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ATO Interpretative Decision

ATO ID 2002/710

Goods and Services Tax

GST and increasing adjustment for the purchase of a block of residential flats with leases intact as a going concern
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does the entity, a recipient that purchases a block of residential flats with leases intact as a GST-free supply of a going concern, have an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it intends to lease those residential flats after settlement?

Decision

Yes, the entity has an increasing adjustment under Division 135 of the GST Act, when it intends to lease those residential flats after settlement.

Facts

The entity is a recipient that purchases a block of residential flats, with leases intact, as a GST-free supply of a going concern under section 38-325 of the GST Act. The entity intends to continue to lease those residential flats after settlement.

The entity is registered for goods and services tax (GST).

Reasons for Decision

Subsection 135-5(1) of the GST Act provides that an entity has an increasing adjustment where:

(a)
it is the recipient of a supply of a going concern; and
(b)
it intends that some or all of the supplies to be made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

The entity purchases a block of residential flats, with leases intact, as a GST-free supply of a going concern under section 38-325 of the GST Act. Therefore, the entity is the recipient of a supply of a going concern and paragraph 135-5(1)(a) of the GST Act is satisfied.

The entity intends to continue to lease those residential flats after settlement. The lease of residential premises is an input taxed supply under section 40-35 of the GST Act. Therefore, the entity intends that all supplies made through the enterprise of leasing the residential flats, are supplies that are neither taxable supplies nor GST-free supplies and paragraph 135-5(1)(b) of the GST Act is satisfied.

Therefore, the entity has an increasing adjustment under Division 135 of the GST Act, when it intends to lease those residential flats after settlement.

[Note 1: Subsection 135-5(2) of the GST Act provides that the amount of an increasing adjustment under subsection 135-5(1) of the GST Act is:
1/10 x supply price x proportion of non-creditable use
where:
supply price means the price of the supply in relation to which the increasing adjustment arises
and
proportion of non-creditable use is the proportion of all the supplies made through the enterprise that the entity intends will be supplies that are neither taxable supplies nor GST - free supplies, expressed as a percentage worked out on the basis of the price of those supplies
In this case, the proportion of non-creditable use is the proportion of all the supplies to be made through the residential flats purchased that the entity intends will be supplies that are input taxed (that is, the lease of residential premises). If this percentage is 100%, the increasing adjustment is equal to 1/10 of the price of the residential flats. The adjustment increases the entity's net amount by an amount equal to the GST the entity would bear on the acquisition if it had been a taxable supply to it. The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit that the entity would have been entitled to for the acquisition if the supply had been a taxable supply.
Note 2: This ATO ID should be read in conjunction with ATO ID 2002/709.]

Date of decision:  19 June 2002

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 38-325
   section 40-35
   Division 135
   subsection 135-5(1)
   paragraph 135-5(1)(a)
   paragraph 135-5(1)(b)
   subsection 135-5(2)

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2001/5

Related ATO Interpretative Decisions
ATO ID 2002/709

Keywords
Goods and Services tax
GST-free
Supply of a going concern
Supply of residential premises
Input taxed supply
Increasing adjustment

Business Line:  GST

Date of publication:  31 July 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 19 June 2002 Original statement
  19 March 2010 Archived

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