Edited version of private advice

Authorisation Number: 1052210752106

Date of advice: 15 February 2024

Ruling

Subject: GST - sale of real property

This private ruling applies to the beneficiaries of the trust, the trustee and any future trustee for as long as the private ruling remains current.

Issue: GST

Question 1

Will you, Entity X, be making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you make a supply by way of sale of the properties known as unit numbers, located at address (the Properties) and will GST be payable on the sale?

Answer

No.

Issue: Capital v revenue

Question 2

Will the proceeds from the sale of the Properties be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will the profit from the sale of the Properties be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997 as a result of the realisation of a capital asset?

Answer

Yes.

Relevant facts and circumstances

In this ruling, the expressions 'you', 'the X Family Trust', 'the Family Trust', 'the Trust' and 'the Trustee' refer to Entity X and are used interchangeably throughout the ruling.

You are a type of trust settled by deed dated DDMMYYYY.

Entity A is your sole trustee.

You were established to operate as an investment entity. It was intended that you would purchase land and construct residential properties on the land and derive income from renting.

You have not registered for GST currently or historically. You have also not registered for an Australian business number (ABN).

You acquired vacant land with an area of # sqm at address by contract dated DDMMYYYY which settled on DDMMYYYY and engaged Entity Y (an associated entity) to construct # units on the vacant land. Site preparation and drafting commenced in MMYYYY and the construction of the # units is currently near completion.

Entity B, spouse of Entity A, is the sole director and shareholder of the associated entity. Entity A has no role in the associated entity or its operations.

The associated entity trading as Entity Z is registered for GST and is constructing the units at arm's length.

The associated entity is a general builder who builds for third parties and is not a property developer or builder of speculative houses.

To finance the project, Entity A and Entity B borrowed money and loaned the funds to you on the same terms. Entity A also contributed substantial funds to make up your total financing needs.

It was planned that on completion of the construction the loans would be refinanced as investment loans and the Properties would be positively geared and provide a steady income stream.

As you were intending to hold the Properties as investments and rent them out, you did not register for GST as you did not consider yourself to be entitled to claim input tax credits in respect to the construction of the Properties (as they will be input taxed).

Your trustee has been unsuccessful in their efforts to refinance the loans associated with the Properties and is currently servicing the loans from their personal funds. In addition, the rental market has now softened, and the rental returns will not cover the outgoings for the Properties.

You did not anticipate the increase in interest rates or the softening of the rental market when investing in the land and subsequent construction.

As a result of the current economy, in particular the rising interest rates, you are considering disposing of the Properties in the year ended YYYY You did not engage in property development in the past or operate in any matter that is similar. You have not listed the units for sale or for lease at the time of this ruling.

The estimated completed cost of the project (including the land and construction costs) is $amount. Interest and other associated holding costs have also accrued since commencement of the trust totalling around $amount. With the Properties approaching completion at this stage, you believe the possible sale value will be around $amount each after costs.

You consider that based on the above figures and after associated agent costs there may be a small profit before GST is considered. If this sale price is achieved, then the outcome is likely to be a small loss if GST is applied.

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 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 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 section 104-5

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Entity X.

Issue: GST

Question 1

Will you, Entity X, be making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you make a supply by way of sale of the properties known as unit numbers, located at address (the Properties) and will GST be payable on the sale?

Detailed reasoning

In this reasoning, unless otherwise stated,

•         all legislative references are to the GST Act.

•         all legislative terms marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials published by the Australian Taxation Office (ATO) and referred to in this ruling are available on the ATO website www.ato.gov.au

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; 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.

In your case, you engaged in activities of acquiring land and developing # units with the original intention of leasing them. The construction of the # units is currently near completion and you decided to sell the # units instead.

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively.

Based on the facts, we consider Division 38 is unlikely to apply to your situation and Division 40 does not apply as you will be selling the units on completion or shortly thereafter. That is, you will not be making an input taxed supply in selling the units. You will be making a taxable supply if all the requirements specified in paragraphs 9-5(a) to (d) are met.

The Properties are located in Australia and your sale will be for consideration. That is, paragraphs 9-5(a) and (c) will be satisfied.

Paragraph 9-5(b) and (d) will be considered next.

The concept of an 'enterprise' is a fundamental GST concept. A supply cannot be a taxable supply made by an entity unless the supply is made in the course or furtherance of an enterprise that the entity carries on. In addition, an entity cannot be registered for GST unless it is carrying on an enterprise.

