Edited version of private advice

Authorisation number: 1052320003223

Date of advice: 21 October 2024

Ruling

Subject: GST - sale of property

Question

Will the sale of the property, be a taxable supply when sold by the Company in accordance with section 9-5?

Answer

No. The sale of the property will not be a taxable supply in accordance with section 9-5 as the sale will be an input taxed supply under subsection 9-30(4) when the Company sells the property as vacant land in these circumstances.

This ruling applies for the following :

Financial year ending 30 June 20YY, to

Financial year ending 30 June 20YY.

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

•                     The Company purchased a property with an existing residential premises on site.

•                     The property has only been used in the making of input taxed supplies of residential premises.

•                     The Company is set up as an investment entity with long-term residential rental investments.

•                     The Company has an Australian business number (ABN) but is not registered for goods and services tax (GST).

•                     There was a fire at the property which caused extensive damage and due to the extent of the damage the property was demolished.

•                     After demolition it was determined that there was no longer a demand in the area and the Company have decided to sell the vacant property.

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 subsection 9-30(4)

Reasons for decision

Under section 9-5, an entity makes a taxable supply where the supply:

1.            is made for consideration; and

2.            is made in the course or furtherance of an enterprise being carried on; and

3.            is connected with the indirect tax zone; and

4.            is made by a supplier who is 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.

Subsection 9-30(4) states that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you used solely in connection with your supplies that are input taxed but are not financial supplies.

In considering the application of subsection 9-30(4) to the supply of vacant land, it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies). This requires that the land, whether by itself, or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th ed, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

•                     how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party)

•                     what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

•                     what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose.

In this case, the Company's enterprise involves input taxed supplies of leasing residential premises. Up to the time when the house was fire damaged, the Company had used the property solely in connection with its leasing activities. The Company had not held the property for the purpose of property development.

Since the property was fire damaged, the Company has not done anything to the property other than demolish what remained of the residence. The demolition of the residence does not suggest that the Company commenced to hold the property for a purpose not connected with its input taxed supplies of residential leasing. The fire damaged house was demolished and removed merely to prepare the land for sale.

In these circumstances, where the fire made the house uninhabitable, the demolition should not be regarded as a separate and distinct use of the land but rather as a consequential step between the end of the leasing activities and the sale of the land.

Conclusion

The sale of the property by the Company will not be a taxable supply. The Company will be making an input taxed supply under subsection 9-30(4) when the property is sold.