Edited version of private ruling

Authorisation Number: 1011608848950

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Ruling

Subject: GST and the sale of real property by a trustee of a bankrupt estate

Questions

1. Are you required to register for goods and services tax (GST)?

Answer: Yes.

2. Do you have to remit GST on the commercial rent?

Answer: Yes.

3. Do you have to remit GST on the residential rent?

Answer: No.

4. Do you have to remit GST on the sale of the commercial unit?

Answer: Yes, unless the commercial unit is sold as a GST-free going concern.

5. Do you have to remit GST on the sale of the residential unit?

Answer: No.

6. Can the commercial unit be sold as a GST-free going concern?

Answer: Yes, provided the purchaser is registered for GST (or required to be registered) and you and the purchaser agree in writing before the supply that the supply of the commercial unit is the supply of a GST-free going concern.

7. Is GST payable on money received as a loan or on any repayment?

Answer: No.

8. What are the GST consequences of making a dividend payment?

Answer: Refer to reasons for decisions.

Relevant facts and circumstances

You, as Trustee for the bankrupt estate of an entity (you) has registered for GST.

You were appointed Trustee to administer the bankrupt estate of a bankrupt entity (BE).

BE was declared bankrupt and was registered for GST up to the date of being declared bankrupt.

BE remains registered for GST although our computer system has inactivated their GST registration.

BE uses an accrual basis of accounting for GST purposes.

You are collecting rent from a residential unit located in Australia.

The residential unit:

· has been sold previously

· has not been created through substantial renovations, or

· has not been built (or does not contain a building that has been built) to replace demolished premises on the same land.

You are collecting rent from a commercial unit located in Australia.

The commercial lease agreement (Lease) provides that the rent is over $75,000 per annum plus GST.

You are to sell the residential and commercial units.

The commercial unit will be rented out until the day of its supply.

The commercial unit will be sold with the Lease intact.

The Lessee will not be the purchaser of the commercial unit.

If so required, you and the purchaser will agree in writing that the supply of the commercial unit will be the supply of a GST-free going concern.

You expect to pay a dividend to unsecured creditors from the collection of the rent.

BE's statement of affairs (SOA) shows that the Australian Tax Office is owed a GST amount.

The SOA also lists the following debts which appear to be bad debts:

· Entity A - amount A

· Entity B - amount B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) 1999:

Section 9-5

Section 9-10

Subdivision 38-J

Section 38-325

Section 40-5

Section 40-35

Section 40-65

Section 40-75

Section 58-5

Section 58-10

Section 58-20

Section 195-1

Reasons for decision

Detailed reasoning

1. Are you required to register for goods and services tax (GST)?

Under section 58-20 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a representative of an incapacitated entity (such as a Trustee in bankruptcy) is required to be registered for GST in that capacity if the incapacitated entity is registered or required to be registered.

In your case, BE is registered for GST and hence, you are required to be registered for GST.

2. Do you have to remit GST on the commercial rent?

Under section 9-5 of the GST Act an entity makes a taxable supply if:

· it makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· the entity is registered, or required to be registered for GST.

The supply is not taxable to the extent that it is GST-free or input taxed. However in this case there are no legislative provisions in the GST Act or any other Act that would allow the leasing of the commercial unit to be GST-free or input taxed.

Under section 58-5 of the GST Act, any supply by a representative of an incapacitated entity is considered for GST purposes to be a supply by the incapacitated entity. In this case, the commercial unit is leased for consideration, the supply is made in the furtherance of BE's enterprise, the supply is connected with Australia as it is made in Australia and BE is registered for GST.

Hence, the leasing of the commercial unit is taxable and therefore GST is payable on the commercial rent received.

Under section 58-10 of the GST Act, a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would be liable to pay on a taxable supply to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

In your case, the collection of the residential rent is within your scope of responsibility and therefore it is you that must pay the GST on the commercial rent received.

3. Do you have to remit GST on the residential rent?

Again, the collection of the residential rent is within your scope of responsibility.

However, provided the residential unit is not commercial residential premises, under section 40-35 of the GST Act the supply of accommodation in the residential unit would be an input taxed supply (and hence no GST would be payable by you).

Under section 195-1 of the GST Act, commercial residential premises are defined as hotels, motels or similar (the other parts of the definition not being relevant to your circumstances).

We consider that the residential unit does not satisfy the above definition of commercial residential premises and hence there is no GST payable by you.

4. Do you have to remit GST on the sale of the commercial unit?

As per the reasons given in question 2, the sale of the commercial unit would be taxable with GST being remitted by you.

Margin scheme

The margin scheme may be used given certain conditions are met (possibly reducing the amount of GST payable). More information on the scheme can be found on the website www.ato.gov.au.

