Edited version of private ruling

Authorisation Number: 1011593420215

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: supply of going concern and in-specie superannuation fund contribution.

Questions

1. Is the transfer of the property by you and Person A to the trustee(s) of a self managed superannuation fund (SMSF) a taxable supply?

Answer: No.

The transfer of the property by you and Person A to the SMSF is not a taxable supply. Therefore no GST is payable by you and Person A on this transaction.

2. Does division 165 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act -anti-avoidance provisions) apply to the arrangement described in your private ruling request and accompanying documentation?

Answer: No, this particular arrangement does not attract the application of Division 165.

Relevant facts and circumstances

You and Person A are the two members of a self managed superannuation fund (SMSF). You and Person A are also the beneficiaries of a discretionary trust (the trust). Both the SMSF and the trust are registered for GST.

The trust's asset comprises of a commercial property consisting of a number of retail showrooms. All showrooms are currently leased to long term tenants who carry on a business on these premises. The annual rent of the property is more than $75,000.

Person A is the trustee and guardian of the trust. On Day 1, the trustee Person A will exercise their discretion and distribute in-specie the property to you and themself as joint tenants at no consideration. You and Person A will be registered for GST on Day 1.You and Person A will be deriving the equivalent of one day's rent. Such rent will be calculated as a proportion of the annual rent received in relation to the property.

A market valuation of the property will be made. On the next day, you and Person A will then transfer the property to the GST-registered SMSF in the following manner:

· Make an in specie contribution of part of the property to the SMSF (the contribution amount will be the full limit of non-concessional contribution amount); and

· The SMSF will purchase the remainder of the property at the market value.

The SMSF will acquire the commercial property for the purpose of leasing.

You state that under superannuation contribution rules, a member of a self managed superannuation fund must make non-concessional contributions to the superannuation fund personally; therefore the sole purpose of the above scheme is to plan for your and Person A's retirement by transferring the property into the SMSF.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-20

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-15

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 72-5

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 165

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 38-325

A New Tax System (Goods and Services Tax) Regulations 1999 ("GST regulations") sub regulation 40-5.09(3)

Superannuation Industry (Supervision) Act 1993

Reasons for decision

1. in specie contribution of part of the property to the SMSF

A supply is taxable and subject to GST where the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states:

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.

Do you carry on an enterprise of leasing even if it is only for one day?

Miscellaneous Taxation Ruling 2006/1 (MT 2006/1) provides guidance in determining whether an entity is carrying on an enterprise within the meaning of the GST Act.

Paragraph 159 of MT 2006/1 indicates that whether or not an activity amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. Paragraph 153 of MT 2006/1 indicates that the meaning of the term activity for an entity can range from a single undertaking including a single act to entire operations of the entity.

Paragraph 9-20(1)(c) of the GST Act defines an enterprise as an activity done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Your activity on that one day is an activity done in the form of a lease in property Therefore we need to consider if your activity on that day is an activity done on a regular or continuous basis.

You contend that paragraphs 135 and 136 of Goods and Services Tax Ruling GSTR 2002/5 indicate that an entity may carry on a leasing enterprise even if the enterprise is carried on for one day only. Paragraphs 135 and 136 of GSTR 2002/5 explain further section 38-325 of the GST Act.

Example 21: One supplier and two recipients

135. Smithers Pty Ltd (Smithers) operates a bookshop enterprise from premises that it owns. It decides to sell the bookshop enterprise. The purchaser, Bookworm Pty Ltd (Bookworm), for financial reasons does not want to purchase the freehold. Smithers agrees to sell the bookshop enterprise and enters into an agreement to lease the premises to Bookworm. The day of supply is to be 30 August. Assuming all other requirements of subdivision 38-J are satisfied, Smithers is making a GST-free supply of a going concern to Bookworm

136. Landmark Pty Ltd (Landmark) is a separate legal entity, although its directors and shareholders are also directors and shareholders of Bookworm. Landmark enters into an agreement with Smithers to acquire the building. The day of supply will be 31 August. Smithers supplies the building to Landmark with the lease intact. For the purposes of section 38-325, we will accept that Smithers has carried on an enterprise of leasing, albeit for only a day, and can therefore make a GST-free supply of a going concern, when he supplies the leasing enterprise.

