GST - property

1 Will you, the taxpayer, be making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the property located at XXXX (the Property)?

1 Yes. Question 2 If yes, are you required to be registered for GST pursuant to section 23-5 of the GST Act as a result of selling the Property? Answer 2 Yes. Question 3 If yes, on application by you, will the Commissioner cancel your GST registration pursuant to section 25-55 of the GST Act effective from 1 July 20XX? Answer 3 No. Question 4 If you are entitled to cancel your GST registration, will you have an increasing adjustment in accordance with section 138-5 of the GST Act in regard to any input tax credits claimed on the Property throughout the period of your ownership? Answer 4 Not applicable. This ruling applies for the following periods : DDMMYYYY to DDMMYYYYYY The scheme commenced on: DDMMYYYY

You, the taxpayer, are registered for GST effective from DDMMYYYY. Your ABN application lists your main activity as 'Property Development - Land Development or Subdivision'. Your Australian and New Zealand Standard Industrial Classification (ANZSIC) code classifies you under the 'Management Advice and Related Consulting Services' class. You are a related entity of Entity A, who also acts as your parent entity for income tax purposes. The ANZSIC code of Entity A classifies them within the 'House Construction' industry. On DDMMYYYY, Entity B entered into a contract of sale (the Purchase Contract) with Entity C to purchase the property located at address (the Property). On DDMMYYYY, a nomination was made by Entity B to nominate you as the substitute purchaser to take a transfer or conveyance in lieu of the purchase of the Property. The Property was purchased for an amount of $amount. Settlement for the purchase of the Property occurred on DDMMYYYY. Given the size and settlement conditions of the Property, it is common for Entity B to nominate a related party to settle the purchase. The Property was purchased for long-term land banking with potential for residential development.

The identifiers of the Property include the following: •                Lot number on Plan of Subdivision number •                Volume: number •                Folio: number The size of the Property is number hectares, and includes an existing residential premises and farming sheds. You removed number shed from the Property. The Property was rezoned to 'Urban Growth Zone' on DDMMYYYY prior to your purchase. The rezoning of the land was a result of a government initiative. Since your purchase of the Property, you have used the Property in the following ways: •                Leasing the residential premises and the surrounding number acres (approximate) of land (Leasing); and •                Running your cattle business for fattening and sale purposes (cattle fattening and sales). The lease of the residential premises on the Property ceased on DDMMYYYY. The final sale relating to the cattle fattening and sales occurred on DDMMYYYY. Agreement On DDMMYYYY, you, as the owner of the Property, entered into an Agreement (the Agreement) with the Council. Land Project Schedule number to the Agreement lists the Land Project (the Land Project) to be undertaken on the Property.

In conjunction Clause number of the Agreement, the Land Project will be transferred to or vested in the Council prior to or concurrent with the relevant stage as described in the endorsed plans. The Agreed Land Value for the Land Project is $amount. Open Space Land Schedule number to the Agreement lists the Open Space Land (the Open Space Land), with an additional description for an equalisation payment to be made from the owner to the Council. In conjunction with Clause number of the Agreement, the Open Space Land depicted above will be transferred to or vested in the Council prior to or concurrent with the relevant stage as described in the endorsed plans. The owner is required to pay the Council an Equalisation Payment for any of the Open Space Land subject to a payment. The Growth Areas Infrastructure Contribution Certificate issued on DDMMYYYY lists the Development Infrastructure Contribution amount as $amount. Sale contract On DDMMYYYY, you entered into a contract of sale (the Sale Contract) for the sale of the Property to the Purchaser for a total price of $amount, exclusive of GST.

The Sale Contract was subject to a settlement period of number years from the date the Sale Contract was entered into. On DDMMYYYY, a deed of variation (Deed) was signed to extend the settlement period to DDMMYYYY, number years from the date the Sale Contract was entered into. The Property was listed on website. Since the termination of the Leasing and cattle fattening and sales activities on the Property, you have simply maintained the Property, incurring minor expenditure in this regard. The activities that are being undertaken to maintain the Property include primary maintenance activities related to hay mowing and fence repairs. You engaged a local farmer to mow the hay with a verbal agreement that the farmer would sell the hay and collect the proceeds in exchange for the mowing service. The estimated cost of the mowing services is to be around $amount to $amount. From DDMMYYYY, you expect to incur expenditure for maintenance of the Property (in the ranges of $amount to $amount including GST) and certain other expenses to complete the sale of the Property such as legal and real estate agency costs (estimated at $amount including GST).

Besides the Property in question, you currently do not own any other properties, nor have you previously owned any other properties. Your registration for GST is in accordance with a group company policy. You provided the following documents as part of your ruling application: •                The Sale Contract •                Deed of Variation of the Sale Contract •                Title Search of the Property •                Plan of Subdivision; and •                Land Information Certificate.

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 25-55 A New Tax System (Goods and Services Tax) Act 1999 section Division 38 A New Tax System (Goods and Services Tax) Act 1999 section 40-65 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

Question 1 Section 9-5 provides that you make a taxable supply if: a)    you make the supply for consideration; b)    the supply is made in the course or furtherance of an enterprise that you carry on; 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. As the Property contains an existing dwelling, we first need to determine whether its sale will be a supply of input taxed residential premises under Division 40. Input taxed residential premises Residential premises is defined in section 195-1 as land or a building that: (a)   is occupied as a residence or for residential accommodation; or (b)   is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of occupation) and includes a floating home. Subsection 40-65(1) states: A sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises provides the following commentary in relation to land included with a building: Land supplied with a building 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.

