Edited version of private advice

Authorisation Number: 1052205712043

Date of advice: 19 December 2023

Ruling

Subject: GST - new residential premises

Question

Will your in-specie distribution of <address> (the Property), be a taxable supply 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 periods:

DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

<Entity B> is the corporate trustee of the <Entity A>.

<Entity A> (You) are a Self-Managed Superannuation Fund (SMSF). You are both a regulated and a complying SMSF within the meaning of the Superannuation Industry (Supervision) Act 1993.

You are not registered for GST.

<Person A> is the director of <Entity B> and is your sole member and beneficiary.

<Person A> has reached their preservation age and is neither registered, nor required to be registered for GST in their own capacity.

On DDMMYYYY, <Person A> acquired the property located at <address>.

After acquiring <address>, <Person A> operated their business from the premises. <Person A> also resided at <address> for a period of time until they moved out to live with their partner.

On DDMMYYYY, you acquired <address> from <Person A>. At the time of the acquisition, the property comprised an area of Xm² and contained a residential house.

Since acquiring <address>, you have leased the property to <Person A's> business at market value.

In YYYY, you made a decision to subdivide <address> into two lots and construct a new dwelling for <Person A> to live in during their retirement.

On DDMMYYYY, an application was made to <local council> for the construction of a dwelling, in addition to the existing dwelling and the subdivision of the land into two lots. The Planning Permit was issued on DDMMYYYY.

On DDMMYYYY, <address> was subdivided into two lots known as:

•         <address> (Lot 1) - comprising an area of Xm² and containing the existing dwelling

•         <address> (Lot 2) - comprising an area of Xm².

Your original intention when you decided to proceed with the development was to:

•         retain Lot 1 as an investment property

•         transfer Lot 2 (the Property) as an in-specie distribution to <Person A> once construction of the new dwelling was completed.

Construction of the new dwelling on the Property was completed on DDMMYYYY. The dwelling is a X bedroom house with bathrooms, a kitchen, a living area and a carport. An Occupancy Certificate was issued on DDMMYYYY.

On <date>, you will transfer the Property as an in-specie distribution in favour of <Person A>, as your sole member and beneficiary, if there is no GST payable on this supply. However, if GST is payable on the in-specie distribution, you will retain the Property as an asset in your name.

Your Trust Deed permits the transfer of assets in-specie.

The Property will be leased to an unrelated party prior to the in-specie distribution to <Person A>. You have advertised the Property for lease.

At the time of the in-specie distribution, the existing lease agreement will be transferred from you to <Person A>.

<Person A> intends to lease the Property for <period of time> before moving in.

The market value of the Property is <amount>.

You have not claimed any input tax credits for the subdivision and development of the Property.

You do not have any intention to undertake similar development activities in the future.

You will continue to lease Lot 1 to <Person A's> business.

Other than Lot 1 and Lot 2, your only other assets are minor shares in listed securities and cash at bank.

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 9-15

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 11-15

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 72-5

A New Tax System (Goods and Services Tax) Act 1999 section 72-10

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 1936 section 318

Reasons for decision

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 provides 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 (Australia)

(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 term 'supply' is defined in section 9-10 and includes any form of supply whatsoever. Paragraph 9-10(2)(d) further clarifies that a 'supply' includes a grant, assignment or surrender of *real property. Therefore, your in-specie distribution of the property located at <address> (the Property) to <Person A> is a supply.

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 the supply of the Property 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 Property is newly constructed and has not previously been sold as residential premises or the subject of a long term lease, it is new residential premises and as such, given the facts in this case, will not be an input taxed supply pursuant to section 40-65. Accordingly, we need to determine if the supply of the Property will be a taxable supply.

Consideration

'Consideration' is defined in subsection 9-15(1) to include any payment, or any act or forbearance, in connection with, in response to or for the inducement of, a supply of anything.

In the case of a discretionary trust, a beneficiary does not have a vested interest in either the income or the assets of the trust. The beneficiary merely has their right to demand that the trustee administers the trust according to the trust deed. As such, when the trustee makes a distribution, the beneficiary has no rights to surrender and gives no consideration. Given that a superannuation fund is considered to be a special type of trust, set up and maintained for the sole purpose of providing retirement benefits to its members (the beneficiaries), we consider that these principles can be applied to this case, when you make an in-specie distribution to <Person A>, as your fund member and beneficiary.

