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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051282336231

Date of advice: 13 September 2017

Ruling

Subject: GST and a supply of a property

Issue 1

Will the sale of the property by and Australian entity (you) to a property developer under a two year call option agreement subject to goods and services tax (GST)?

Answer

The sale of the residential premises and the surrounding parcel of vacant land will not be subject to GST when sold as the supply of residential premises and the surrounding parcel of vacant land will not be a taxable supply under section 9-5 of the GST Act.

Issue 2

Is your supply of a call option fee in connection with the sale of the Property to the property developer subject to GST?

Answer

No. Your supply of call option in connection with the sale of the Property to the property developer will not be subject to GST as the supply will not be a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are an Australian entity which is not registered for goods and services tax (GST). You have an Australian Business Number (ABN).

You acquired the property with the house for $X.X million. The property is XX acre block of land with a residential house on it. The property is currently zoned as rural.

You purchased the property as residential premises on a rural land and therefore no GST was charged on your purchase of the property.

The house on the property is used by the owners for residential accommodation on weekends.

You have not done any renovation to the house on the property since your acquisition of the property.

The surrounding land is used for sheep grazing since your acquisition of the property. There are XX sheep on the property.

You have not received any income from the sheep grazing activities.

The Property was never rented out.

The Property has been listed as business assets as an investment on your records.

Recently, you have been approached by a property developer to purchase the property with two year call option agreement.

The call option fee will be $XXX,XXX plus GST for a two year option period. The additional call option fee will be $XX,XXX plus GST if the purchaser decides to extend the option period for a further XX months at the end of the initial option period of X years.

Sheep will be bought and sold up until the sale of the surrounding parcel of the land which can be X-X years being the option periods. Although the option agreement will be signed, the sheep grazing will continue while you are still the owner of the property because there will be no exchange of the contract until the option is exercised.

You will continue to carry on an enterprise of sheep grazing up until the date the land is sold in X or X year time. The sheep grazing enterprise will cease at that point

Any sales of sheep will be reported as income in the XXXX income tax return and cost of the sheep will be claimed as expense in the tax return.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-30

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 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-25

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decisions

Issue 1

GST is payable where you make a taxable supply. You make a taxable supply of land where the transaction satisfies all the requirements of section 9-5 of the GST Act.

Under section 9-5 of the GST Act, 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 that you carry on; and

    (c) the supply is connected with 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.

A supply may be characterised as consisting of one or more things or parts. That is, the supply may be regarded as commercially distinct in its own right or it may be regarded as having several identifiable parts.

You advised that a portion of the property is used as a residence and portion of the property was used for sheep grazing. Therefore, we need to determine the characteristics of your supply of the property.

In this instance you are using the property for the purposes of a residence and also to operate a sheep grazing enterprise. We need to consider if the sale of the property is done in the course of an enterprise that you carry on and if the consideration received on the sale will put you above the registration turnover threshold which will require you to be registered for GST.

Further, we need to consider whether the supply of the property is a mixed supply, consisting of taxable and input taxed parts, or a composite supply of residential premises that is wholly input taxed.

Goods and Services Tax Ruling GSTR 2001/8 provides guidance in relation to mixed or composite supplies.

A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. Whereas a composite supply is a supply that contains one dominant part and the supply includes something that is integral, ancillary or incidental to that part.

Supply of residential premises

Subsection 40-65 (1) of the GST Act provides that 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.

Further, subsection 40-65(2) of the GST Act provides that the sale of real property is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

The term residential premises is defined in section 195-1 of the GST Act to mean land or a building occupied or intended to be occupied as a residence or for residential accommodation, regardless of the term of occupation or intended occupation and includes a floating home.

Paragraph 19 of Goods and Services Tax Ruling GSTR 2000/20, provides that the physical characteristics of the premises determine whether or not such premises are to be used predominantly for residential accommodation. Paragraph 26 of GSTR 2000/20 provides that to be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term.

The issue under consideration is therefore whether the house is to be used predominantly for residential accommodation or capable of being occupied.

Based on the facts provided, the property containing the residential house is clearly residential premises to be used predominantly for residential accommodation. It has the physical characteristics of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living. The purpose of the premises is for personal accommodation. Furthermore, the building was not structurally modified and was intended to be occupied and capable of being occupied as a residence or for residential accommodation.

The premises are neither commercial residential premises, nor new residential premises as defined under the GST Act.

Therefore, it is considered that the house is a residential property used predominantly for residential accommodation. Accordingly, the sale of the residential premises is input taxed and no GST is payable on the sale portion of the residential premises.

However, as the surrounding parcel of vacant land has been used sheep grazing, the supply of the surrounding parcel of vacant land to the residential premise is not input taxed under Division 40 of the GST Act.