On the facts provided, the existing residence on the Property meets the definition of residential premises. The area of number hectare that can be enjoyed in conjunction with the house will also form part of the residential premises. As such, the supply of the residential premises and area surrounding the premises of the Property will be an input taxed supply under subsection 40-65(1). As we have determined that the portion of the Property that forms part of the residential premises will be input taxed, it now remains to be determined whether the supply of the remainder of the Property will be taxable. Based on the facts, you will be selling the remainder of the Property for consideration, being the sale price of the Property. The supply will be connected with the indirect tax zone as the Property is located in Australia and you are registered for GST. There are no provisions in Division 38 under which your sale of the remainder of the Property would be GST-free. As such, the requirement that needs to be considered is paragraph 9-5(b) and whether the supply is made in the course or further or an enterprise that you carry on. Enterprise

The term enterprise is defined in subsection 9-20(1) as follows: (1)   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)   in a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or ... The term 'carrying on' is defined in section 195-1, which provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. The meaning of enterprise is considered in 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). According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of 'enterprise' beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is on determining the factors indicating a business. Paragraph 270 of MT 2006/1 provides the Commissioner's view on land bought with the intention of resale: Land bought with the intention of resale 270.       In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade.

You contend that the activities of Leasing and cattle fattening and sales conducted on Property ceased prior to DDMMYYYY and you are not carrying on any other enterprise. Whilst the disposal of the property is not part of the leasing or cattle fattening and sales enterprise, it is a furtherance of the activity of land banking which was your original purpose of selling the land for profit. You contend that the sale of the Property is not an activity conducted in the furtherance of, or termination of your enterprise. However, we do not agree with your contentions. Rather, we consider that, at the time of entering into the Sale Contract, you continued to carry on the land banking enterprise where the land was purchased with the intention of resale at a profit. Despite leasing the residential premises situated on the Property and using the land temporarily for the cattle fattening and sales, your primary enterprise is considered to be a land banking enterprise, consistent with the view set out under MT 2006/1.

Consequently, we consider that you were carrying on a land banking enterprise under section 9-20 of the GST Act when you entered into the Sale Contract on DDMMYYYY to sell the Property. As your supply of the Property as a whole will be partly taxable due to the input taxed supply of the residential premise, you will therefore be making a mixed supply of the Property. As such, apportionment of the taxable and input taxed components of a mixed supply is required on a fair and reasonable basis. Question 2 and 3 Section 25-55 sets out when the Commissioner must cancel registration and provides that: (1)   The Commissioner must cancel your *registration if: (a)   you have applied for cancellation of registration in the *approved form; and (b)   at the time you applied for cancellation of registration, you had been registered for at least 12 months; and (c)   the Commissioner is satisfied that you are not *required to be registered. (2)   The Commissioner must cancel your *registration (even if you have not applied for cancellation of your registration) if: (a)   the Commissioner is satisfied that you are not *carrying on an *enterprise; and

(b)   the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months. ... (*denotes a term defined in section 195-1 of the GST Act). Subsection 25-55(2) is not relevant to your case as we have determined above in Question 1 that you are carrying on an enterprise of property development. Therefore, what remains to be determined is whether subsection 25-55(1) applies. Section 23-5 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). Paragraph 23-5(a) is satisfied as you are carrying on an enterprise. We now need to consider whether your GST turnover meets the registration turnover threshold when you make the supply of the Property. Subsection 188-10(1) provides you have a GST turnover that meets the registration turnover threshold if: (a)  your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or (b)  your projected GST turnover is at or above the turnover threshold.

'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. '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. Section 188-25 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: (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 asset' is discussed in 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. 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. You submit that the activities conducted in relation to the Property are consistent with the mere realisation of a capital asset. Therefore, the sale of the Property will be excluded from the calculation of your projected turnover under section 188-20. We disagree with your submission. You held the Property as trading stock (revenue asset) since its acquisition as the Property was acquired for long-term land banking with potential for residential development. Later, when the development did not eventuate and you decided to sell the undeveloped Property, we do not consider the character of the Property changed. Relevantly, Goods and Services Tax Advice GSTA TPP 070:

Goods and services tax: Is a party to a contract for the sale of a commercial property who deregisters for GST before settlement required to pay GST? provides an example of the consequence of the vendor's GST registration when the sale of a commercial property is not a capital asset: Commercial property is not a capital asset If the commercial property is not a capital asset, the Commissioner is not required to cancel the supplier's registration. The value of the supply is included in the supplier's projected annual turnover, which is likely to exceed the registration turnover threshold. The supplier is required to be registered. The GST payable is attributable to the tax period where any part of the consideration is received, which is likely to be the period in which settlement occurs. The supplier is required to give the recipient a tax invoice if requested (subsection 29-70(2)), unless the supplier chooses to use the margin scheme (section 75-30). As we consider that the Property is not a capital asset pursuant to section 188-25, the proceeds from the sale of the Property will need to be included when calculating your projected turnover.

As it can be determined that the sale of the Property will exceed $75,000, the Commissioner is not satisfied that your GST turnover when you supply the Property is below the GST registration turnover threshold in subsection 188-10(1). Consequently, this means that paragraph 25-55(1)(c) will not be satisfied and the Commissioner is not required to cancel your GST registration. That is, you are not entitled to cancel your GST registration by DDMMYYYY pursuant to section 25-55.