Edited version of private ruling

Authorisation Number: 1011718482002

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Ruling

Subject: GST and supply of real property

Question 1

Is the sale of the property an input taxed supply of existing residential premises?

Advice/Answers

No.

Question 2

Is there any GST to be charged on the rent received from the tenants of the premises?

Advice/Answer

Yes.

Question 3

If the supply of the property is not an input taxed supply, is the supply of the property a GST-free supply of a going concern?

Advice/Answer

Yes.

Relevant facts and circumstances

You are registered for goods and services tax (GST). Your enterprise is leasing.

You acquired residential premises located in Australia.

The property is a free standing residence and was divided into a ground floor and a first floor apartment. Each apartment comprised of a number of separate bedrooms, lounge, kitchen, meal and bathroom.

You received a notice of decision to grant a permit from the local council to use the property as a relevant centre (relevant centre) and associated car park dispensation. The planning permit (permit) was subsequent issued.

The property was converted into a number of medical practitioners suites following the grant of the permit. The conversion is not a substantial renovation of the existing residential premises.

The permit

The key details of the permit are provided.

The lease of the relevant property

The details relating to the lease of the relevant property are provided.

The sale of the relevant property

The details relating to the sale of the relevant property are provided.

Reasons for decisions

Question 1

Summary

The supply of the property under the contract is not an input taxed supply of residential premises. The contractual arrangements provide for the supply of a commercial property at settlement.

Detailed reasoning

In order to determine whether the supply of the property in question is an input taxed supply of residential premises we need to determine the character of the supply at the time the subject matter of the supply is transferred.

The supply occurs when settlement for the real property is completed. The definition of residential premises is applied to whatever is supplied at settlement.

The character of what is supplied is determined by all of the facts and circumstances surrounding the supply, primarily as reflected in the contractual arrangements between the supplier and the recipient.

Section 40-65 of the GST Act provides conditions for the input taxed treatment of the sale of residential premises. This section states:

(1) 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 (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

*denotes a defined term in the Act

For their sale to be input taxed under section 40-65 of the GST Act, premises must not only be residential premises but must also satisfy the further condition that they are to be used predominantly for residential accommodation.

The term 'residential premises' is defined in section 195-1 - Definition of the GST Act to mean:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a *floating home.

The Australian Taxation Office (ATO) has issued goods and services tax ruling GSTR 2000/20 to provide guidance on what is considered to be residential premises.

The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation.

Paragraph 20 of GSTR 2000/20 provides the view of the ATO on the meaning of to be used for 'residential accommodation' or 'occupied as a residence'. It states:

To be used for 'residential accommodation' or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. 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…

Following the definition we need to determine:

1. at the time of the supply whether the property is occupied as a residence or for residential accommodation, or

2. if the property was vacant at the time of the supply, whether the property is intended to be occupied, and is capable of being occupied, as a residence or for residence accommodation?

As the property was occupied under a lease at the time of the supply, we only consider (1) above, not (2).

You have provided that:

· the property was converted into a relevant centre prior to the contract date

· the conversion was completed and the property was leased prior to its sale

· the contract provides for the sale of a relevant centre (subject to lease).

The subject of the supply at the settlement date is a relevant centre (under a lease). As per the floor plan provided, what the relevant centre consists of is noted.

At the time of the supply, the question is whether the relevant centre is occupied as a residence or for residential accommodation. The following facts are considered:

· The relevant centre was being leased at the settlement date under a lease contract commenced prior to the contract date. The use of premises is a relevant centre as per the permit.

· The restrictions on the use of the premises are provided for under the permit. The key restrictions are considered.

It is considered that the subject matter of the supply, the relevant centre, is not occupied as a residence or for residential accommodation, at the time of the supply, due to its restricted usage under the permit.

We consider that the relevant centre is commercial premises rather than residential premises. There are a number of factors that can be taken into account when determining whether the premises have commercial characteristics:

· whether the area is clearly identifiable as a place of business:

The relevant centre is clearly identifiable as a place of providing relevant services, a business rather than private residence/accommodation due to the restriction of operating hours and number of medical practitioners and staff that can be present.

· whether the area is used exclusively or almost exclusively for business purposes

The relevant centre is used exclusively for the supply of relevant services.

· whether the area is used regularly for visits by clients or customers

The usage of the Relevant centre is the provision of relevant services and therefore it is expected that it is used regularly for visits by clients.

· whether there are separate facilities available for toilets, parking etc and the business does not rely on the use of any areas of the residential premises.

· The provision for a number of car parks and a bicycle park is required by the local council for staff/and or customers of the relevant centre at all times the Centre is open.

· Access to and within the premises to be compliant with the Disability Discrimination Act.

· There are no areas within the relevant centre being used for residential purposes as indicated in the floor plan.

The relevant centre is not residential premises at the time of the supply, it is a commercial premises and therefore section 40-65 of the GST Act does not apply to make the supply input taxed.

Question 2

Summary

Yes, the supply by way of lease of the relevant centre is subject to GST as all of the requirements under section 9-5 of the GST Act are met and no exceptions apply to make the supply input taxed or GST-free.

Detailed reasoning

The supply of the relevant centre by way of lease is subject to GST if all of the requirements under section 9-5 of the GST Act are met and there is no provision in the GST Act applies to make the supply input taxed or GST-free.

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.

In your circumstances:

· the supply of the property by way of lease is made for monetary consideration

· leasing is your enterprise

· the supply is connected with Australia because the property is in Australia (subsection 9-25(4) of the GST Act), and

· you, the supplier, are registered for GST

The supply of the relevant centre is a taxable supply to the extent that it is not GST-free or input taxed.

