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Authorisation Number: 1011943098441

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Ruling

Subject: GST and apportionment

Question

How do you determine the valuation for GST purposes of a part supply of a residential property that includes a portion of land that was used previously to develop a farming business?

Answer

Any reasonable method can be used to apportion the consideration for a mixed supply. The method used must be supportable in the particular circumstances.

Relevant facts and circumstances

You purchased a residential property (the property) in 2004

You were registered for Goods and Services Tax (GST) during the period 20XX to 20XX.

A valuation of the property was obtained in 2007 by your bank for first mortgage security purposes. You provided a copy of the report and valuation which contains the following information:

· The valuation has considered the market value of the property based on 'lifestyle'. The valuation does not consider any business value associated with the farming business which at the time of inspection, were still a number of years away from producing.

· The property contains an area of over X hectares of which X hectares has been developed for the farming business.

· A dam is also part of the farming business development.

· Also situated in the property is an older style residential dwelling which has had significant upgrades undertaken including double storey extension.

· The property also has other improvements including sheds and workshops.

· The property was purchased in 2003.

· The current market value of the freehold interest in the property as at the date of inspection is $X apportioned as follows:

Value of improvements $Y

Value of land $Z

After the property did not sell on the market for several months and being passed in at auction, it was eventually sold in 20XX for $W with no GST. You treated the sale solely as a residential property and the market had determined that there was no value attributed to the farming business. At the time of the sale you relied upon advice of a real estate agent who is a widely held expert in the field.

The property was sold to your related entity.

In a letter to you in 20XX, the real estate agent states that his appraisal has been done in a manner so as to demonstrate the value of the home and its immediate curtilage while keeping the plantation land as a separate entity. He further states that there is no commercial value associated with the farming business at this stage of its development. If offered for sale, the property would realise the following price:

Homestead, outbuildings and capital

improvements on X hectares $A

Land (remainder) $B

You provided a copy of a letter dated 2011 titled 'Apportionment of previous valuation' issued by a valuer to the accountants for the purchaser. This letter provides the following:

· An inspection of the property has not been undertaken.

· The contents of the correspondence should not be interpreted as a current market valuation.

· The advice is an apportionment of a previous full valuation in 2007.

· This advice has been arrived at from a review of file information and subsequent discussion with the previous valuer.

· The previous report and valuation may be apportioned as:

House on a theoretical land size including structural improvements $D

Area for the farming business (including improvements) $E

Balance grazing land incorporating dam $F

$X

· The above calculations have been readjusted on a pro-rata basis to arrive at a break-up on the basis of $W.

House on a theoretical land size including structural improvements $H

Area for the farming business (including improvements) $I

Balance grazing land incorporating dam $J

$W

In your letter to the purchaser's accountant in 2011, you state that 'it was the clear understanding of the buyer and the seller that the farming business had no commercial value and that the property was sold as a lifestyle property. We have provided a tax invoice that reflected that position'. You further stated that you maintain your 'original and consistent position'.

In the real estate agent's letter to you in 2011 he states 'at the time of sale, "lifestyle acres" were commanding between $M and $N per acre, depending upon the total size of such holdings'.

In your statement in 2011, you stated that:

· 'while there was interest in the property for lifestyle purposes there was no interest in the property as [the specified plantation]'

· you offered the property for sale through the real estate agent as 'a lifestyle property with a reduced selling price'

· 'all outbuildings on the property were orientated for personal use… and not related to the farming business'.

It is the opinion of the accountants for both parties that there was no GST implication and the sale contract treated the property as your residential dwelling.

In another statement 2011, you stated the following:

· In 20XX, you were the chairman of the board of directors of the related entity.

· In 20XX, it was unanimously agreed by all directors of all the company at a special meeting to purchase the property. It was further unanimously agreed that the purchase price acknowledged that the property was a lifestyle property and that the farming business had no commercial value at that time.

In your letter dated 2011, in reply to our request for additional information, you advised the following:

· The property was originally purchased for lifestyle purposes. You immediately commenced significant renovation and addition to the existing house. You did not move on to the property until this renovation and extension was complete.

· All building on the property at the time of sale in 20XX were on the property when purchased in 2004.

· No GST was included on the sale when you purchased the property in 2004.

· Your main enterprise was that of a specific profession. You also commenced the development of farming business on the property.

· No income was ever generated from the property. The farming business was a long term business and due to other factors the property was sold prior to the business earning income.

· You borrowed funds to purchase the property but you have not claimed the interest on the borrowed funds as business expenses or tax deductions.

· Since the purchase of the property you undertook significant upgrade to the house, significant landscaping around the house, development of infrastructure and facilities and development of the plantation.

· Borrowed funds were used to finance these improvements.

· Only costs for developing the farming business were recorded as business expenses and tax deductions and input tax credits claimed.

· The upkeep and maintenance costs of the property were not recorded as business expenses and no tax deductions or input tax credits were claimed for these costs.

· The valuation provided in 2007 used the size of the paddocks that contain the farming business instead of actual area used for the farming business.

You provided a copy of a rates notice which shows that in 2006 for the purpose of calculating the council rate, the land value of the property is $S and the capital value is $T.

