Edited version of private advice

Authorisation Number: 1052248091432

Date of advice: 29 May 2024

Ruling

Subject:GST - sale of property

Question

Will the sale of the newly constructed duplex 2 be a taxable supply under section 9-5 the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the specified period.

The scheme commenced on the specified date.

Relevant facts and circumstances

You are an entity.

You currently do not operate an enterprise or business and you have no plans to do so in the future. You work for salary and wages, and you are not registered for the goods and services tax (GST).

Several years ago, you purchased the specified property (the Property) as your family home, and you promptly moved in. The property is in Australia.

Later, your house was damaged by severe storms. The house had sustained severe and extensive water damage to the roof and ceilings. As a result, black mould grew through the ceilings and into the house. This created health issues and you had to move out of the house to start renting.

Your insurance refused to cover the damage.

Due to the extensive damage and expected costs, repairing the damage was not a viable option for you, and you sought to rebuild the house.

However, due to the decreasing value of the property market, you were unable to obtain finance for a single house. You were only able to obtain financing for a dual occupancy.

The development involved demolishing the damaged house, building a side-by-side common wall duplex on the land and subdividing the land into two lots.

The purpose of the subdivision and the building of a duplex on each lot was for use as your family home after your original house was made inhabitable from severe storm damage (Duplex 1), with Duplex 2 to become a home for your ageing parents upon their relocation to the area. In the interim it would be rented.

You have not set up a business organisation to manage the development.

You engaged a builder. The DA plans for the duplex have been approved.

Demolition works have been completed. These costs almost doubled due to the extensive asbestos found.

Construction has commenced and scheduled for completion at a specified date, with the subdivision to be completed concurrently.

The construction of the duplexes has been managed by X with the construction costs expected to total approximately $Y at completion. Other costs including demolition and interest charges will exceed $Z at completion.

As the construction progressed, you have encountered significant financial pressures due to significant increases in demolition, building and holding costs.

You are now well beyond your capacity due to these extremely unexpected conditions. The loan servicing costs have increased so dramatically that you are using your residual savings and redrawn from the mortgage to cover the mortgage repayments. These savings are being rapidly eroded and will be exhausted not long after completion.

Due to the significant financial difficulty, your circumstances have changed radically.

To avoid losing your family home (Duplex 1), you need to sell Duplex 2. Without the sale of Duplex 2, you will not be able to keep your family home. This means that Duplex 2 will no longer be available to your parents for occupation as their residence, as initially planned. You will also no longer rent out Duplex 2 after completion as it will be sold.

Duplex 2 will be sold to an unrelated third party upon completion. You will engage a real estate agent to organise the sale.

Based on the most recent advice, it is possible that the sale of Duplex 2 will not recover the cost of completion; however, the sale will improve your debt and cashflow position.

You have not claimed any tax deductions for the construction of the duplexes.

You have no history of buying and developing land whether individually or with another party.

You have previously owned a primary residence, which you have disposed of after renting it out for a period.

You have not been involved in any other enterprise or business activities, apart from renting your former primary residence and this current subdivision and sale of property.

You do not currently own any other property, whether individually or with another party.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1,

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 23-5,

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Does Division 165 apply to this private ruling?

Division 165 of the GST Act is a general 'anti-avoidance' rule that can apply in certain circumstances if you or another entity obtains a GST benefit from a scheme that you entered into or carried out for the main purpose of obtaining a GST benefit or allowing another to obtain one.

It may also apply in some cases where the GST benefit arises as a principal effect of a particular scheme. An entity can get a 'GST benefit' under the GST, Luxury Car Tax or Wine Equalisation Tax laws.

If Division 165 applies, the benefit can be cancelled. For example, we might increase the net amount for a particular tax period.

Unless your private ruling specifically discusses Division 165, we have not considered the application of the anti-avoidance provisions to your case.

If you want us to rule on whether Division 165 applies in your circumstances, contact your contact officer to find out what details we will need to make the private ruling.

Reasons for decision

In this reasoning, unless otherwise stated,

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

•         where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act

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

Section 7-1 of the GST Act provides that GST is payable on taxable supplies.

Taxable supply

The requirements of a taxable supply are set out in section 9-5 of the GST Act, which states:

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 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.

(*Denotes a term defined in section 195-1 of the GST Act)

All the above requirements must be met for a supply that you make, to be a taxable supply.

The sale of Duplex 2 will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale will be a supply made for consideration and the property is in Australia.

We need to establish whether the sale is made in the course or furtherance of an enterprise that you carry on.

Moreover, you are currently not registered for GST. Therefore, we also need to determine whether you would be required to be registered for GST at the time of settlement of the sale of Duplex 2.

GST registration

Section 23-5 of the GST Act provides that an entity is ,required to be registered, for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold.

Enterprise

The term 'carrying on an enterprise' is defined in section 195-1 of the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 defines 'enterprise' to include, amongst 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

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

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

Based on the facts, we do not consider that your activities in engaging third parties for the demolition of the damaged house, construction of the duplexes, subdivision of the land into two lots, and the sale of the newly constructed Duplex 2 under the given circumstances would amount to carrying on a property development enterprise for GST purposes.

Accordingly, your sale of Duplex 2 will not be a supply in the course or furtherance of an enterprise that you carry on and paragraph 9-5(b) of the GST Act will not be satisfied. Also, as you will not be carrying on an enterprise, you will not be required to be registered for GST under section 23-5 of the GST Act. Paragraph 9-5(d) of the GST Act will also not be satisfied at the time of settlement of the sale of Duplex 2.

Therefore, at the time of settlement, the sale of Duplex 2 will not meet all the requirements under section 9-5 of the GST Act and will not be a taxable supply. Consequently, GST will not be payable on your sale of Duplex 2.

Note that: The sale of Duplex 2 will not be a taxable supply in this instance. However, if you carry on similar activities in the future, the outcome for GST purposes may be different.