We accept that you and Person A carry on an enterprise of leasing when you and Person A lease the property to the tenants for one day before transferring the property and assign the lease to the SMSF the next day.

From the facts given, the supply of the property to the SMSF satisfies the requirements of paragraphs (b) (c) and (d) of section 9-5 of the GST Act, as follows:

(b) You and Person A carry on the enterprise of leasing in relation to the commercial property for one day. As the property is transferred to the SMSF for the purpose of providing superannuation benefits to you and Person A, the transfer is considered to be made in the course or furtherance of the leasing enterprise carried on by you and Person A;

(c) The supply consists of the commercial property and the leases. The property is located in Australia so the supply is connected with Australia; and

(d) You and Person A will be registered for GST purposes on the day of the supply.

Additionally, the supply of a commercial property is neither GST-free or input taxed under the GST provisions. Therefore, the only thing that needs to be determined is whether paragraph 9-5(a) of the GST Act is satisfied.

Consideration

The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment (paragraph 47 of Goods and Services Tax Ruling GSTR 2001/6). Subsection 9-15(1) of the GST Act provides that consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

In this case, you intend to make an in specie contribution of part of the property to the SMSF (the contribution amount will be the full limit of non-concessional contribution amount). An in specie contribution means a contribution in kind of goods or natural produce instead of money.

Non-monetary consideration

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form (paragraph 12 of GSTR 2001/6). You contend that there will be no consideration in the form of money paid by the SMSF to you for the property. It still needs to be determined if non-monetary consideration is provided by the SMSF in response to the supply of property.

By providing non-monetary consideration for a supply, an entity is in turn making a supply (paragraph 15 & 16 of GSTR 2001/6). As such, if the trustee(s) of the SMSF is making a supply in response to the contribution of commercial premise it may constitute non-monetary consideration for that supply.

Financial Supplies

Provided that all of the other requirements in regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 ("GST regulations") are met, the supply of an interest in or under a superannuation fund is a financial supply (Item 4 in the table in sub regulation 40-5.09(3) of the GST Regulations).

Whilst the contribution of a commercial property may result in an increased level of assets being held in the SMSF, the true character of the transaction needs to be identified to determine if this is consideration for a supply. In the case of an SMSF, members, or beneficiaries of the fund obtain their rights, or prospective rights in relation to the fund by way of the trust deed that creates the fund. As such, from that point onwards the member has acquired an ongoing interest in the superannuation fund. The initial or any additional contributions whether monetary or otherwise are related to the interest in the SMSF provided under the trust deed, but do not result in the trustee(s) of the SMSF providing a further interest to the members.

Therefore the contribution of the commercial property by you and Person A to the SMSF does not result in the trustee(s) of the SMSF making a financial supply to the members, you and Person A. It follows that as there is no supply being made, the trustee(s) of the SMSF is not providing non-monetary consideration in relation to the contribution of part of the commercial property.

As there is not a supply for consideration under paragraph 9-5(a) of the GST Act, the supply would not be a taxable supply under the basic rules.

Supply without consideration

However, section 72-5 of the GST Act provides that the fact that a supply to your associate is without consideration does not stop the supply being a taxable supply if:

· your associate is not registered or required to be registered; or

· your associate acquires the thing supplied otherwise than solely for a creditable purpose.

Supplies to associates

Pursuant to section 195-1 of the GST Act, associate has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

Where the entity is a natural person (in this subsection called the "primary entity"), subsection 318(1) of the ITAA 1936 provides a list of what the legislation considers to be associates of this entity. An associate of a natural person includes a trustee of a trust where the primary entity benefits under the trust. In your case, you are a natural person who benefits under the SMSF, which is a trust.

