As the property market continues climbing to new heights, the key question facing clients engaging in property activities is whether their property activities constitute an enterprise and if they are ‘required to register for GST’. Whilst this appears to be an innocuous question, the impact of getting this wrong can be costly.
Essentially, an entity will be liable to pay GST where it makes a ‘taxable supply’. This will occur where:
- it makes the supply for consideration; and
- the supply is made in the course or furtherance of an enterprise that it carries on; and
- the supply is connected with the indirect tax zone; and
- it is 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 such, GST is payable on the supply of certain types of property if the supplier (seller or vendor) makes a “taxable supply” and is registered or required to be registered for GST purposes. Generally, your client will not be required to register for GST if:
- their property transactions are for private use, such as constructing or selling their family home; or
- they only receive residential rent from your property.
However, an entity may be required to register for GST, (even if they are not a business), where:
- their turnover from property transactions and other taxable transactions is more than the $75,000 GST registration threshold; and
- their activities are regarded as an ‘enterprise’, for example – if they buy land with the intention of developing it for resale at a profit.
The crucial issue is determining whether the property activities amount to an “enterprise”. Two cases on this matter have resulted in taxpayers having to pay GST even where they were not registered for GST at the time of the sale of their property due to the property activities constituting an enterprise.
In the Administrative Appeals Tribunal (AAT) decision in Lance’s Case (Lance v Commissioner of Taxation (Taxation) [2024] AATA 11) Mr Lance failed to prove that the development works relating to the subdivision of his property were not carried on in the course or furtherance of an enterprise. The AAT noted that Mr Lance’s actions—subdividing, rezoning, engaging experts, and lodging development plans were consistent with conducting a business or at least an adventure in the nature of trade. The AAT held that evidence showed Mr Lance was enhancing the property’s value with the clear intention of selling at a profit and not simply holding it for private enjoyment. The Tribunal rejected the argument that the works were just a “realisation” of a private asset and instead that the activities were commercial development activities with a trade purpose.
In the Collins SMSF Case, (Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and FCT [2022] AATA 628, AAT, Olding SM, 4 April 2022), the AAT has held that the Collins Fund, , was subject to GST on the sale of their subdivided residential lots (despite having deregistered prior to development activities). This was on the basis that it was ‘required to be registered’. The Collins SMSF contended that the sales were the mere realisation of a capital asset and thus, under s 188-25(b) of the GST Act ought to be disregarded as the sales were of a capital asset made as a consequence of the ceasing of an enterprise. The Tribunal rejected this, finding the subdivision and sale were part of a commercial venture, not a passive realisation.
The key learning from these cases is that significant development works and commercial intent will prevent sales being treated as mere capital realisation, resulting in sales being considered part of a commercial venture. Both cases demonstrate how the enterprise test applies; if activities look like trade, an enterprise is being conducted and GST applies.
The cases reinforce the ATO’s view that property development and subdivision, even if argued as “one-off” or “capital realisation,” can be treated as a commercial venture subject to GST. Importantly, it demonstrates that advice should be obtained if there is any doubt and, if not properly planned for, the GST implications can be substantial.
Please contact Mimi Ngo if you would like to discuss the above matter.