Edited version of private advice

Authorisation Number: 1052246631589

Date of advice: 7 May 2024

Ruling

Subject: GST - sale of property

Question

Is the sale of your property located at <specified location> (the Property) a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

This ruling applies for the following period(s)

<date> - <date>

The scheme commences on

<date>

Relevant facts and circumstances

You are registered for GST effective from <date>.

In <month/year>, you acquired property located at <specified location> (the Property).

At the time of your acquisition, the Property was approx. <area>and contained a three-bedroom residential dwelling.

Your intention when you acquired the Property was use as your principal place of residence.

Due to housing prices increasing, you decided to assist your child and their family and construct a duplex on the Property in which you would reside in one and your child and their family would live in the other.

In <month/year>, you received the construction certificate enabling you to commence development of the Property. You demolished the existing residential premises and commenced construction of the duplex.

Construction was carried out by your child who is a builder. Your child built the duplex on a cost-plus basis. In order to minimise costs, you assisted in the construction process when you could.

Construction was completed resulting in two residential dwellings known as the Property and <specified location A>. You received an occupation certificate in <month/year>.

The purchase of the Property and the construction costs were financed partly by your own personal funds and partly by a loan from <financial institution>.

You have provided a copy of the Loan Application which states the purpose of the loan as 'Investment' with the loan term being <number> years with an interest only period of <number> years.

The Loan Application also contains an acknowledgement by you that if the purpose of the loan is to buy/refinance an owner-occupied property, this home will be your principal place of residence in Australia and be non-income generating.

Following construction being completed:

•         you moved into <specified location A>; and

•         your child and their family moved into the Property. However, after a short period your child's spouse was having health issues and moved to another area in Australia for their health.

The dwelling at the Property was subsequently rented for two years. Following this period, you sold <specified location A> (the dwelling you had been residing in) in <month/year> and moved into the Property in <month/year>.

You subsequently decided to sell the Property to move closer to your child and their family to assist the family due to your child's spouse health issues.

You sold the Property with settlement occurring on <date>.

You registered for GST on the same day as settlement as you were not sure if you would be liable for GST on the sale and wanted to be prepared.

You have provided the following details of prior activities you have been involved in relating to the construction of residential property:

•         In <year>, you purchased property located at <address> which contained an existing residential dwelling. You demolished the existing dwelling, subdivided the property and constructed two new residential dwellings (known as <address A> and <address B>).

Following construction you resided at <address A> for approximately 3 years prior to selling around <month/year>.

The dwelling at <address B> had been rented for approximately 2 years. After you sold <address A>, you moved into <address B> where you lived for approximately one year prior to selling in <month/year>.

•         In <month/year>, you, together with another party, purchased vacant land containing two lots on a single title known <address D>. The title was separated with the separate lots being known as <address C> and <address D>.

You constructed a residential dwelling on <address D which was used as your primary residence until sold in <month/year>.

A residential dwelling was also constructed on <address C> with this property being owned by the other party.

The dwellings were constructed together (at the same time) by the same builder with the dwellings sharing a common wall.

•         In <month/year>, together with another party, you purchased property located at <address E>. The property contained two lots on a single title with a single residential dwelling. The title was separated with the separate lots being known as <address E> and <address F>.

You demolished the existing dwelling and constructed a new residential dwelling at <address E> for use as your primary residence until you sold it in <month/year>.

A new dwelling was also built at <address F> and is still owned by the other party.

The dwellings were constructed together (at the same time) by the same builder with the dwellings sharing a common wall.

•         In <month/year>, you purchased property with your child and their spouse at <address G>. You registered for GST as a partnership consisting of the X individuals and constructed a duplex (<address G and address H>).

The duplexes were sold in <month/year> and <month/year> with the sales reported on Business activity statements (BAS) for GST purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-20

Section 9-40

Division 38

Division 40

Section 40-65

Further issues for you to consider

Reasons for decision

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

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

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 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 instance, your supply of the Property will be made for consideration, is located in the indirect tax zone (Australia) and you were registered for GST as at the date of your supply (being settlement on <date>).

Therefore paragraphs 9-5(a), 9-5(c) and 9-5(d) will be satisfied.

GST-free and input taxed supplies

Supplies that are GST-free or input taxed are contained in Division 38 and Division 40 respectively. Your supply of the Property will not fall within provisions contained in Division 38 and, therefore, will not be GST-free.

Section 40-65 provides that the sale of real property will be input taxed, but only to the extent the property is residential premises to be used for residential accommodation (regardless of the term of occupation). However, the sale is not input taxed to the extent the residential premises are 'new residential premises'.

The term 'new residential premises' is defined in section 40-75 as premises that have been built, or contain a building that has been built, to replace demolished premises on the same land. However, the premises are not 'new residential premises' if the premises have only been used for making input taxed supplies of residential rental for the period of at least 5 years since the premises were last built, where the premises have been built, or contain a building that has been built, to replace demolished premises on the same land.

In this case, the Property was built to replace demolished premises and an occupancy certificate was issued in <month/year>. Since that date, the dwelling had been rented for a period of approximately 2 years. Therefore, for GST purposes, the Property is considered 'new residential premises' and will not be input taxed under section 40-65.

