Edited version of private advice

Authorisation Number: 1052219178119

Date of advice: 29 April 2024

Ruling

Subject: Trust - sale of rental property

Issue 1

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.

Issue 2

Question 2

Will the profit from the sale of the property be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

The entity entered into a contract to purchase a block of land. It consequently built a house on the block through a third-party builder and began renting it immediately after completion.

The house was managed by an agent which is an associated entity.

Historically the entity has derived commission income from property sales (a taxable supply), but it no longer generates commission income (a taxable supply), and is only making input taxed supplies (by way of rental income). The entity is not currently registered for GST. Its current GST turnover and projected GST turnover are less than $75,000.

Associates of the entity require funds. It is proposed that the entity will sell the subject property, and make funds available. It is expected that there will be a profit from the sale.

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 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 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

Issue 1

Question 1

Will the sale of the property be a taxable supply pursuant to section 9-5 of the GST Act?

Summary

You are engaged in an enterprise of leasing real property, but you are not registered or required to be registered. Based on scale and repetition, the sale of the property will not amount to a property development enterprise. Given the asset has not been held for a long period, the experience of relevant parties and the fact that the activities were profitable, we consider the supply not to be in the course of a property development enterprise, after weighing up the relevant factors.

Detailed reasoning

Please note all references to legislation in this Issue are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

The property was only constructed recently and is considered to be 'new residential premises' as defined in the GST Act as you rented it for only one year whereas subsection 40-75(2) requires they be rented continuously for five years. Where a supply of real property is new residential premises it is, prima facie, a taxable supply where the conditions of section 9-5 are met.

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 to the indirect tax zone (Australia); and

(d)  you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case, the sale of the property will be made for arm's length consideration and is located in Australia. As such, we will consider whether the sale of the property is made in the course or furtherance of any enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered. Finally, it needs to be considered whether the supplies in any enterprise are input taxed or GST free.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

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; or

...

You are not currently renting the property but had rented it until recently. This is an enterprise as it meets paragraph 9-20(1)(c). That is, the property was supplied on a regular or continuous basis in the form of a lease.

Therefore, we consider you were carrying on an enterprise. The acquisition of the land, construction of the residential dwelling, its rental and subsequent sale of the property would all be considered to be a series of activities done in the course or furtherance of your rental enterprise.

However, under that enterprise, you were registered for GST and when you deregistered, you were not required to be registered as you were below the turnover threshold. Residential rent is an input taxed supply under section 40-35. As discussed later, these amounts are not taken into account when determining your registration threshold.

The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise which includes sale of the residence.

Other activity or series of activities you conducted may be considered to be an 'enterprise' for GST purposes to determine if they amount to a business, or are in the form of a business, or is a one-off adventure in the nature of trade. This is primarily because the activities of construction and eventual sale may be in the commencement and termination of a property development enterprise.

Additionally, as section 188-25 may be engaged in this case, we need to consider all enterprises you may be conducting in assessing your projected turnover and consequently, we need to determine if you were also engaged in the form of a business of property development or a one-off adventure in the nature of trade in making the sale.

The Commissioner, 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 provides guidance on the meaning of the term 'enterprise' for GST purposes.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is still on making an assessment of the factors indicating a business.

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, provides the main indicators of carrying on a business. These indicators include:

•          a significant commercial activity;

•          the purpose and intention of the taxpayer in engaging in the activity;

•          an intention to make a profit from the activity;

•          the activity is or will be profitable and there was a purpose of profit;

•          repetition and regularity of activity; and

•          the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business.

These factors in turn are derived from a number of common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in matters including FCT v Whitfords Beach Pty Ltd (1968) 120 CLR 191 (Whitfords Beach), Federal Commissioner of Taxation v Williams (1972) 127 CLR 226, and Casimaty v FCT 97 ATC 5135 (Casimaty). A leading case considering isolated transactions is FC of T v The Myer Emporium Ltd (1987) 163 CLR 199 (Myer). The principles in this case, amongst others, were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. These principles are considered below.

These cases indicate that the question of 'whether a business is being carried on' is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. Considering your arrangement, you purchased the property with the intention of holding it long term as a place to rent as residential premises. This indicates that, when you purchased it, you did not have the intention to acquire and sell at a profit. Having regard to the facts, the property was acquired a few years before your intended date of sale. On one hand you have not held the asset long term. However, the facts also indicate that you now wish to spend money on your personal residence and the financial outcome is that you cannot afford to keep the rental property. This change is not indicative of a profit motive.

In terms of assessing the scale of your activity, it is one suburban block. On this basis there is low repetition and small scale. However, it is noted that at least one related party has had previous subdivision and sale experience, indicating some repetition.

