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1 Is the sale of the property located at (address) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

1 No. Question 2 Were the acquisitions you made in relation to feasibility studies for subdividing the land partly creditable acquisitions under section 11-30 of the GST Act? Answer 2 Yes. This ruling applies for the following period : 1 July 20XX to 4 July 20XX The scheme commence on: 1 July 20XX

You have been registered for Goods and Services Tax (GST) since XXXX. You purchased a X hectare property with a house (the property) on it at the address of XXXX for a price of XXXX. The property is in the XXXX local government area. The current zoning of the property is low density residential. The zoning specifies that it can be used for residential purposes and also certain types of small businesses that would be (or would often be) located in a residential area, such as a home-based businesses, corner stores and childcare centres. The zoning also contemplates certain other uses. The zoning explanatory document on the local Council website states that any residential use of a property within the low density residential zone must not interfere with any use of adjacent rural land for productive agricultural purposes. Your intention at the time of purchase was to invest some money in a property in a good location that had potential for good market growth and resale at some future point together with a rental yield to cover the holding costs involved. The property is located close to the centre of the rural town of XXXX within an easy walk of schools, shops and transport.

You have rented out the property for the entire period of your ownership. The tenant had access to the entire property and the permitted use in the lease agreement was for residential use only. The house is a low set four-bedroom XXXX style home with ensuite and main bathroom, a lounge and family/dining area, kitchen and laundry. It has a front veranda and a covered entertainment area off the family room at the rear. There is no attached car accommodation, however there is a nearby corrugated iron shed that the tenants use for storage and car accommodation. The driveway entrance crosses a broken watercourse which skirts around the property. The dwelling site and balance of land is largely level and mainly cleared. To the best of your knowledge, there is no history of farming on the property, however, a previous owner did run cattle on the property as a hobby. There is no water licence associated with the property.

The area of land that the house occupies is around XXXX square metres. The area around the house is partly fenced on three sides. That area would be around XXXX square metres. The back property line borders a number of houses and there is a mixture of timber and metal fencing on the perimeter. The side and front property fences are stock type wire fences. The house yard fence is a chain mesh fence down one side and along the majority of the front and back of the house. There are some scattered shrubs along this fence line. The shed stands alone apart from the house and there is no fencing on this side of the house or shed. The construction of the shed is a mixture of timber and steel frame with metal roof and partially enclosed metal walls and concrete floor. It comprises X large open bays and X smaller enclosed bays. You have not substantially renovated the house in your period of ownership. There were some repairs undertaken to the house during the period of your ownership associated with wear and tear or replacing faulty fixtures.

Sometime after the purchase, you realised the demand for land in the region was beginning to escalate rapidly. Other subdivisions were being made on nearby properties and you believed that perhaps you could do the same. Thus, at some point after purchasing the property, you explored the viability of subdividing the property, with one lot including the existing house and the other lots being vacant lots which you would sell. You were advised that the potential yield would probably be between XX and XX lots. You incurred expenses totalling approximately XXXXX in connection with this investigation (feasibility studies). The expenses included a flood study, a bushfire report, an environmental impact report done on the creek area, a traffic flow report and you sought town planning advice. The expenses were incurred in XXXX and XXXX and over another period in XXXX to XXXX. You claimed input tax credits for the GST components of these expenses. You did not apply to rezone the property.

After lodging a development application the result of the feasibility studies you undertook was that you determined that developing the property in the way that you had contemplated would not have been economically viable. You decided to withdraw the development application and not proceed. Due to the health conditions and age of your shareholders, you decided that you would sell the property. The property was sold in (month)(year) for (price) The sale contract between you and the buyer was conditional upon the buyer being wholly satisfied with its due diligence enquiries relating to the land and the development on or before expiration of the due diligence period. The buyer gave you verbal permission to renew the current lease agreement with the existing conditions for a period of up to (period).

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 9-40 A New Tax System (Goods and Services Tax) Act 1999 section 11-5 A New Tax System (Goods and Services Tax) Act 1999 section 11-15 A New Tax System (Goods and Services Tax) Act 1999 section 11-25 A New Tax System (Goods and Services Tax) Act 1999 section 11-30 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 A New Tax System (Goods and Services Tax) Act 1999 section 195-1

s Question 1 Under section 9-40 of the GST Act, GST is payable by you on any taxable supply you make. You make a taxable supply if you meet the requirements of 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 the indirect tax zone (Australia); 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 that is defined in section 195-1 of the GST Act) In your case: •                you sold the property for consideration (paragraph 9-5(a)); and •                the sale was connected with Australia (paragraph 9-5(c); and •                you were registered for GST at the time of sale (paragraph 9-5(d)). Enterprise is defined in section 9-20 of the GST Act to include: •                an activity in the form of a business (paragraph (a)); and •                an adventure of concern in the nature of trade (paragraph (b)); and

•                leasing out property on a regular or continuous basis (paragraph (c)) In your case, you derived income from leasing the Property on a regular and continuous basis. This will be sufficient to be an enterprise of leasing the property. You then sold the property in the course or furtherance of the leasing enterprise that you carried on. Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act. There are no provisions of the GST Act under which your sale of the property was GST-free. Therefore, what remains to be determined is whether your sale of the property was an input taxed supply. A sale of residential premises may be input taxed if the requirements of section 40-65 of the GST Act are met. Section 40-65 states: (1) A sale of real property is input taxed , but only to the extent that property is *residential premises to be used predominantly for residential accommodation (2) However, 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 2 December 1998.