5. Do you have to remit GST on the sale of the residential unit?

In this case, the sale of residential premises is input taxed under section 40-65 of the GST Act provided the residential premises are not commercial or new residential premises.

We have already determined that the residential unit is not commercial residential premises.

Under section 40-75, residential premises are new residential premises if:

· the residential unit has not been sold previously

· has been created through substantial renovations, or

· has been built (or contain a building that has been built) to replace demolished premises on the same land.

In your case, none of the requirements of section 40-75 are met and hence the residential unit is also not new residential premises. Consequently, the sale of the residential unit is input taxed under section 40-65 of the GST Act and as a result, no GST would be payable on the sale.

6. Can the commercial unit be sold as a GST-free going concern?

Subdivision 38-J of the GST Act provides that if certain conditions are satisfied, a supply (by way of sale) of an enterprise is GST-free. This means a supply of an enterprise, which would otherwise be taxable or input taxed is GST-free if the enterprise is supplied under an arrangement between the vendor and the recipient as a going concern.

The definition of a going concern and the requirements for the supply of the going concern to be GST-free are stated in section 38-325 of the GST Act as follows:

(1) The *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; and

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

(2) A supply of a going concern is a supply under an arrangement under which:

(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).

Note that the asterisks denote a defined term in the GST Act.

All the things necessary

Paragraph 38-325(2)(a) of the GST Act provides that for the sale to be the supply of a going concern, it is necessary for the supplier to supply to the recipient all of the things that are necessary for the continued operation of the enterprise.

The term necessary incorporates every attribute of an enterprise that is essential for the continued operation of the enterprise. The things that are necessary will of course depend on the nature of the enterprise carried on and the core attributes of that enterprise.

In your case, the leasing of the commercial unit needs to be construed under the definition of enterprise pursuant to section 9-20 of the GST Act. It is this enterprise for which you must supply all the things necessary for the leasing enterprise's continued operation.

The Tax Office view on going concerns is provided by the public ruling GSTR 2002/5. With reference to paragraph 75 of GSTR 2002/5, a thing is necessary for the continued operation of a leasing enterprise if the leasing enterprise could not be operated by the recipient in the absence of the thing. In this matter two elements are essential for the continued operation of the leasing enterprise:

· the asset necessary for the continued operation to the leasing enterprise, in your case the commercial unit; and

· the operating structure and process of the enterprise consisting or the commercial or economic activity relevant to the leasing enterprise, in your case the Lease.

You are to sell the commercial unit with the Lease intact. Hence paragraph 38-325(2)(a) of the GST Act is met.

Carry on the enterprise until the day of the supply

You have stated that you will carry on the leasing of the commercial unit until its supply therefore paragraph 38-325(2)(b) of the GST Act is also met.

Consequently, as all the requirements of subsection 38-325(2) are met, the sale of the commercial unit is the supply of a going concern.

To determine if the supply of the going concern can now be GST-free we must make reference to subsection 38-325(1) of the GST Act.

GST-free going concern

In your case, the supply will be for consideration, hence paragraph 38-325(1)(a) is met.

You are presently unsure as to the GST registration status of the purchaser so we can only state that if the purchaser is registered for GST (or required to be registered) then paragraph 38-325(1)(b) would be met.

You have also stated that if so required, you and the purchaser will agree in writing before the supply that the supply of the commercial unit will be the supply of a GST-free going concern, hence paragraph 38-325(1)(c) will be met.

Given that the above requirements of 38-325(1)(b) and 38-325(1)(c) will be met, the sale of the commercial unit would be able to be treated as a GST-free supply of a going concern.

7. Is GST payable on money received as a loan or on any repayment?

Section 9-10 of the GST Act provides that a supply of money is not a supply for GST purposes unless the money is provided as consideration for a supply that is a supply of money.

Outstanding loan

In the case of the loan, this is a supply of money that is not made as consideration for a supply that is a supply of money. Hence, the loan is not a supply for GST purposes and consequently, no GST is payable on the loan.

Repayments

The loan repayments are made as consideration for a supply of money and are therefore a supply for GST purposes. However, the repayments are a financial supply under section 40-5 of the GST Act and therefore input taxed.

Consequently, no GST is payable on the repayments or on any possible dividend paid in respect of the outstanding loan.

8. What are the GST consequences of making a dividend payment?

Information on the GST consequences of a dividend payment can be found in the public bulletin GSTB 2003/1 (of which you have a copy).

Please note that according to our records, BE uses the non cash (accruals) basis of accounting for GST purposes.

Examples of interim and final dividend payments (incorporating bad debt increasing adjustments) are provided in the bulletin.

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