1 Will the sale of a unit (new residential premises) situated on land created from the subdivision of a property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
1 No, the sale of the unit will not be a taxable supply under section 9-5 of the GST Act. This ruling applies for the following periods : Date to date Date to date The scheme commenced on: Date
You purchased a property containing a house which you used as your main residence. You took out a home loan to purchase the Property. The Property was zoned General Residential when you purchased it, and it has not since been rezoned. You decided to subdivide the Property and build two new residential premises ('the Units'). You engaged an architect to design the Units and lodge the planning permit application. Your initial intention behind subdividing the land and building the Units was for you to live in one unit as your main residence and for your parents to live in the second unit. You have demolished the existing house and are constructing the Units. Your parents have contributed financially to the construction, and you took out a loan. Your parents will contribute to the loan repayments. Due to circumstances, your parents may now not be able to live in the second unit and you would have to sell it as you will not be able to make the loan repayments. You are currently not registered for GST, nor have you been registered in the past. You are living in a rental property while the Units are being constructed.
You did not obtain any advice prior to your decision to undertake the development. You do not have any previous history of property development. To date, you have not obtained any advice in relation to the sale of the second unit.
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 paragraph 23-5(a) A New Tax System (Goods and Services Tax) Act 1999 section 188-10 A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-15(1)(a) A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-20(1)(a) 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
Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make. Section 9-5 of the GST Act states 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 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. There are no provisions in the GST Act under which the sale of the second unit would be a GST free or input taxed supply. You will make a supply of real property located in Australia for consideration. Therefore, your supply will satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. What remains to be determined is whether the sale of the second unit will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST. Supply in the course or furtherance of enterprise
The term 'enterprise' for GST purposes is defined in section 9-20 of the GST Act and states the following: 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 (c) leasing out property on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or ... Section 195-1 of the GST Act states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'. This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise. 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 guidelines on the meaningof carrying on an enterprise . Paragraph 1 of 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? provides that the guidelines in MT 2006/1 are considered to apply equally to the term'enterprise' as used in the GST Act and can be relied upon for GST purposes. 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. Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling T R 97/11 Income tax: am I carrying on a business of primary production? , lists indicators of carrying on a business: • 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. 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. 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. The facts presented show that:
• you are constructing the second unit with the intention of your parents living in it. • your parents have contributed financially towards the development costs and will contribute to the loan repayment if they live in the second unit. • you are unable to service the loan if your parents do not move into the second unit. • there is no repetition or regularity, and the activity is small scale. Based on the facts provided, we do not consider that you are carrying on a property development enterprise in the form of a business. As the transaction may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities are in the form of an adventure or concern in the nature of trade. 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. Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions. • The subject matter of the realisation; • Length of period of ownership;
• Frequency or number of similar transactions • Supplementary work on or in connection with the property realised • Circumstances that were responsible for the realisation • Motive. Paragraphs 258 and 259 of MT 2006/1 contain guidance on the distinction between trading/revenue assets and investment/capital assets. Paragraphs 258 to 261 state the following: Trade v. investment assets 258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. 259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. 260. Assets can change their character but cannot have a dual character at the same time.
261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes. 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. The property was originally acquired for private purposes, with the existing residential dwelling being used as your main residence. You engaged an architect to design two units and apply for a planning permit. Your plan was to live in one unit and for your parents to live in the second unit. Funding for the subdivision has been provided by your parents and through a loan. Your parents may not be in a position to move into the second unit and consequently you will have to sell the second unit as you will be unable to fund the loan. You will retain one unit to be used as your principal place of residence.
Your activities in relation to the subdivision of the property have not been done in a businesslike manner. You did not acquire additional land to add to the original parcel of land, and the arrangement is not complex. You have not undertaken subdivision or land development activities in the past. While there appears to be a coherent plan for the subdivision of the property and in constructing the second unit you will have developed the land beyond the minimum necessary to secure council approval for the subdivision, this was done for the purpose of establishing a house for your parents to live in and was not done with the view to profit from its sale. Given the above, we consider that your activities do not amount to the carrying on of an enterprise either as a business or an adventure or concern in the nature of trade. Therefore, the sale of your second unit will not be done in the course or furtherance of a property development enterprise you carry on. On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property
Paragraphs 303 to 322 of MT 2006/1 discuss activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Goods and Services Tax Determination GSTD 2000/9 Goods and services tax: if you let out residential premises do you need to get an ABN for PAYG purposes or register for GST? explains at paragraph 7 that the letting of a property is an activity in the nature of a lease, licence or other grant of an interest in property. If it is done on a regular and continuous basis, the activity will meet the definition of enterprise. The leasing of a property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes. This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST. Furthermore, the activities associated with the commencement or termination of a leasing enterprise will also fall within the scope of an enterprise for GST purposes.
When you began the process of subdividing the Property you intended for your parents to live in the second unit once it was completed. Your parents would contribute to the repayment of the loan under an informal private/familial arrangement. As your intention was to make the second unit available to your parents for payment this would encompass a leasing enterprise as per paragraph 9-20(1) of the GST Act in that you would be leasing the property on a regular or continuous basis. Your activities associated with the subdivision of the Property and the construction of the second unit are activities undertaken in the commencement of your leasing enterprise. If your parents are not in a position to move into the second unit once construction has been completed, you will be forced to sell the second unit as you will not be able to fund the loan repayment. The activities associated with marketing and selling the second unit will also be undertaken in the course or furtherance (including the termination) of your leasing enterprise. The sale of a capital asset used in a leasing enterprise is considered to be made in the course of that enterprise pursuant to paragraph 9-20(1)(c) of the GST Act. Therefore, the requirement in paragraph 9-5(b) of the GST Act will be satisfied in this case.
The remaining analysis is on whether you are required to be registered for GST in relation to your leasing 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, building the second unit and making it available for your parents to live in for payment, falls within the scope of 'carrying on an enterprise' of leasing thus satisfying subsection 23-5(a) of the GST Act. The next issue to consider is whether your GST turnover is $75,000 or more. Subsection 188-10(1) of the GST Act 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.
'Current GST turnover' is defined in section 188-15 of the GST Act as the sum of the values of all of your supplies made in a particular month and the preceding 11 months. 'Projected GST turnover' is defined in section 188-20 of the GST Act 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. Leasing the property 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 leasing of the second unit are not included in the calculation of your 'current GST turnover' or '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. Based on the facts of this case, we consider that the proposed sale of the second unit will constitute the transfer of a capital asset for the purposes of section 188-25 of the GST Act and will therefore be disregarded when calculating your projected GST turnover. Given the above, your turnover will consist of income that is not required to be included in the calculation of your GST turnover, providing this does not change, your GST turnover will not meet the registration turnover threshold under paragraph 23-5(b), and you are not or will not be required to be registered for GST in relation to the sale of the second unit. Conclusion The sale of the second unit created from the subdivision of the property will not be a taxable supply as all the elements of section 9-5 will not be satisfied.