years>.

The construction of the Duplex 1 Units commenced on DDMMYYYY and an Occupation Certificate has been issued.

Since MMYYYY, you have observed the rises in interest rates and cost of living more generally. The change in the financial and economic environment forced you to reconsider your original intention to hold all four dwellings for long-term investment purposes.

In MMYYYY, you made a decision to sell both of the Duplex 1 Units, as the interest rate on the loan had risen to an unsustainable level.

On DDMMYYYY, you engaged a real estate agent to sell the Duplex 1 Units.

On DDMMYYYY, you executed a Sales Contract for the sale of <address> (Duplex 1 Unit A). The Sales Contract provides that:

•         the supply is subject to vacant possession

•         the sale is not a taxable supply

•         the margin scheme will not apply

•         the sale is input taxed because the sale is of eligible residential premises (sections 40-65, 40-75(2) and 195-1)

•         the supply will be for consideration of <amount>.

On DDMMYYYY, you executed a Sales Contract for the sale of <address> (Duplex 1 Unit B). The Sales Contract provides that:

•         the supply is subject to vacant possession

•         the sale is not a taxable supply

•         the margin scheme will not apply

•         the sale is input taxed because the sale is of eligible residential premises (sections 40-65, 40-75(2) and 195-1)

•         the supply will be for consideration of <amount>.

The Duplex 1 Units have not been and will not be leased prior to sale.

You currently own one other property which is your principal place of residence. You have not been involved in any previous subdivisions or property development activities (individually or as a partnership).

You do not have any intention to undertake similar development 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 23-5

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

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

Reasons for decision

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 states that you make a taxable supply if:

(a)  you make the supply for *consideration

(b)  the supply is made in the course or furtherance of an *enterprise that you *carry on

(c)   the supply is *connected with the indirect tax zone

(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.

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

There are no provisions in the GST Act under which your sales of the Duplex 1 Units will be GST-free.

Subsection 40-65(1) provides that a sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominately for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) provides the sale of real property 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.

Subject to subsection 40-75(2), residential premises are new residential premises, as defined in subsection 40-75(1), if they:

(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.

As the Duplex 1 Units are newly constructed and have not previously been sold as residential premises or the subject of a long term lease, they are new residential premises. Accordingly, we need to determine if they will be supplied by way of a taxable supply.

In this case, your sales of the Duplex 1 Units will be made for arm's length consideration and are located in the indirect tax zone (Australia). As such, we need to consider whether the sales will be made in the course or furtherance of an enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered.

In the course or furtherance of an enterprise

The term 'enterprise' is defined for GST purposes in section 9-20.

Subsection 9-20(1) provides, amongst other things, that an enterprise is 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.

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.

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 303 to 322 of MT 2006/1 discuss activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents.

The leasing of a property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes under paragraph 9-20(1)(c). This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

In this case, you purchased the property located at <address> (the Property) on DDMMYYYY.

You leased the Property between MMYYYY to MMYYYY, whilst concurrently undertaking preparatory activities to demolish the existing house and construct two duplexes for the purpose of leasing.

Your leasing activities constitute an 'enterprise' in accordance with paragraph 9-20(1)(c).

The construction of the Duplex 1 Units was done with the intention of developing them for leasing purposes, and so is a continuation of your leasing enterprise.

Consequently, your sales of the Duplex 1 Units will fall within the scope of being made in the course or furtherance of an enterprise that you carry on, satisfying paragraph 9-5(b).

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 (in your case the threshold is $75,000).

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 the Duplex 2 Units is not included in the calculation of your current or projected GST turnover.

Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

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

(b)    any supply made, or 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.

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) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

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 MT 2006/1 contain guidance on the distinction between trading/revenue assets and investment/capital assets. While MT 2006/1 discusses these principles in the context of entitlement to an ABN, these principles have equal application to determining whether the sale of something is a revenue or capital asset for GST registration purposes. Paragraphs 258 and 259 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.

As outlined in the facts, your original intention was to lease all four units on a long-term basis. However, given the rising interest rates and cost of living pressure, you decided to sell the Duplex 1 Units.

Although a profit may result from the sale of the Duplex 1 Units, your initial use of the Property and the subsequent development of the Property, does not show that your intention was to construct and sell the Duplex 1 Units for a profit. This is also supported by your Broker's comments in your loan application that you will be receiving rental income from the investment properties upon completion of both dwellings (the Duplex 1 Units). The timing of your decision to sell the Duplex 1 Units is coincident with a significant increase in interest rates. During the construction phase, you did not register for GST and you have not claimed any input tax credits. Additionally, we note the term of the construction loan is X years. This also supports your initial intention to continue to hold the Duplex 1 Units for a prolonged period of time, as opposed to them being trading assets.

Taking into account the facts of this case, we consider the sales of the Duplex 1 Units constitute the transfer of capital assets for the purposes of section 188-25 and are therefore disregarded when calculating your projected GST turnover.

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

Your supplies of the Duplex 1 Units will be made in the course or furtherance of an enterprise you carry on, made for consideration and the properties are located in Australia. However, you are neither registered, nor required to be registered for GST.

Consequently, you will not be making taxable supplies when you sell the Duplex 1 Units and GST will not be payable on the sales.