Given the above, the remaining issue is whether your supply of the Property was made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b)).

Enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity or series of activities done:

(a)  in the form of a business;

(b)  in the form of an adventure or concern in the nature of trade;

(c)   on a regular or continuous basis, in the form of a lease, licence or grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999. However, paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act.

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? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise:

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.

Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise:

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Paragraph 180 of MT 2006/1 explains that small scale activities can still constitute an enterprise:

Small scale activities

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

Activity or series of activities done in the form of a business

Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 176 of MT 2006/1 notes that the meaning of 'business' is considered in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with carrying on a primary production business, the principles discussed in TR 97/11 apply to any business.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, with reference to the principles in TR 97/11:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial 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 businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a businesslike manner 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 or skill.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

Activity or series of activities done in the form of an adventure or concern in the nature of a trade

'An adventure or concern in the nature of trade' is not defined in the GST Act.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade':

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.

Paragraphs 244 to 246 of MT 2006/1 discuss the characteristics of 'trade' stating (footnotes excluded):

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.

245. The (Radcliffe) Royal Commission on the Taxation of Profits and Income (UK) in 1954 identified six badges or identifying features of trade. The United Kingdom courts have seen the 'badges of trade' as providing 'common sense guidance'[ in reaching a conclusion on such matters.

246. The badges of trade have also been referred to by the High Court in FCT v. Myer Emporium Ltd and more recently by the Full Federal Court in the decision in Puzey v. Federal Commissioner of Taxation.

Paragraphs 247 to 261 of MT 2006/1 discuss the six 'badges of trade' referred to:

(1)  The subject matter of realisation - this badge of trade 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.

(2)  The length of period of ownership - a trading asset is generally dealt with or traded within a short time after acquisition.

(3)  The frequency or number of similar transactions - the greater the frequency of similar transactions the greater the likelihood of trade.

(4)  Supplementary work on or in connection with the property realised - improving the property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

(5)  The circumstances that were responsible for the realisation - trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered.

(6)  Motive - if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. Motive is also important in cases if there is a change in character of the asset.

Paragraph 262 of MT 2006/1 recognises 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 of MT 2006/1 continues stating in part:

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....

Paragraph 264 of MT 2006/1 discusses two cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty). Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265. From the Statham and 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 profit-making 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 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.

Application to your circumstances

The facts in this case are that you have been involved in multiple developments involving the construction of new residential premises. In coming to a conclusion, we have considered whether your activities will, taken as a whole over the years and culminating in the sale of the Property in <month/year>, fall within the ambit of being done 'in the form of a business' or 'in the form of an adventure or concern in the nature of trade'.

Typically, activities done in the form of a business have a recurrent or regular nature. Whilst you have engaged in like activities over the years, these activities have not all been carried on by you, with similar activities being carried on in association with other parties. In this case, we do not consider your activities, ignoring those similar activities done in association with other parties, have sufficient repetition or regularity to fall within the scope of being 'in the form of a business'.

This leaves the remaining issue being whether your sale of the Property was an activity done in carrying on an adventure or concern in the nature of trade (enterprise).

In summary, we note the following in regard to the Property:

•         the Property was originally acquired, and the existing residential dwelling used, as your primary place of residence for approximately 3 years

•         the existing dwelling was demolished and two new residential dwellings constructed on the land (one dwelling retaining the identity of the Property)

•         following construction, the Property was used by your child and their spouse as their primary place of residence for a short period (approximately 1 year)

•         the dwelling was subsequently rented to an unrelated party/parties for a period of approximately 2 years

•         following this period, you moved into and used the Property as your primary place of residence for approximately 10 months prior to selling the duplex in <month/year> (settlement).

We have also considered the following:

The Loan Application provided to fund construction costs details that the use of the property was for investment purposes together with an acknowledgement by you that if the purpose of the loan is to buy/refinance an owner-occupied property, this home will be your principal place of residence in Australia and be non-income generating. In this case, whilst you moved into the Property in <month/year>, prior to this time, the dwelling was used to generate income in renting to third parties and prior to that used as the residence of your child and their family.

You have conducted multiple similar ventures over time where property has been purchased, the existing dwelling demolished/renovated, multiple new residential dwellings constructed and sold within a relatively short period of time. It is acknowledged that in some cases you have entered into these arrangements with other parties; however, in all cases, we would consider the process involved a coherent and systematic strategy or plan.

It is also acknowledged that in most ventures of this nature that you have been involved in, you have resided in either the original residential dwelling situated on the property or the new dwelling post-construction, or both.

Paragraph 269 of MT 2006/1, discusses that the Commissioner recognises that difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree and requires a careful weighing of all the various factors.

Given the above, we consider that your activities in relation to the Property, specifically the sale of the Property, are activities done in the form of an adventure or concern in the nature of trade. Therefore, the sale of the Property was done in the course or furtherance of an enterprise you carry on thus satisfying paragraph 9-5(b)

Conclusion

The positive limbs of section 9-5 have been satisfied and the sale of the Property is neither GST-free nor input taxed.

Your sale of the Property is a taxable supply as defined in section 9-5.