In this case, although the supply is not being made for consideration, a distribution you make may still be a taxable supply where Division 72 applies. Division 72 ensures that supplies to, and acquisitions from your associates without consideration are brought within the GST system and that the supplies to your associates for inadequate consideration are properly valued for GST purposes.

The term associate is defined in section 195-1 as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(3) of the ITAA 1936 categorises the types of entity capable of being an associate of a trust and includes any entity that benefits under the trust (a beneficiary).

Due to the operation of section 72-5, the fact that there is no consideration for a supply does not prevent it from being a taxable supply. Such supplies can be taxable if the supply is made to an associate of the supplier and:

(a)   your associate is not registered or required to be registered; or

(b)   your associate acquires the thing supplied otherwise than solely for a creditable purpose.

This section has effect despite paragraph 9-5(a) (which would otherwise require a taxable supply to be for consideration).

Section 11-15 provides that you acquire a thing for a creditable purpose if it is acquired in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose if it is used to make input taxed supplies or is of a private or domestic nature.

In your case, the beneficiary (associate) will be neither registered nor required to be registered for GST. Furthermore, the beneficiary will not acquire the Property for a creditable purpose. Consequently, if all of the requirements of section 9-5 are met, Division 72 will apply and your GST liability will be calculated as 1/11^th of the GST exclusive market value of the real property in question.

In the course or furtherance of an enterprise that you carry on

The term enterprise is defined for GST purposes in subsection 9-20(1) and includes, among other things, an activity or series of activities done:

(a) in the form of a business; or

(b) in the form of and 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; or

...

(da) by a trustee of a complying superannuation fund, or if there is no trustee of the fund, by the person who manages the fund.

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

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.

Based on the facts, you will be leasing the Property until the day of the in-specie distribution to <Person A>. Your leasing activities constitute an 'enterprise' in accordance with paragraph 9-20(1)(c).

Consequently, your supply of the Property via an in-specie distribution to <Person A> 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).

For completeness, the scope of paragraph 9-20(1)(da) is extensive in the sense that the activities done by a trustee of a complying superannuation fund are what forms the enterprise that they carry on.

The issue of whether the transfer of the Property is made in the course or furtherance of an enterprise that you carry on as required under paragraph 9-5(b) is discussed in Goods and Services Tax Determination GSTD 2009/1 Goods and services tax: is a supply by way of an in specie distribution of an asset that is applied in an enterprise carried on by a discretionary trust to a beneficiary of the trust made 'in the course or furtherance of' the trust's enterprise?

Paragraph 9 of GSTD 2009/1 states:

9. The application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise. The fact that the supply in question was made by way of an in-specie distribution rather than by sale does not alter the analysis. Entities can dispose of assets in a number of ways. The method of itself is not relevant to whether the supply is in the course or furtherance of the enterprise.

As you are a complying superannuation fund, you are carrying on an enterprise through your trustee for GST purposes under paragraph 9-20(1)(da). Your activities in subdividing, developing and transferring the Property to <Person A> fall within the scope of being made in the course or furtherance of an enterprise that you carry on, satisfying paragraph 9-5(b).

Connected with the indirect tax zone

The Property is connected with the indirect tax zone as it is located in Australia.

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. In this case, your supply of residential premises at <address> by way of lease is an input taxed supply pursuant to section 40-35 (regardless of the use of the premises by the tenant). Your supply of the Property by way of lease will also be in input taxed supply under section 40-35.

Therefore, the values of your supplies by way of leasing of these premises are not included in calculating your current and projected turnover.

In this case we consider your current GST turnover is not, at or above, the registration turnover threshold of $75,000.

In your case, it is now relevant to determine if your projected GST turnover is at or above $75,000 pursuant to paragraph 188-10(1)(b).

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 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 supply of the Property to <Person A>, should be included in your projected GST turnover.

In your case, you acquired <address> as an investment property. You did not acquire the property as a trading asset for the purpose of resale.

During the construction phase of the Property, you did not register for GST and you have not claimed any input tax credits.

Whilst it was, and still is your intention to transfer the Property to <Person A> for them to live in during their retirement, you will lease the Property to an unrelated party prior to the in-specie distribution to <Person A>.

Taking into account the facts of this case, we consider the transfer of the Property will constitute the transfer of a capital asset for the purposes of section 188-25 and is 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

On the basis of the facts provided, your supply of the Property will not satisfy all the requirements of section 9-5 and will therefore not be a taxable supply. Consequently, GST will not be payable on the supply. This is provided that you do not voluntarily register for GST before the time of the supply.