Therefore, we need to determine whether your supply of the surrounding part of land is a taxable supply.

Supply of the surrounding parcel of vacant land

Taxable supply

The facts indicate that you satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as

    (a) you make the supply of the surrounding parcel of vacant land for consideration;

    (b) the sale of the surrounding parcel of vacant land is connected with Australia as the surrounding parcel of vacant land is located in Australia,

    (c) the supply of the surrounding parcel of vacant land will be made in the course of the sheep grazing enterprise that you carry on as the surrounding parcel of vacant land is an asset which you use to carry on your sheep grazing enterprise.

Therefore we need to determine is

    ● whether you are registered or required to be registered for GST for the purposes of paragraph 9-5(d) of the GST Act.

Are you required to be register for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the property.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The registration turnover threshold for entities other than non-profit entities is $75,000.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

    n your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

    n your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the anticipated value of supplies in next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

    n supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises)

    n supplies that are not for consideration

    n supplies that are not made in connection with an enterprise that you carry on

    n supplies that are not connected with Australia.

Based on the facts provided, your current GST turnover is nil and therefore, you are not registered for GST. However, given the sale of the property for $XX.XXX million (excluding GST), you will exceed the current GST turnover threshold during the month of sale.

However, even where you have a current GST turnover greater than registration turnover threshold, you will not be required to be registered for GST if the Commissioner is satisfied that your projected GST turnover does not exceed the registration turnover threshold. Thus, we will need to look at whether your projected GST turnover will exceed the registration turnover threshold.

Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

      (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.

Based on facts provided, you use the surrounding parcel of vacant land for sheep grazing and is a capital asset. The ownership of the surrounding parcel of vacant land will be transferred when sold. Furthermore, you advised that the supply of the surrounding parcel of vacant land will be made by you solely as a consequence of ceasing to carry on your sheep grazing enterprise. That is, at the time of the sale you will have sold the sheep and will no longer be carrying on a sheep grazing enterprise.

Consequently, the consideration received from the sale of the surrounding parcel of vacant land will be excluded from the calculation of your GST turnover. Therefore, you will not exceed the registration threshold and you will not be required to register for GST when selling the surrounding parcel of vacant land.

Accordingly, the sale of the surrounding parcel of vacant land will not be a taxable supply as all the requirements in section 9-5 of the GST Act will not be satisfied. Therefore, GST will not be applicable when you sell the surrounding parcel of land.

Summary

The sale of the residential premises and the surrounding parcel of vacant land will not be subject to GST when sold as the supply of residential premises and the surrounding parcel of vacant land will not be a taxable supply under section 9-5 of the GST Act.

Issue 2

GST status of call option

The supply of the call option by you will be a taxable supply where all the requirements in section 9-5 of the GST Act are satisfied. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Call option for residential premises

Input taxed supply

Under subsection 9-30(2) of the GST Act a supply is input taxed if:

    a) it is input taxed under Division 40 of the GST Act or under a provision of another Act, or

    b) it is a supply of a right to receive a supply that would be input taxed under

paragraph (a).

The supply of the call option is a supply of a right to receive a supply of residential premises which would be input taxed under subsection 40-65(1) of the GST Act. Therefore, the supply of the call option is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

As discussed in the reasons for decisions to issue 1, your supply of the residential premises is input taxed supply under subsection 40-65(1) of the GST Act and therefore the supply of the right to receive the residential premises is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

Accordingly, you are making an input taxed supply under paragraph 9-30(2)(b) of the GST Act, when you grant a call option which entitles the grantee to purchase the residential premises, the supply of which is an input taxed supply and no GST is payable on the call option of the residential premises.

Right to acquire surrounding parcel of land

Based on the information provided, you satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as

    (a) you make the supply of the call option for consideration;

    (b) the supply is connected with Australia; and

    (c) the supply of is made in the course of your sheep grazing enterprise

As currently you are not registered for GST, we need to consider whether you are registered for GST when you supply call option.

Are you required to be register for GST?

As stated in reason for decisions issue 1, you will be required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. However, under section 188-25 in working our your projected GST turnover, disregard any supply made by you by way of transfer of ownership of capital assets and any supply made or likely to be made by you solely as a consequence of ceasing to carry on enterprise.

For GST purposes, we consider that where the supply is the sale of a capital asset, the proceeds from granting an option to purchase the asset are capital proceeds.

The sale of the surrounding parcel of vacant land is a capital asset and therefore the proceeds from granting the option to purchase the capital asset is considered to be capital proceeds. The proceeds received from the call option are therefore disregarded in working out your projected annual turnover in the same way as the proceeds from the sale of the land are disregarded.

Summary

Your supply of call option in connection with the sale of the Property to the property developer will not be subject to GST as the supply will not be a taxable supply under section 9-5 of the GST Act.