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 Paragraph 9-5(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d).

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80.

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

Reasons for decision

Summary

Any reasonable method can be used to apportion the consideration for a mixed supply. The method used must be supportable in the particular circumstances.

Detailed reasoning

It is the character of the supply that determines its GST treatment. Therefore, to determine how GST applies to a transaction, it is necessary to analyse the character of the supply.

A supply may be characterised as consisting of one or more 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.

Goods and Services Tax Ruling GSTR 2001/8 describes the characteristics of supplies that contain taxable and non-taxable parts. It refers to these supplies as mixed supplies.

Paragraph 16 of GSTR 2001/8 provides that 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.

In your case, you sold a property which comprised a house, workshop, sheds, vacant land and area for produce. Part of the property was used for private purposes and the other was used for the farming business which you established. The sale of the property therefore comprised of separately identifiable parts. As such, we need to consider the effect the GST Act has on the supply of each part.

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it 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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term defined in section 195-1 of the GST Act.)

Based on the information provided, you satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act because:

· the supply of the property is for consideration

· the supply of the property is connected with Australia and

· you were registered for GST at the time of the sale.

It remains to be determined whether the sale of the property is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act and whether the sale is GST-free or input taxed.

Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done:

· in the form of a business, or

· in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian business number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term enterprise as used in the GST Act and can be relied on for GST purposes.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Part of the property containing the house and part of the land used for private purposes

You advised that the house was your primary residence. Therefore, to the extent that the sale relates to the part of the property containing the house and surrounding areas used in conjunction with the house the sale is the mere realization of a private asset. The sale is not a business or an adventure or concern in the nature of trade.

To the extent that the sale relates to the part of the property containing the house and part of the land used for private purposes, the sale is not made in the course or furtherance of an enterprise that you carry on. Hence, the condition at paragraph 9-5(b) of the GST Act is not satisfied.

Therefore, to this extent, the sale is not a taxable supply and GST is not payable.

Part of the property used for the farming business

Goods and Services Tax Ruling GSTR 2004/8 considers the requirement in paragraph 9-5(b) of the GST Act that the supply be made in the course or furtherance of an enterprise that you carry on. Paragraphs 28 and 29 state:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent

Paragraph 30 of GSTR 2004/8 lists the following characteristics which strongly indicate that a sale of a thing has a connection with an enterprise:

· at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

· at the time of sale it was applied in carrying on your enterprise to at least some extent; and

· it is sold as a transaction of your enterprise.

Each of these points will indicate a connection, and not all of the points need to be satisfied.

The Commissioner's preliminary view as outlined in Draft Goods and Services Tax Determination GSTD 2011/D1 is that in certain circumstances a farming business can be carried on where there has been an absence of routine farming activities by the supplier in anticipation of a sale.

In your case, part of the property was used for your long term farming business. To this extent, the sale is made in the course or furtherance of your enterprise. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Furthermore, to this extent, the sale in the circumstances described is neither GST-free nor input taxed

Therefore, to the extent that the sale relates to the part of the property used for the farming business, as all the requirements of section 9-5 of the GST Act are satisfied, the sale is a taxable supply under section 9-5 of the GST Act.

As you have made a taxable supply of real property, the GST payable under the basic rule is 1/11^th of the price.

Apportionment

Section 9-80 of the GST Act deals with supplies that are partly taxable and partly GST-free or input taxed. Where there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion the consideration to the parts of the mixed supply. However, the apportionment must be justifiable in terms of reasonableness.

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) provides methods and examples that you may use to help you work out how to apportion the consideration for a mixed supply. These methods are discussed in paragraphs 92 to 113. As explained in ruling, a reasonable method for apportioning a mixed supply will depend on the circumstances of each case.

Paragraph 92 of GSTR 2001/8 states:

92. Where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances.

Paragraph 94 of GSTR 2001/8 provides that depending on the circumstances, a direct or indirect method may be used when apportioning the consideration for a mixed supply.

Paragraph 97 of GSTR 2001/8 highlights direct methods that can be used:

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives you the most accurate measure of the consideration for the taxable part of the supply you make. Such methods may include:

· the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103);

· the relative amount of time required to perform the supply (see paragraphs 104 to 105); and

· the relative floor area in a supply of property (see paragraphs 106 to 108).

Accordingly, you can use any reasonable method to apportion the consideration for the mixed supply. The method you use must be supportable and you should keep records that explain the method used in your calculation.

We do not consider that a nil value for the area used for the farming business component of the land is a reasonable apportionment of the sale price. Although there may not be a value for the farming business operation, the land on which it is conducted has some value.

There is evidence to suggest that a value has from time to time been allocated to this component of the land, for example:

· the valuation in 2007 provided a value for the land which includes the area used for the farming business, as $Z

· the market appraisal done in 2008 gave an expected selling price for the land including the area used for the farming business, as $B

· the rates notice shows the land value of the property as $S, and

· in the real estate agent's letter to you in 2011 he stated that at the time of sale, lifestyle acres were commanding between $M and $N per acre, depending upon the total size of such holdings.

You should note that as you were registered for GST at the time of sale, you must issue a tax invoice for the taxable supply that you made within 28 days of a request by the recipient.

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