The definition of 'enterprise' has the meaning given by section 9-20.

Under subsection 9-20(1) an enterprise includes 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 the term 'carrying on' 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) explains when certain activities will amount to an enterprise.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 MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

MT 2006/1 includes the following guidelines:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

258. United Kingdom cases categorise assets as either trading assets or 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.

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

263. The issue to be decided is whether the activities 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...

265. From the Stathamand Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profitmaking undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

•       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.

266. 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.

Are you carrying on an enterprise? - paragraph 9-5(b)

Based on the information you provided, we consider the activities you engaged in, in purchasing the land and developing the # units for lease would have eventuated into a leasing enterprise. When you later decided to sell the developed units instead, we consider the activities you are carrying on in purchasing the land and developing the # units for sale constitute a one-off activity and not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities. Therefore, we will next consider whether your activities are done in the form of an adventure or concern in the nature of trade.

MT 2006/1 explains:

•         Assets can be categorised as either trading assets or investment/capital 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 (paragraph 258).

•         Examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere realisation of investment/capital assets does not amount to trade (paragraph 259).

•         The mere realisation of a capital/investment asset is not a business or an adventure or concern in the nature of trade (paragraph 263).

In considering the facts and circumstances of your case, including that you had intended to hold the Properties as long-term rental investments objectively evidenced by the fact that you did not claim any input tax credit related to the construction costs, we consider your activities were not done in the form of an adventure or concern in the nature of trade. You also submitted that you did not engage in property development in the past or operate in any matter that is similar.

In view of the above, and in weighing up of all the relevant factors in combination, the Commissioner is satisfied your activities in the development and sale is a one-off real property transaction that does not amount to an enterprise. As such, the sale of each of the units will not be a supply made in the course or furtherance of an enterprise that you carry on. The sale of the units will be considered as the mere realisation of a capital asset. That is, paragraph 9-5(b) will not be satisfied for the sale of the # units, located at address to be a taxable supply and GST will not be payable of the sale.

Are you required to be registered for GST? - paragraph 9-5(d)

Section 23-5 states:

You are required to be registered under this Act if:

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

(f)           your *GST turnover meets the *registration turnover threshold.

The GST registration turnover threshold in relation to your case is $XX.XX

As determined earlier in this ruling, you are not carrying on an enterprise in relation to the development and sale of the Properties. This means you would not satisfy section 23-5 and are not required to be registered for GST in relation to the sale of the units.

Issue: Capital v. revenue

Question 2

Will the proceeds from the sale of the Properties be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 3

Will the profit from the sale of the Properties be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997 as a result of the realisation of a capital asset?

Detailed reasoning

Broadly, there are three ways profits or proceeds from the sale of real estate can be treated for taxation purposes:

1.             as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development

2.             as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, where the land was acquired or subsequently held for a profit-making purpose, and

3.             as statutory income under the capital gains tax (CGT) provisions contained in Parts 3-1 and 3-3 of the ITAA 1997 on the basis that a mere realisation of a capital asset has occurred.

Carrying on a business of property development

The definition of business in section 995-1 of the ITAA 1997 simply states what activities may be included in a business; it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose, it is necessary to turn to case law.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business.

Profits on isolated transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will be income when:

a)    the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

b)    the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Capital gains tax

A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset you own. Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset (section 104-10 of the ITAA 1997). You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2) of the ITAA 1997). The time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997.

Application to your circumstances

In your case, you are not considered to be carrying on a business of property development, or to be carrying on or carrying out a profit-making undertaking or plan. There is no evidence to suggest that you intended to carry on a business or that you acquired the land and constructed the Properties for the purpose of selling them for a profit. Rather, your intention was to derive rental income from the properties. The fact that you did not register for GST nor claim input tax credits in respect to the construction of the Properties supports this intention. It is also accepted that the reason you are selling the Properties rather than holding them to derive rental income is not that you are selling them to make a profit, rather you are selling them due to the changes in the economy with respect to increasing interest rates and the softening of the rental market. In addition, you have been unsuccessful in your efforts to refinance the borrowings associated with the Properties.

You are considered to be merely realising a capital asset. As such the profit or proceeds from the sale of the Properties will not be assessable income under section 6-5 of the ITAA 1997. Rather, any proceeds will fall for consideration under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.