Section 40-75 of the GST Act defines new residential premises. Subsection 40-75(1) of the GST Act states: *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 renovation 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). Goods and Services Tax Ruling GSTR 2012/5: Residential Premises (GSTR 2012/5) provides the Commissioner's view on the definition of 'residential premises' as it appears in section 40-65 of the GST Act. Paragraphs 6 and 7 of GSTR 2012/5 notes that for the definition to be met, the premises must be for used for residential accommodation or be intended to be used for residential accommodation:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition 7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential Thus, there is a need to look at the physical characteristics of the property and whether the actual or intended use of the property is for providing residential accommodation. Where there is a large land area which also contains a building, paragraph 46 of GSTR 2012/5 provides further guidance:

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises. Further guidance is also provided in paragraph 91 of GSTR 2012/5:

91. The GST Act does not restrict the area of land that can be included in residential premises. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is enjoyed in conjunction with the residential building. Just because land is used privately does not mean that the land necessarily has the physical characteristics to indicate that the land is to be enjoyed in conjunction with the residential building. Based on the information available, there are no aspects of the property that would hamper or restrict using the property for residential purposes. The dwelling site and balance of land is largely level and mainly cleared and these are features that make it suitable for residential use. The physical characteristics of the land and building in your case suggest that the land is to be enjoyed in conjunction with the house. This is based on:

•                The use of the land by your tenant suggests that the land is to be enjoyed in conjunction with the house. •                There has been no commercial use of the land during the period of the tenancy. •                The zoning of the property allows for residential use of the property. •                The fencing of the property indicates that the land is meant to be enjoyed in conjunction with the dwelling. The fencing within the property divides the residential area, but there is not extensive fencing in other areas of the property to suggest the land is specifically for a commercial use. •                There are buildings on the premises that may be utilised for commercial use and they may have been utilised for such a purpose in the past, but this does not mean the dwelling and land are not intended to be enjoyed in conjunction for residential purposes. Therefore, the sale of the property was the sale of residential premises. Commercial residential premises or new residential premises

Even if the definition of residential premises within section 40-65 of the GST Act is met, the supply of such premises will not be input taxed if it is the supply of commercial residential premises or new residential premises. Commercial residential premises is defined in section 195-1 of the GST Act to include a hotel, motel, inn, hostel or boarding house or anything similar to those types of premises. The premises in your case are not commercial residential premises. As the house that you sold existed on the land in question when you purchased the property it has previously been sold as residential premises. Additionally, you did not undertake substantial renovations during your period of ownership. Section 195-1 of the GST Act defines substantial renovations as follows: "substantial renovations" of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

The repairs and other work you did to the property did not involve renovation in which all, or substantially all, of a building was removed or replaced. The works undertaken were exclusively repairs related to wear and tear or replacing damaged or faulty fixtures. Therefore, you have not substantially renovated the house. Therefore, your sale of the property was not a sale of new residential premises. As the requirements of section 40-65 of the GST Act have been met, your sale of the property was an input taxed supply of residential premises. Therefore, GST is not payable on the sale of the property. Question 2 You are entitled to input tax credits on any creditable acquisitions you make. Section 11-25 of the GST Act states: The amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable. You make a creditable acquisition if you meet the requirements of section 11-5 of the GST Act, which states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. In accordance with paragraph 11-30(1)(a) of the GST Act, an acquisition that you make is only partly creditable if you make the acquisition only partly for a creditable purpose. Subsection 11-30(3) of the GST Act states: The amount of the input tax credit for an acquisition that you make that is partly creditable is as follows: •                Full input tax credit x extent of creditable purpose x extent of consideration where: "extent of consideration" is the extent to which you provide, or are liable to provide, the consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition. "extent of creditable purpose" is the extent to which the creditable acquisition is for a *creditable purpose, expressed as a percentage of the total purpose of the acquisition. "full input tax"

