Edited version of private advice

Authorisation Number: 1052216629355

Date of advice: 15 February 2024

Ruling

Subject: GST - sale of newly built residential house

Question

Will Person A and Person B's sale of the newly built residential house address (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, Person A and Person B's sale of the property will not be a taxable supply under section 9-5 of the GST Act as the sale will not be made in the course or furtherance of an enterprise that Person A and Person B are carrying on. Therefore, Person A and Person B will not be liable for GST on the sale of the property.

Person A and Person B will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the Australian Taxation Office (ATO) when purchasing the property. This can be included in the sale contract or in a separate document prior to settlement.

This ruling applies for the following periods:

Year ending June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

In DDMMYYYY, Person A and Person B (you) purchased a residential house <amount> as joint tenants located at address.

Person A is a occupation and employed by employer.

Person B is a occupation and employed by employer

You are not registered for GST purposes.

After the settlement in DDMMYYYY you rented the original premises until DDMMYYYY.

In DDMMYYYY, the original premises was demolished. You engaged a builder to build a house on the land. The construction of the property was undertaken, and you moved into the property in DDMMYYYY.

Your intention when building the property was to live in it and use it as your primary residence.

You incurred expenses for the development of the property of approximately $XX

You have separated and are in the process of going through a marriage settlement.

You have decided to sell the house now. The reason to sell the house is to make funds available for the financial settlement. The expected sale of price of property is between $XX & $XX

You have reached out to a real estate agent with the intention to sell the property on DDMMYYYY. The property has not yet been marketed for sale.

You are not builders and did not purchase the land and build the house with the purpose of making a profit.

You currently live in the property and intend to reside in it until the date of the settlement.

You currently don't own any other property.

Details of previous property

•         In DDMMYYYY, you purchased a residential house as joint tenants located at address.

•         In DDMMYYYY, the residential house was demolished, your intention was to build a newly built residential family house on the land and live in whilst using as the primary residence.

You didn't subdivide the land and lived in the newly built residential family house from the period the physical construction of the property was completed until it was sold in DDMMYYYY.

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 40-65

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

Reasons for decision

Please note, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Taxable supply

Section 9-5 of the GST Act provides individuals make a taxable supply if:

a) individuals make the supply for consideration; and

b) the supply is made in the course or furtherance of an enterprise that individuals carry on; and

c) the supply is connected with the indirect tax zone; and

d) individuals are 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.

For the purpose of paragraph (b) above, the sale will not be in the course or furtherance of the enterprise that the two individuals carry on as a occupation (Person A) and occupation (Person B). Therefore, it must be determined whether your activities of purchasing the existing residential house (property) and constructing a house on the land constitute an enterprise; and thus, the subsequent sale of the property after its construction will be done in the course or furtherance of that enterprise. If so, we will need to consider whether you are required to be registered for GST for the purpose of paragraph (d) above.

You will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you will sell the property for consideration; and the sale will be connected with Australia since the property is located in Australia.

Therefore, what remains to be determined is whether the sale of the property will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as currently you are both not registered for GST.

We will now consider paragraphs (b) and (d) of s-5 of the GST Act.

Enterprises

The term 'enterprise' is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or series of activities done:

•         in the form of a business

•         in the form of an adventure or concern in the nature of trade.

The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity, or series of activities, done:

•         by an individual without a reasonable expectation of profit or gain.

The question of whether an entity is carrying on an enterprise is examined in 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).

In the form of a business

Paragraphs 170 to 232 of MT 2006/1 discuss the 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 TR 97/11 Income tax am I carrying on a business of primary production? lists indicators of carrying on a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other business in the same or similar trade;

•         activity is systematic, organised and carried out in a business-like way and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge and 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.

You purchased a residential house as joint tenants located at address with the initial intention to use for investment purposes and derive rental income from that property. You then decided to build the property to live in it and use as their primary residence. Your activities of ceasing the leasing enterprise, demolishing the existing residential house and building the property on the land were for the purpose of using the property after construction for private/domestic use. You are not in business as a builder and did not purchase the land and build the house with the purpose of making a profit. The reason for selling the house is to make funds available for the financial settlement of your separation.

Based on the facts provided, we do not consider that your actions of demolishing the existing residential house and building the property and selling it constitute activities done in the form of a business.

In the form of an adventure or concern in the nature of trade

Paragraph 234 of MT 2006/1 provides that 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.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•         the subject matter of the realisation;

•         length of period of ownership;

•         frequency or number of similar transactions;

•         supplementary work on or in connection with the property realised;

•         circumstances that were responsible for the realisation;

•         motive

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.

Your activities were motivated by their desire to use the property as the principal place of residence. Your activities were not done with the expectation of generating a profit, as you are not in business as a builder and did not purchase the land and build the house with the purpose of making a profit. Due to changes in your circumstances, you have decided to sell the property now in order to make funds available to deal with the financial settlement of their separation.

After weighing up all the facts of this case, we do not consider your activities carried on in relation to the property constitute an adventure or concern in the nature of trade. The activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes.

Conclusion

Your sale of the property will not be a supply made in the course of furtherance of an enterprise. As such, the sale of the property will not be a taxable supply under section 9-5 of the GST Act.

As we have determined that you will have no GST liability when selling the property, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sale contract or in a separate document prior to settlement