Edited version of private ruling

Authorisation Number: 1011580954099

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Ruling

Subject: GST and the sale of the property

Issue 1

Question 1

Is your supply of residential premises in Australia taxable under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, your supply of the residential premises in Australia is not taxable supply as it is an input taxed supply under subsection 40-65(1) of the GST Act and therefore not subject to GST.

Question 2

Is your supply of a surrounding parcel of land of the property in Australia at taxable under the GST Act?

Answer

No. The supply of the surrounding parcel of land of the property in Australia is not taxable supply as you do not satisfy the requirement of paragraph 9-5(d) of the GST Act and the sale of the property will not be subject to GST.

Question 3

Are you required to register for GST when you sell the property?

Answer

You are not required to be registered for GST when you sell the property as you will not satisfy all the requirements of section 23-5 of the GST Act.

Relevant facts and circumstances

You jointly own real property in Australia. You are not registered for goods and services tax (GST) as individuals or as a partnership.

You acquired a property in Australia in the early 1990s. This property is a large block of land with a house on it.

You acquired the property with the intention of use as your family home and to house the family's horses.

The costs of the property were paid from joint funds.

You have occupied the residence on the property as a family home since purchase.

There have been no substantial renovations/alterations done to the property since your acquisition of the property.

The property is currently zoned as an urban growth zone

You have not done any subdivision of the vacant land.

The surrounding land was used to operate a business which was operated by the company owned by you for ten years.

The company ceased its operation.

The company did not pay any rent to you for the use of the land.

The company has added some of additions to the property for the business purposes

The company has claimed GST for the above additions in its Activity statements.

The property has not been listed as business assets on the company records.

You have sold the property to a property developer.

Under the sale contract the settlement is due within 2 years from the day of the sale.

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:

· you make the supply for consideration; and

· the supply is made in the course or furtherance of an enterprise that you carry on; and

· the supply is connected with Australia; and

· 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 was used as a family residence and portion of the property was used to operate a business. 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 an enterprise by a company owned by you. 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.

Question 1

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.

Paragraph19 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 land has been used by the company to operate a business, the supply of the surrounding parcel of 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 taxable supply.

Question 2

Supply of the surrounding parcel of land

Taxable supply

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

From the information provided, you satisfy requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make is for consideration and the property is located in Australia, respectively.

Therefore, we need to consider whether:

· your sale of property is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

· you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities done:

· in the form of a business

· 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, license or other grant of an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: The meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: Does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in these rulings have been applied in this case.

Based on the facts provided, you provided the surrounding parcel of land to the company to operate its business for ten years. You advised us that you have not charged any rent to the company for using the land. However you have continuously provided the land to the company to carry on its enterprise for ten years.

Therefore, we consider that you have been carrying on an enterprise of leasing the property as defined in section 9-20 of the GST Act. Accordingly, the sale of the surrounding parcel of land is in the course of your enterprise, and paragraph 9-5(b) of the GST Act is satisfied.

We now need to consider if you are required to be registered for GST.

Are you required to be register for GST?

From the facts given, the property is jointly owned by two individuals, thus we need to establish, who is the entity that is making the supply before we determine whether that entity is required to be registered for GST.

An entity is defined in subsection 184-1 of the GST Act to include (amongst others) an individual, and a partnership. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership of yours.

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6:Tax law partnerships and co-owners of property.

As you (the partnership) 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:

· 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

· 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 next 11 months.

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

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

· supplies that are not for consideration

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

· 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, the sale of the property will push your current GST turnover above the registration 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 is below the registration turnover threshold. Thus, we will need to look at whether your projected GST turnover will be below the registration turnover threshold.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset.

The sale of the surrounding parcel of land is considered to be a transfer of ownership of a capital asset. Consequently, this sale will be excluded from the calculation of your GST turnover.

Sale of a capital asset

Goods and Services Tax Ruling GSTR 2001/7:Meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7, discusses the meaning of capital assets in paragraphs 31 to 36.

As stated above, the projected GST turnover excludes sales of capital assets.

Paragraph 31 and 32 of GSTR 2001/7 provides that 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'. 'Capital assets' can include assets such as your factory, shop or office, and your land on which they stand, that are retained by you to produce income.

From the facts provided, at the time of the sale of the surrounding parcel of land, the nature of your assets has not changed from capital assets to revenue assets. Therefore, the sale of your property constitutes disposals of capital assets of your leasing enterprise and section 188-25 of the GST Act is applicable.

Question 3

Required to be registered

You are required to be registered if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

See explanation above. It is considered that you are carrying on an enterprise but as you will not satisfy the requirements of sub section 23-5(b) of the GST Act, you will not be required to be registered for GST when you sell the surrounding parcel of land.

Summary

In summary, the supply of the part of the property containing the house will be an input taxed supply, to the extent the supply is of residential premises to be used predominantly for residential accommodation. The supply of the reminder of the property will be a non-taxable supply as discussed above and GST will not be payable to the sale of the surrounding parcel of land.

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