is what would have been the amount of the input tax credit for the acquisition if it had been made solely for a creditable purpose and you had provided, or had been liable to provide, all of the consideration for the acquisition. Thus, there is a need to determine whether you made creditable acquisitions in relation to the feasibility study fees and if so, whether these acquisitions were partly creditable acquisitions. Where the feasibility study fees included a GST component, the requirement of paragraph 11-5(b) of the GST Act will be met. You provided consideration for the supplies of services made to you in connection to the feasibility study. Therefore, the requirement of paragraph 11-5(c) of the GST Act will be met. You were registered for GST when you made the acquisitions relating to the feasibility study. Therefore, the requirement of paragraph 11-5(d) of the GST Act will be met. What remains to be determined is whether you acquired the relevant things for a creditable purpose. Section 11-15 of the GST Act defines what is an acquisition for a creditable purpose. Section 11-15 of the GST Act states: (1)           You acquire a thing for a creditable purpose

to the extent that you acquire it in *carrying on your *enterprise. (2)           However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. Paragraphs 122 to 130 of 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 (MT 2006/1) provides guidance on determining whether an entity has carried on activities in the course of the commencement or furtherance of an enterprise. It also includes guidance about feasibility studies. 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? statesat paragraph 1:

Yes. Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The principles in that Ruling apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. Paragraph 122 to 130 of MT 2006/1 states: Commencement of an enterprise 122. Given this definition, it follows that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. 123. In the Commissioner's view the term, 'doing anything in the course of the commencement....of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

124. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated. 125. An enterprise must start somewhere, and the first step or steps may be minor. In Ferguson v. Federal Commissioner of Taxation Bowen CJ and Franki J expressed the point in this way: Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. 126. In the case of feasibility studies involving genuine business activities where, from the scale and nature of these activities it is clear that there has been serious contemplation of developing an enterprise, it will be accepted that this has been the commencement of an enterprise.

127. In contrast there is a range of activities that are of a private nature or too remote from fruition that are not the commencement activities of an enterprise. As well, commencement activities require more than an intention. For example, if a person undertakes a tour of a wine region to enhance their knowledge of the wine industry with the aim to possibly establish some future business activity, the Commissioner would not consider this to be commencement activities. 130. In Merseyside Cable Vision Ltd v. Commissioners of Customs and Excise a cable television company was entitled to input tax credits during the preparatory stages of a business which included a feasibility study. The company's objective intention was always to operate a cable television service. The credits were allowed even though the company had not obtained a licence at the time of the hearing. It was held, having regard to all of the relevant circumstances, that it did not matter that it was not absolutely certain that the taxpayer would be able to operate a cable television. Paragraph 52 of 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 changes in extent of creditable purpose also discusses feasibility studies. It states: 52. The test for establishing whether you have made an acquisition in carrying on your enterprise is broader than the test for income tax deductibility. Under section 195-1, 'carrying on' is defined to include the commencement or termination of your enterprise. For example, usually the cost of a feasibility study incurred in commencing a business is not deductible for income tax purposes, while acquisitions for the same study conducted in the course of commencing an enterprise could be creditable acquisitions under the GST Act. Based on the information provided you conducted a feasibility study evidenced by the expenditure incurred. Thus, in accordance with paragraph 52 of GSTR 2006/3, acquisitions associated with a feasibility study could be creditable acquisitions under the GST Act as the things acquired would be acquired in the course of the commencement of an enterprise.

We consider that you acquired the services associated with conducting the feasibility study in carrying on a property development enterprise and more specifically this activity was an enterprise commencement activity despite the fact that you did not proceed with the subdivision of the property as: •                The subdivision activity, if it had gone ahead, would have involved the operation of a property development enterprise. •                You took the preliminary steps normally associated with an activity undertaken to commence a property subdivision enterprise. •                You took all the steps necessary to arrive at a determination as to whether the subdivision would be viable. •                There was a large scale and repetition to the activity associated with assessing the viability of the subdivision and it was conducted over a number of years.

However, if you had subdivided the property, this would have resulted in the sale of a number of smaller lots - one of which would have been an input taxed sale of residential premises, and the others would have been taxable supplies of vacant land. The sale of the vacant lots would not have been input taxed under section 40-65 of the GST Act, as they would not have been residential premises. Therefore, your acquisition of the services associated with the feasibility study would have related partly to making an input taxed sale of residential premises and partly to making taxable sales of vacant land. Hence, you have acquired these services partly for a creditable purpose. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act. As you have met all the requirements of section 11-5 of the GST Act, you have made creditable acquisitions. However, as these creditable acquisitions were made only partly for a creditable purpose, they are partly creditable acquisitions under paragraph 11-30(1)(a) of the GST Act. Formula for calculating your input tax credit entitlements

You were only entitled to partial input tax credits on your acquisition of services associated with the feasibility study, as they were creditable acquisitions, but you acquired the relevant services only partly for a creditable purpose The amount of your input tax credit entitlement for a given feasibility expense would be the GST component multiplied by the creditable purpose percentage. See 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 creditable purpose for guidance on how to determine the extent of creditable purpose of an acquisition.