The facts indicate that you do not have a significant commercial purpose or intention on your part in this arrangement. This arrangement is not a subdivision as you acquired the block as a vacant subdivided lot. You arranged for a builder to construct a new residence which you rented out as soon as it was complete. In this way, you retained experts but only to the extent of hiring a builder. This factor, of itself, does not point to an enterprise. In Whitfords Beach, a factor pointing to the business character of the arrangement is the skill of the parties. It is noteworthy that a related entity was employed in a sector related to building or construction as an employee and has previously subdivided property to sell. These factors suggest it is possible the sale is a business-like venture, but this factor alone is not determinative.

You acquired the property and spent money for the construction of the house on the property. It is acknowledged there were potentially more costs as you borrowed from the Bank to acquire and construct. As it is not a subdivision, you expect to sell the land with the structure, and a profit is likely or will be made. However, the facts do not indicate that you had the intention to profit from these activities. Even if this factor points to the activities being more business-like, it is, by itself, not sufficient to point to the activities being in the form of a business as it needs to be considered against the entirety of the facts.

On balance we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not at all large scale. You do not have a business plan for developing the property as the original intent was to rent the property. You have not financed the arrangement in a way that a business would ordinarily finance a development as you borrowed against your family home.

As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression.

An 'adventure or concern in the nature of trade' refers to transactions that have a commercial nature which are entered into for a profit-making purpose.

Paragraph 237 of MT 2006/1 states:

The term 'profit-making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 6 in TR 92/3 provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph 13 in TR 92/3 provides that:

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a)  the nature of the entity undertaking the operation or transaction

(b)  the nature and scale of other activities undertaken by the taxpayer

(c)   the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d)  the nature, scale and complexity of the operation or transaction

(e)  the manner in which the operation or transaction was entered into or carried out

(f)    the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g)  if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h)  the timing of the transaction or the various steps in the transaction.

These factors are considerably similar to the factors considered in TR 97/11 as mentioned earlier.

In relation to the factors above, MT 2006/1 at paragraph 247 sets out that it:

considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

Here the property was a rental and it is accepted it is more likely to be an investment asset.

The arrangement is a planned rental activity that had to be altered significantly albeit due to factors which were largely in your control. As a result, the funding required increased. The scale is very small, you are not employed in a related field and you were looking to take advantage of negative gearing. The arrangement is not complex and the nature of the property is that it was not acquired with profit in mind but rather as a rental and subsequent capital accretion. You constructed a new dwelling but this was largely to produce rental income.

There are no other land parcels being adjoined to yours, you do not operate as a property developer although you or a related entity have done this activity before and have no future plans to do so.

After weighing up all of the information, we consider that you are not carrying on an enterprise of developing the land. The remaining analysis is on whether you are required to be registered for GST in relation to your rental enterprise.

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 discussed previously, your activities of purchasing the property, building residential dwellings, renting the property and sale of the property 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 is $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 disregarded when calculating your current and projected turnovers respectively. Your rental of the property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises)). As such, rental proceeds in relation to the rental of the property are not included in the calculation of your 'current GST turnover' or your 'projected GST turnover'.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours:

In working out your *projected GST turnover, disregard:

(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 discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

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.

Taking into account the facts of this case, we consider the sale of the property would constitute the transfer of a capital asset for the purposes of section 188-25 and in the ordinary course of events would therefore be disregarded when calculating your projected GST turnover.

As you had an existing enterprise of renting property, this is an input taxed activity but the sale of new residential premises is generally taxable.

Your case is distinguishable from the matter of Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund v Commissioner of Taxation [2022] AATA 628 (Collins) where the entity making the supplies was an enterprise because its activities were conducted by a trustee of a complying superannuation fund; thereby meeting the definition of 'enterprise' under subparagraph 9-20 (1)(da). Arguments put for the entity included that they were significantly reducing the scale of their enterprise or making a capital supply under section 188-25.

The Administrative Appeals Tribunal determined that the entity was conducting an enterprise of property development in addition to it already being a 'deemed enterprise' as a consequence of it being a complying superannuation fund. Senior Member Olding found that, as it was a property developer, it could not significantly reduce the size of the enterprise by making a sale of what is its trading stock. Section 188-25 requires the entity to make an assessment for each of the enterprises it is conducting. In your case there is no such impediment.

In Collins, the Tribunal held at paragraph 26 that, for the purpose of paragraph 188-25(a), the character of an asset must be determined at the time the supply is made or is likely to be made. Section 188-25 only arises for consideration where the supply is or would be made in the course of an enterprise the taxpayer carries on. The Tribunal accepted at paragraphs 24 and 53 that the applicant's intention or object at the time the asset is acquired is not determinative and is of less significance than it is for the purposes of the capital versus revenue dichotomy in the income tax context. At the time of disposal, you advised that your intentions only related to the sale of the property as the lease expired. This was largely driven by your wish to renovate your new residence.

