Edited version of private advice

Date of advice: 12 April 2024

Ruling

Subject: GST - sale of newly built townhouse

Question

Is the partnership of <name> (the Partnership) making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it sells the property located at <address> (the Property)?

Answer

Yes. The Partnership's sale of the property known as Unit # will be a taxable supply under section 9-5 of the GST Act.

This ruling applies for the following period

1 July YYYY until 30 June YYYY

The scheme commenced on:

1 July YYYY

Relevant facts and circumstances

Note: In the facts below, unless otherwise indicated, the expressions 'You/you/your' and 'the Partnership' refer to the partnership entity of <name> and are used interchangeably throughout.

1.  The partnership of <name> (the Partnership) is registered for GST from (date, month, year). The enterprises carried on by the Partnership include the leasing of commercial and residential properties.

2.  The partners consist of two individuals (A and B).

3.  In (date, month, year), A and B purchased a property located at <address> (the Property) for $amount. This is your Partnership asset. The Property had an existing residence on the land and the Partnership leased the residential premises from (year) to (year).

4.  The Property was purchased for development purposes to build (number) townhouses.

5.  In (month, year), planning permit was received from (name of Council) for the construction of (number) dwellings at the Property.

6.  In (month, year), the Partnership has undertaken construction of the townhouses. Currently, the construction of the (number) townhouses has been completed and are ready for occupation. Subdivision will be completed sometime in (month, year).

7.  The townhouses will be known as (Unit #) and (Unit ##) <address>.

8.  The Partnership's original intention was to rent out the townhouses. Your loan from the Bank to finance the development was based on (number) townhouses being for rental purposes.

9   However, due to the increase in interest rates and inflated building costs your plans have changed, and the decision was made that once construction of the new dwellings is completed, A and B would sell their existing home and move into Unit ## as their primary place of residence, and Unit # would be sold.

10.  The Partnership incurred development costs of $amount in relation to the townhouse for sale, that is, Unit #. The Partnership had claimed the input tax credits and income tax deductions in relation to the development costs.

11.  The Partnership expects to achieve a sale price of $amount for the townhouse to be sold based on a few appraisals they have received from local real estate agents.

12.  The Partnership intends to list (Unit #) for sale through a real estate agent.

13.  The Partnership will not be leasing Unit # prior to the sale.

14.  The Partnership and either partner did not undertake any property development activities previously.

15.  The Partnership and related entities do not intend to undertake any property development in the near future.

16.  Details of properties currently and previously owned by A and B are summarised in the table below:

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

Taxable supply

Section 9-5 of the GST Act provides 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 for GST.

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

In this case, Unit # is the subject matter of this ruling.

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

Based on the facts we consider Division 38 will not apply when you sell Unit #, and the sale will not be GST-free.

In relation to Division 40, of relevance for consideration is section 40-65.

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 predominantly for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) provides that that the sale 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 (date, month, year).

Real property

Section 195-1 provides that the term 'real property' includes, amongst other things, any interest in or right over land, which would include ownership of a property prior to its sale.

Residential premises

Residential premises is defined in section 195-1 to mean land or a building that:

a)    is occupied as a residence or for residential accommodation, or

b)    is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation,

(Regardless of the term of the occupation or intended occupation) and includes a floating home.

Paragraph 9 of Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises provides that the requirement in section 40-65 that premises be 'residential premises to be used predominantly for residential accommodation' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

In your case, Unit # is a newly constructed dwelling currently ready for occupation. The Commissioner accepts the dwelling would be a typical residence with physical characteristics that are suitable and capable for residential accommodation. Accordingly, we consider Unit # will satisfy as residential premises.

Based on the facts, we consider Unit # is not commercial residential premises.

New residential premises

When defining new residential premises, section 195-1 defines the term by reference to the meaning given for the term in section 40-75.

Subsection 40-75(1) provides that residential premises are new residential premises 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.

Paragraphs (b) and (c) have effect subject to paragraph (a).

However, in accordance with subsection 40-75(2), residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b) if paragraph (1)(b) applies - the premises were last substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built.

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 40-35(1)(a) provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (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).

Based on the facts, the Partnership will not be leasing Unit # prior to the sale. Accordingly, we consider subsection 40-75(1) will apply and the sale of Unit # will be the supply of new residential premises. That is, the supply of Unit # will not be input taxed.

As the sale will not be a GST-free or an input taxed supply, the Partnership will be making a taxable supply where all the requirements specified in paragraphs 9-5 (a) to (d) are met.

In this case, you are registered for GST and will be selling Unit # which is located in Australia. Accordingly, we consider the requirements in paragraphs 9-5(a), (c) and (d) will be met.

What remains to be considered is paragraph 9-5(b). That is, whether the sale of Unit # will be made in the course or furtherance of an enterprise that the Partnership carries on.

Enterprises

The term 'enterprise' is defined for GST purposes in section 9-20 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 an adventure or concern in the nature of trade.

The phrase 'carrying 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), an enterprise does not include an activity, or series of activities, done by an individual or a partnership (all or most of the members of which are individuals), 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.

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.

The following paragraphs in MT 2006/1 explain:

Paragraph 159 explains 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.

Paragraph 234 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 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.

Paragraphs 258 to 260 consider Trade v. investment assets. Assets are generally categorised 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. 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.

Assets can change their character but cannot have a dual character at the same time. Over the period that an asset is held by an entity its character may change from a trading asset to an investment asset or vice-versa but cannot have a dual character at the same time.

Paragraph 262 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 states 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.

Paragraph 265 includes a list of factors that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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.

The guidelines in paragraph 266 states that 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.

In this case, we consider the following factors:

•       In relation to the subject property at <address>, this property was purchased for development purposes - to develop (number) townhouses for the purpose of lease. Prior to the development, the Partnership used the existing residence on the land to carry on a leasing enterprise for around (number) years from yyyy to yyyy.

•       The Partnership's enterprises include the leasing of commercial and residential properties. The Partnership had also bought and sold properties in the past.

•       You sourced finance for the development and the lending was on the basis that the developed townhouses will be for rental purposes. Later, instead of leasing the townhouse units you changed plans to selling (number) unit and retaining the (number) unit as your new place of residence.

•       You originally held the Property as an investment asset with the purpose of lease when construction is completed. You later held the new townhouse Unit # as a trading asset for sale purpose.

•       Based on the expected sale price of Unit #, profits would be made in the sale.

In an overall analysis and weighing up all the facts of this case including the above factors, we consider the sale of Unit # will be made in the course of furtherance of the leasing enterprise you had carried on prior to the development. Also, the activities you engaged in, in acquiring the Property, developing Unit # for sale amounted to an enterprise in itself and paragraph 9-20(1)(b) is satisfied. Accordingly, the requirements in paragraph 9-5(b) is met.

As all requirements in paragraphs 9-5(a) to (d) are met, and the sale is not GST-free or input taxed, the Commissioner determines the sale of <address> (the Property) by the Partnership will be a taxable supply and GST will be payable on the supply.

Additional Information

Where an entity has claimed input tax credits for acquisitions that are only partly for a creditable purpose, the entity will have an increasing adjustment under Division 129.

An entity applies a thing for a creditable purpose to the extent that the entity applies it in carrying on its enterprise. An entity does not apply a thing for a creditable purpose to the extent that:

(a)  the acquisition relates to making supplies that are input taxed, or

(b)  the acquisition is of a private or domestic nature.

Further information is available:

•         Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.

•         Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

Where an entity has over claimed income tax deductions, the entity may refer to guidelines available on the ATO website to correct the error.