1 Is the net profit on the sale of the Property only reportable as a capital gain?
No. Question 2 Will the net profit on the sale of the Property be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer Yes. Question 3 Will section 118-20 of the ITAA 1997 apply to prevent any double taxation by reducing the capital gain made on the sale of the Property by the amount assessed as ordinary income? Answer Yes. Question 4 Was the sale of the Property a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Answer Yes. This ruling applies for the following period: Year ended 30 June 20XX
On Date 1, Person A and Person B (you) agreed to purchase a block of land subject to title (the Property) which is part of a new housing estate (the Estate). At the same time, you accepted a quote from a builder to build a house on the block. At that time, you were living in a multi- unit complex in a unit (the Unit), with the other units being tenanted. You borrowed from the bank to finance the block and construction of the dwelling. Your loan was recorded as a residential investment loan. The explanation you have given for this is that you already had an owner occupier loan and the bank would not allow you to have two owner occupier loans. You have not provided any objective evidence that you advised the bank that the Property was to be your new home. You signed a building contract with the builder dated Date 2. Settlement of the block occurred on Date 3. The land purchase contract states: COVENANTS ON THE TITLE
The Purchaser acknowledges that there are covenants on the title designed to maximise property values, the most important, limiting Owners to using only a percentage of the cheaper building materials. A percentage of the external surface (minus windows, doors and roof) needs to be brick, rendered brick, rendered block or stone. Furthermore, the council require stormwater detention on every home in the municipality, with the council also insisting that each home has one or more rainwater tanks and be plumbed into one of the toilets, so re-use occurs. The Purchaser must ensure that their builder, designer, draughtsman and/or architect complies with the covenants. On Date 4,you submitted a development application to the council for construction of the dwelling. On Date 5,construction of the house commenced. Construction of the house was completed on Date 6. The only involvement you had with the construction of the house was construction of fences and basic landscaping. You experienced setbacks with the new build due to a delay in issuing of the title causing a building price increase and extending the overall timelines by several months. The Property was listed for sale on Date 7.
The Certificate of Occupancy for the Property was issued on Date 8. You signed a contract for the sale of the Property on Date 9. Settlement of the sale occurred on Date 10. You never lived at the Property. Prior to the completion of the house at the Property, you did not take any steps to market the Unit or contact any real estate agents in preparation to sell the Unit. You remain living at the Unit. Your property ownership history You have provided a list of all the properties you have purchased and how you used them. Your experience in the building industry You have not previously undertaken any subdivision or property development projects. You have no current plans to be involved in any subdivision or property development projects in the future. Person B has previously been engaged as a XX agent on a contract basis. Person B is employed by a home building company as a XX consultant. They have been employed by the company for several years. The company has been selling house and land packages in the Estate for several years. Person B was listed as the contact for the company for house and land packages in the Estate that are currently being advertised for sale.
Person A has not been employed in the building industry. You are not currently associated with any entities in any industry. You operated a partnership a few years ago which provided some services unrelated to property development. You are not registered for GST.
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 40-65 A New Tax System (Goods and Services Tax) Act 1999 section 184-1 A New Tax System (Goods and Services Tax) Act 1999 section 188-10 A New Tax System (Goods and Services Tax) Act 1999 section 188-20 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 Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 section
Section 9-5 of 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 you carry on; and (c) the supply is connected with the indirect tax zone; and (d) you are registered or required to be registered A supply is not a taxable supply to the extent that is GST-free or input taxed. For the purpose of section 9-5 of the GST Act, the term 'you' applies to entities generally. An entity is defined in section 184-1 of the GST Act to include an individual and a partnership, amongst others. The Property was owned by two individuals; thus, it must be determined whether for GST purposes it was supplied by each individual separately or by a partnership. Co-owners of a property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, for the purpose of section 9-5 of the GST Act, the entity that made the supply of the Property was the partnership of Person A and Person B.
Paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied because the supply of the Property was for made for consideration; and it is connected with the indirect tax zone as the Property is situated in Australia. What remains to be determined is whether paragraphs 9-5 (b) and 9-5(d) of the GST Act are also satisfied. Paragraph 9-5 (b) of the GST Act - Whether the supply was made in the course or furtherance of an enterprise that you carry on The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Section 195-1 provides that "carrying on" an enterprise includes doing anything in the course of the commencement or termination of the 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 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the
A New Tax System (Australian Business Number) Act 1999 . According to 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? the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. According to paragraphs 262-263 of MT 2006/1, the question of whether an entity is carrying on an enterprise arises where there are 'one-offs' or isolated real property transactions. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature because they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.
A number of public rulings have issued, including TR 92/3 and TR 97/11 which state factors to consider when determining whether a business is carried on or whether an isolated transaction amounts to a business. Paragraph 266 of MT 2006/1 provides that in determining whether isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular. No single factor will be determinative. Application to your circumstances Our view is that the purchase of the land, the construction of the house and the subsequent sale of the Property were activities of an adventure or concern in the nature of trade rather than the mere disposal of a capital asset. The following information that you provided indicates that the isolated transaction was of a commercial nature: • Person B was previously engaged as a XX agent. Currently, they are employed by the employer as a XX consultant. • The employer has been selling house and land packages in the Estate for several years for which Person B is listed as the contact person.
• You purchased the block of land and signed a building contract with the employer several years ago. • While you intended to make the Property your new home, you obtained a residential investment loan instead of an owner occupier loan. • Upon completion, the Property was listed for sale through the employer. After the Certificate of Occupancy was issued, you entered into a contract for the sale of the Property. • Your main reason for building the Property was to move out of the Unit; however, you did not take any steps in marketing the Unit even after you sold the Property. • You did not live in the Property. You continued to live in the Unit. The activities you have undertaken in relation to the Property constitute an enterprise; thus, the sale of the Property was made in the course of that enterprise. Paragraph 9-5(b) of the GST Act is satisfied. Paragraph 9-5 (d) of the GST Act -Whether you are registered or required to be registered for GST Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: (a) the entity is carrying on an enterprise; and
(b) the entity's GST turnover meets the registration turnover threshold. Currently, the registration turnover threshold is $75,000 ($150,000 for non-profit organisations). As you were carrying on an enterprise at the time the XX was sold, paragraph 23-5(a) of the GST Act is satisfied. What remains to be determined is whether your GST turnover met the registration turnover threshold at that time. According to subsection 188-10(1) of the GST Act, an entity has a GST turnover that meets a particular turnover threshold if: (a) the entity's current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the turnover threshold; or (b) the entity's projected GST turnover is at or above the turnover threshold. Subsection 188-15(1) of the GST Act provides that an entity's current GST turnover at a time during a particular month is the total value of all the supplies made or are likely to be made during the 12 months ending at the end of that month.
Subsection 188-20(1) of the GST Act provides that an entity's projected GST turnover at a time during a particular month is the total value of all the supplies made or are likely to be made during the month and the next 11 months. Paragraph 188-25(a) of the GST Act provides that any supply made, or likely to be made, by an entity by way of transfer of ownership of its capital asset is disregarded in working out the entity's projected GST turnover. Application to your circumstances The Property was sold for $XXX,XXX. As the sale was not a supply made by way of transfer of ownership of a capital asset it is not disregarded in working out your GST turnover. 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' At the time of the supply, your GST turnover met the registration turnover threshold as your current and projected GST turnover were above the threshold. Paragraph 23-5(b) of the GST Act is satisfied.
Accordingly, you were required to be registered for GST as a partnership at the time of the supply of the Property. Paragraph 9-5(d) of the GST Act is satisfied. Taxable supply The requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act are met; therefore, the sale of the Property was a taxable supply. The sale was not an input taxed supply under section 40-65 of the GST Act which provides that a sale of residential premises is input taxed unless the residential premises are new residential premises. The Property is new residential premises. There is no provision in the GST Act under which the sale of the Property would be GST-free.