Hence under paragraph 318(1) (d) of the ITAA 1936, the trustee(s) of the SMSF is considered to be your and Person A's associate.

However, section 72-5 of the GST Act only applies where:

· the associate is not registered or required to be registered; or

· where supply to the associate is acquired by the associate otherwise than solely for a creditable purpose.

In this instance, the associate (the SMSF) is registered for GST.

In addition, the associate acquires the property to carry on an enterprise of leasing commercial property. The leasing of the commercial property is considered to be for a creditable purpose as defined under section 11-15 of the GST Act. The acquisition is not of a private or domestic nature or relates to making input taxed supplies. Hence section 72-5 of the GST Act will not apply to this supply.

As there is no consideration for the supply, paragraph 9-5(a) of the GST Act is not satisfied. Hence, we do not need to discuss whether the supply is GST-free or input taxed. In summary, you and Person A are not making a taxable supply under section 9-5 of the GST Act when you and Person A make an in specie contribution to the SMSF.

Consequently, no GST liability will arise from the transfer of the commercial property from you to the trustee(s) of the SMSF, as the supply is not a taxable supply.

This advice only addresses the GST implications of the transaction. It does not address any other issues including those under the Superannuation Industry (Supervision) Act 1993.

Your supply to the SMSF of the remainder of the property at the market value

As mentioned above, a supply will be taxable where the requirements of section 9-5 of the GST Act are satisfied.

In relation to the supply to the SMSF of the remainder of the property at the market value, we consider that you and Person A will make the supply for consideration, the supply will be made in the course or furtherance of an enterprise that you and Person A carry on, the supply will be connected with Australia and you and Person A will be registered for GST at the time of the supply. Hence paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act are satisfied.

The supply of commercial property is not an input taxed supply under any GST provision. The issue is whether the supply will be GST-free.

GST-free going concern 

Subsection 38-325(1) of the GST Act provides that a 'supply of a going concern' is GST-free if:

(a) the supply is for consideration; and

(b) the recipient is registered or required to be registered for GST; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

On the information provided, the supply of the leasing enterprise will be for consideration and the recipient SMSF is registered for GST. You also state that you and Person A and the SMSF will agree in writing that the supply is a going concern.

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an arrangement where:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier.

Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). Under paragraph 38-325 (2) (a) the identified enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. The identified enterprise of you and Person A is the leasing of the commercial property.

Under paragraph 38-325(2) (b) of the GST Act, the supplier must also carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise. GSTR 2002/5 sets out the Tax Office's view on the supply of GST-free going concerns. Paragraphs 29 and 30 of GSTR 2002/5 explain further about paragraph 38-325(2) (b) of the GST Act.

Supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

Paragraph 74 of GSTR 2002/5 explains that the supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

Paragraph 75 of GSTR 2002/5 states that two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Paragraph 150 of GSTR 2002/5 explains that a supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being carried on, but is also operating.

Paragraph 80 of GSTR 2002/5 states as follows:

80. The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

From the facts, you will satisfy all the above since you carry on an enterprise of leasing on the day of the supply and the leases will be transferred to the SMSF. You provide a copy of the leases which are current for all units in the property. In relation to one unit, you advise that you are expecting a new lease to be executed shortly. In summary, all units will be leased for the period from day 1 and beyond.

Therefore the supply of the property to the SMSF will be GST-free under section 38-325 of the GST Act. The supply is not a taxable supply.

In summary you and Person A will not be liable for GST on the supply of the commercial property to the trustee(s) of the SMSF.

2. Division 165 of the GST Act

The application of Division 165 of the GST Act, which contains the general anti-avoidance provision, requires a careful weighing of the individual circumstances of each case. It is considered that this particular arrangement does not attract the application of Division 165.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).