Under the Collins decision, paragraph 188-25(a) applies such that the supply of the premises, despite being new residential premises as defined, will be the supply of a capital asset and will not form a component in the calculation of your projected turnover. Furthermore, paragraph 188-25(b) may be open as you are ceasing or significantly reducing the scale of your rental enterprise.

The property was not intended to be acquired for the primary purpose of resale. Furthermore, you have derived your rental income from the use of the property as opposed to the trading of properties.

Given the above, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST.

Conclusion

The sale of the property will be made for consideration and is located in Australia. Even though the supply was made through the rental enterprise you conducted, you are neither registered nor required to be registered for GST as the sale is excluded from your turnover calculations. Consequently, you will not be making a 'taxable supply' as defined when you sell the property as you are not registered or required to be registered for GST.

Issue 2

Question 2

Will the profit from the sale of the property be assessable income under section 6-5 of the ITAA 1997?

Summary

You are not considered to be carrying on a business and the sale of the property is not considered to be an isolated profit-making transaction. As such any gain on the sale of the property will not be assessable under section 6-5 of the ITAA 1997 but will be assessed under the capital gains tax provisions in Part 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

Under section 6-5 of the ITAA 1997 your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Ordinary income may include income from a business you carry on or income from an isolated transaction with a profit-making purpose.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in TR 97/11. Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character;

•         whether there is repetition and regularity of the activity;

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•         the size, scale and permanency of the activity; and

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

In this case the purchase of land to build a house which was rented and then sold was the first of its kind undertaken by the taxpayer. The beneficiaries of the Trust subdivided and sold a portion of the land at their previous main residence. There has been no repetition or regularity of any development activity, and the scale was small.

Based on the information provided the purchase of land, building a house, renting it out and subsequent sale of the rental property were not the beginning of or the continuing of a business of building development. The activities do not display the indicators of a business, being transactions entered into on a continuous and repetitive basis. The transaction is likely to represent an isolated transaction.

Isolated transaction with a profit-making purpose

Taxation Ruling TR 92/3 provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term 'isolated transactions' refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•         those transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present:

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

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

Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors as some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

a)    the nature of the entity undertaking the operation or transaction;

b)    the nature and scale of other activities undertaken by the taxpayer;

c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d)    the nature, scale and complexity of the operation or transaction;

e)    the manner in which the operation or transaction was entered into or carried out;

f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g)    if the transaction involves the acquisition and disposal of property, the nature of that property; and

h)    the timing of the transaction or the various steps in the transaction.

Paragraph 36 of TR 92/3 notes that 'the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way'. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Paragraph 41 of TR 92/3 states that 'if a transaction or operation involves the sale of property it is usually necessary that the taxpayer has the purpose of profit making at the time of acquiring the property'. However, as demonstrated in Whitfords Beach this is not always the case where the asset is committed to a business venture or commercial transaction.

Further at paragraph 43 of TR 92/3:

if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

In this case, in determining whether the purchase of land and sale of the rental property would be viewed as a profit making undertaking the following has been considered:

•         The entity, its related entities or associates have not previously undertaken any similar activities.

•         The undertaking was of a small scale.

•         Independent third parties were engaged for the works conducted on the property.

•         The intention at the time of purchase was to build a house and to hold the property to derive rental income.

•         The steps in the transaction were undertaken over a two-to-three-year period.

•         The house was rented out after the build was completed.

•         The entity decided to sell the property due to its associates being in need of funding for renovation of a house that they were going to live in. The bank wouldn't lend them enough to make the alterations that they wanted.

According to paragraph 244 in MT 2006/1, 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.

Paragraph 247 in MT 2006/1, as mentioned previously, further states that if the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. In paragraph 259 of MT 2006/1 it says that the mere disposal of investment assets does not amount to trade and provides examples of investment assets which include rental properties, business plant and machinery, family home, family cars and other private assets.

Based on the information provided and having regard to the factors set out in TR 92/3 the purchase of land, building a property, renting it out and subsequent sale of the rental property is not considered to be commercial in nature and you are not considered to be engaged in a profit-making undertaking. The intent was to develop capital assets from which the entity would earn rental income and the decision to sell came about due to changes in circumstances. At that point you are merely realising the value of a capital asset. Any gain would be assessed under the capital gains tax (CGT) provisions in Part 3-1 and Part 3-3 of the ITAA 1997.