The supply of the relevant centre by way of lease is not GST-free under any provisions of the GST Act or any Act.

The supply of the relevant centre by way of lease is not input taxed because the supply is not a supply of residential premises as discussed above.

Therefore, the supply of the relevant centre is a taxable supply under section 9-5 of the GST Act.

Question 3

Summary

The supply of the property under the contract meets all of the requirements under section 38-325 of the GST Act to be a GST-free supply of a going concern.

Detailed reasoning

Subdivision 38-J of the GST Act provides that if certain conditions are satisfied, a 'supply of a going concern' is GST-free.

The first thing to consider is whether the supply in question is a supply of a going concern pursuant to subsection 38-325(2) of the GST Act. That is, for subsection 38-325(1) of the GST Act to apply (to determine whether a supply of a going concern is GST-free supply), the prerequisite is that the supply must be a supply of a going concern.

Consequently, the requirements under subsection 38-325(1) of the GST Act will only be considered if the supply in question is a supply of a going concern.

The term 'supply of a going concern' is a statutory term which is defined in subsection 38-325(2) of the GST Act. It states:

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 part of a larger enterprise carried on by the supplier).

For the purposes of the definition, it is not a supply itself that must satisfy the conditions in paragraphs 38-325(2)(a) and (b) of the GST Act but the arrangement under which the supply is made.

ATO's view of the application of section 38-325 of the GST Act is explained in Goods and Services Tax Ruling GSTR 2002/5.

Paragraphs19 and 21 of GSTR 2002/5 state:

19. …the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to paragraphs 38-325(2)(a) and (b) ('the identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

It is considered that the supply of the property is a supply made under a sale contract and therefore is a supply under an arrangement for the purposes of section 38-325 of the GST Act.

Identifying the enterprise

The arrangement between you and the Purchaser under the contract provides that the legal and beneficial ownership of the Land and the leasing business are being transferred to the Purchaser. Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by you, the supplier (the identified enterprise). This is the enterprise, which the vendor must supply for it to be a supply of a going concern. 'Enterprise' is defined in subsection 9-20(1) of the GST Act. This subsection states:

An enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) …

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or …

In the application for the Private Ruling your tax agent provides that you were carrying a leasing business on the property.

Therefore, your leasing activity is considered to be an activity or series of activities done on a regular or continuous basis, in the form of a lease under paragraph 9-20(1)(c) of the GST Act.

The supplier supplies

Paragraphs 42 and 45 of GSTR 2002/5 state:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier…

45….the requirements in paragraph 38-325(2)(a) can only be met where a single entity is the recipient of the supply. This is because the supplier must supply all the things that are necessary for the continued operation of the 'identified enterprise' to the recipient and the recipient must be put in a position on the day of the supply where it can, if it so chooses, continue to operate that enterprise.

The contract indicates that there is only one supplier (you) and one recipient, the Purchaser.

All the things necessary

Paragraphs 65 to 68 of GSTR 2002/5 provide the ATO's view on the term 'necessary'

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. This will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all the necessary' does not refer to every conceivable thing, which might be used in the 'identified enterprise'.

73. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing…

74. 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.

75. 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 activities relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Land/Building

Under the contract, the Land comprised in Title Particulars Volume X Folio Y is to be sold to the Purchaser. This is the Land on which the leasing business is being carried on.

Your contract has provided that the main asset, the Land, necessary for the conduct of the enterprise is to be transferred by you to the Purchaser.

Leasing business

You were operating a leasing business on the property. Under the contract, you will assign the lease to the Purchaser at the settlement date.

It is considered that you have provided all the things that are necessary for the continued operation of your leasing business as required under paragraph 38-325(2)(a) of the GST Act.

The supplier carries on the enterprise until the day of the supply

The term 'carrying on an enterprise' is defined in section 195-1 of the GST Act to include 'doing anything in the course of the commencement or termination of the enterprise.'

A supplier is unable to supply all 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. Where an entity engaged in activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being carried on but not operating.

A clause of the contract provides:

· All periodic outgoings payable by the vendor, and any rent and other income received in respect of the property must be apportioned between the parties and adjusted at settlement and any adjustment paid and received as appropriate.

· The periodic outgoings and rent and other income must be apportioned on the basis that the vendor is liable for the periodic outgoings and entitled to the rent and other income up to and including the day of settlement.

This Clause indicates that you will continue to operate the leasing business until the day of the supply.

The requirement under paragraph 38-325(2)(b) of the GST Act is met.

As both paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied, the supply of the leasing business including the Land is the supply of a going concern for GST purposes.

GST-free supply of a going concern

The supply of the leasing business including the Land/Building will be a GST-free supply of a going concern pursuant to subsection 38-325(1) of the GST Act if:

· the supply is for consideration,

· the recipient is registered or required to be registered, and

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

Consideration

The term 'consideration' is defined in subsection 9-15(1) of the GST Act. This subsection provides that consideration includes:

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

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

Your contract stipulates a certain monetary payment for the supply. The payment is the consideration under section 9-15 of the GST Act.

GST registration

You have stated that you are registered for GST and the Purchaser is also registered for GST.

Agreed in writing as the supply of a going concern

The Particulars of sale and a clause of the contract provide that you and the Purchaser acknowledge and agree that the supply is a supply of a going concern.

Therefore, all of the requirements of section 38-325 of the GST Act are met. The supply of the leasing business including the Land/Building is a GST-free supply of a going concern.

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