This article was published in this month’s edition of the Law Society Journal of NSW.
Your clients Betty and Bruce recently called to say that their self managed superannuation fund was selling a residential property and to request that you prepare a contract for them.
They told you that their superannuation fund bought some vacant land a couple of years ago on which it built a house to be rented out as a long-term income earning investment. However, after the house was completed, but before it was rented, they received an offer that was too good to refuse and have therefore agreed to sell.
Betty and Bruce asked about GST. They said their fund was not registered. You said that because they bought and developed the property planning to keep it as a long-term rental proposition, GST would not be an issue.
You completed the contract by indicating the sale was not subject to GST. Everything went according to plan. Settlement happened to Betty and Bruce’s great satisfaction.
Some time after settlement you receive a telephone call from Chloe who identifies herself as Betty and Bruce’s accountant. She asked if you took into account the fact that the sale may be subject to GST.
Your response was no, why? You pointed out that Betty and Bruce were not property developers so why would GST be an issue? How could you say they were conducting an enterprise? And if they aren’t conducting an enterprise, how can the sale be subject to GST?
Chloe said yes, but it is a bit more complicated than that. ‘That if you buy and develop a property for the purpose of resale, that is a profit that can be caught too, and …’
Cutting her short you say but that isn’t the case here. Betty and Bruce bought the property for long-term rental. Surely, you say, that is the intention that counts.
Chloe said, with strained patience, just turn up section 9.20 of A New Tax System (Goods and Services Tax) Act 1999 (‘the GST Act‘), which you do.
You see, somewhat to your surprise, that the definition of “enterprise” includes ‘an activity, or series of activities, done… by the trustee of a complying superannuation fund…’ (s9.20(1)(da).
Somewhat subdued, you ask Chloe what are the consequences of this. Somewhat more sympathetically,
Chloe says that while she understands the reasoning, she had recently been involved in a discussion group when the issue was discussed. A major topic of the discussion was a particular private binding ruling – authorisation number 17550 – mentioned.
You say, let me get back to you after I have a look at the ruling. When you do you find that the facts are very similar to those involving Betty and Bruce. To your dismay you see the ATO’s opinion that, in the case considered in the ruling there was an enterprise, and that there was a requirement to register and that it was the sale proceeds that were taken into account in considering the threshold.
Working your way through the ruling you see the Commission’s analysis is as follows:
Was the sale a taxable supply?
The sale of new residential premises (like any other property) is a taxable supply if the requirements of section 9.5 of the GST Act apply.
One of those requirements is that the sale is “in the course or furtherance of an enterprise that you carry on”.
Another is that “you are registered, or required to be registered”.
Was the sale by the superannuation fund in the course of furtherance of an enterprise?
The definition of enterprise includes (as referred to by Chloe earlier) ‘an activity, or series of activities, done … by the trustee of a complying superannuation fund… (s9.20(1)(da)).
The activities of a superannuation fund include maximising returns on investments, which includes the selling of a house. The sale is therefore in the course or furtherance of an enterprise.
Was the superannuation fund required to be registered?
Because the sale is made ‘in connection with an enterprise…’ the sale price is taken into account in considering whether or not the registration threshold is exceeded: (s188.2(1))
And because the sale price was well over the threshold of $75,000 the requirement to register exists.
Is the news all bad?
Pretty much so. The margin scheme could have been used if you were aware of the problem in time to have an agreement with the purchaser. On the other hand, the private binding ruling indicates that registration can be backdated entitling Bruce and Betty to claim input tax credits on their building costs.
• Everything related to the normal conduct of a complying superannuation fund is an enterprise for GST purposes.
• The bad news is that any sale that is neither input taxed nor GST free can be subject to GST.