Will the sale of your investment property be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
No. The sale of your investment property is the transfer of a capital asset and under section 188-25 of the GST Act it is disregarded in working out your projected GST turnover. Not meeting the requirements for GST registration, you are not providing a taxable supply under section 9-5 of the GST Act. This ruling applies for the following period : X November 20XX - X November 20XX
You are both individuals and not registered for GST. You purchased a residential property located in a town in Australia on the DD Month YYYY. You subdivided this property into two and constructed a dwelling for each lot. The constructions started in Month YYYY and was completed in Month YYYY. No GST was claimed for the construction of the buildings. The aim of the project was to live in one house and rent out the other house. The rental property is currently tenanted under a Residential Tenancy Agreement, managed by XYZ Real Estate Agency, which expires on DD Month YYYY. This is the first and only time you have engaged in subdivision and construction of houses, and have no intention of doing this again. You do not have specific skill sets or relevant knowledge for property developing beyond the project detailed here. No business plans were drawn up for this subdivision and construction activity. Due to health issues and the rising cost of interest rates you may need to sell this property within the next twelve months.
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 40-35 A New Tax System (Goods and Services Tax) Act 1999 section 40-75 A New Tax System (Goods and Services Tax) Act 1999 section 188-10 A New Tax System (Goods and Services Tax) Act 1999 section 188-15 A New Tax System (Goods and Services Tax) Act 1999 section 188-20 A New Tax System (Goods and Services Tax) Act 1999 section 188-25 A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Detailed reasoning The property was constructed over one year ago and is considered to be 'new residential premises' as defined in the GST Act as you have rented the property out for just over one year whereas subsection 40-75(2) requires the property to be rented out continuously for five years. Where a supply of real property is new residential premises it is a taxable supply where the conditions of section 9-5 are met. Section 9-5 of the GST Act provides that 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 to the indirect tax zone (Australia); and (d) you are registered or required to be registered for GST. However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.
In this case, the projected sale of the property will be made for consideration and is located in a town in Australia. As such, we will consider whether the sale of the property is made in the course or furtherance of any enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered. Finally, it needs to be considered whether the supplies in any enterprise are input taxed or GST free. In the course or furtherance of an enterprise The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states: An enterprise is 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; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or ...
You currently have the rental property rented until DD Month YYYY. This is an enterprise as it meets subsection 9-20(1)(c) of the GST Act. That is, the property was supplied on a regular or continuous basis in the form of a lease. Therefore, we consider you were carrying on an enterprise. The subdivision of the land, construction of the residential dwelling (rental property), its rental and eventual sale would all be considered to be a series of activities done in the course or furtherance of your rental enterprise. However, under that enterprise, you were not registered for GST, you were not required to be registered as you were below the turnover threshold. Residential rent is an input taxed supply under section 40-35 of the GST Act. As discussed later, these amounts are not taken into account when determining your registration threshold. The phrase 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise which includes sale of the residence.
Other activity or series of activities you conducted may be considered to be an 'enterprise' for GST purposes to determine if they amount to a business, or are in the form of a business, or is a one-off adventure in the nature of trade. This is primarily because the activities of construction and eventual sale may be in the commencement and termination of a property development enterprise. Additionally, as section 188-25 of the GST Act may be engaged in this case, we need to consider all enterprises you may be conducting in assessing your projected turnover and consequently, we need to determine if you were also engaged in the form of a business of property development or a one-off adventure in the nature of trade in making the sale. 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) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for 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 (GSTD 2006/6)extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes. Paragraphs 94, 120 and 140 of MT 2006/1 provides the following guidance on carrying on an enterprise: Enterprise [...] 94. Carrying on an enterprise includes activities done in the commencement or termination of the enterprise. [...] When is an enterprise being carried on? 120. In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. The definition ensures that activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.[...] [...] Termination of an enterprise
140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets. In the event of the sale of the rental property, the leasing activity will terminate, as detailed in points 94,120 and 140, the termination activity in itself is considered an enterprise activity for GST purposes. You are carrying on a leasing enterprise and the termination by way of sale of the property is an activity that forms part of that leasing enterprise. Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state: 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; • an intention to make a profit from the 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.
The question of 'whether a business is being carried on' is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. Considering your arrangement, you constructed the rental property with the intention of holding it long term as a residential rental premises. This indicates that when you finished construction you did not have the intention to build and sell at a profit. Having regard to the facts, the property construction was completed over 1 year before your intention to sell. The facts also indicate that you have been experiencing health issues and have greater costs from high interest rates and cannot afford to keep the rental property. In terms of assessing the scale of your activity, it is one small suburban block in suburban Queensland. On the facts presented, there is no repetition and it is a small scale activity.
The facts indicate that you do not have a significant commercial scale purpose or intention on your part in this arrangement. This arrangement is a subdivision as you acquired the property as a single lot. You arranged for a builder to construct two new residences, one for you and your family, the other which you rented out as soon as it was complete. In this way, you retained experts but only to the extent of hiring a builder. This factor, of itself, does not point to an enterprise. On balance we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not at all large scale. You do not have a business plan for developing the property as the original intent was to rent out the investment property. As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade. Paragraph 237 of MT 2006/1 states:
The term 'profit-making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority said: It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.
Here the property is a leased property and it is accepted it is more likely to be an investment asset, not a business deal or undertaking. The arrangement is a planned rental investment activity that had to be altered significantly due to factors which were largely out of your control. As a result, in addition to health issues you are experiencing the rising cost of interest rates. The scale of the activity is small, you are not employed in a related field and you were looking to take advantage of negative gearing. The arrangement is not complex and the nature of the property is that it was not constructed with profit from sale in mind but rather as a rental and subsequent capital accretion. The motive for the construction of the second dwelling (your home being the first dwelling) was largely to produce rental income. After weighing up all of the information, we consider that you are not carrying on an enterprise of developing the land. The remaining analysis is on whether you are required to be registered for GST in relation to your rental enterprise. Registration Section 23-5 of the GST Act states that you are required to be registered for GST if:
(a) you are carrying on an enterprise; and (b) your GST turnover meets the registration turnover threshold (currently $75,000). As discussed previously, your activities of subdividing the property, building one of the two residential dwellings, and renting that property out falls within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above. The next issue to consider is whether your GST turnover is $75,000 or more. Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if: (a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or (b) your projected GST turnover is at or above $75,000. Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months. Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.
Paragraphs 188-15(1)(a) and 188-20(1)(a) of the GST Act provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. Your rental of the property in this case is an input taxed supply (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises)). As such, rental proceeds in relation to the rental of the property are not included in the calculation of your 'current GST turnover' or your 'projected GST turnover'. Section 188-25 of the GST Act provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours: In working out your *projected GST turnover, disregard: (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and (b) any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an * enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise.
Goods and Services Tax Ruling GSTR 2001/7: Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue. The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7: Meaning of 'capital assets' 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.
33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling. 36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.
Taking into account the facts of this case, we consider the proposed sale of the property would constitute the transfer of a capital asset for the purposes of section 188-25 and in the ordinary course of events would therefore be disregarded when calculating your projected GST turnover. As you had an existing enterprise of renting property, this is an input taxed activity but the sale of new residential premises is generally taxable. The property was not intended to be constructed for the primary purpose of resale. Furthermore, you have derived your rental income from the use of the property as opposed to the trading of properties. Given the above, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST. Conclusion The proposed sale of the property will be made for consideration and is located in a town in Australia. Even though the supply was made through the rental enterprise you conducted, you are neither registered nor required to be registered for GST as the sale is excluded from your turnover calculations. Consequently, you will not be making a taxable supply when you sell the property.