Edited version of your private ruling

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Ruling

Subject: GST and extent of creditable purpose and adjustments for change in creditable purpose.

Question 1

Are you, entitled to GST credits for acquisitions made in relation to the construction of the residential premises in an accommodation complex?

Answer

No you, are not entitled to GST credits on your acquisitions made in relation to the construction of the residential premises, in the accommodation complex.

Question 2

Are you entitled to make a decreasing adjustment for a change in extent of a creditable purpose, in the specified periods for your acquisitions associated with the construction of the residential premises pursuant to Division 129 of the GST Act?

Answer

No, you are not entitled to make a decreasing adjustment for a change in extent of a creditable purpose, in the specified periods for your acquisitions associated with the construction of the residential premises pursuant to Division 129 of the GST Act of the GST Act.

Relevant facts

Entity A is the Trustee and responsible entity for Entity B.

You, entity A in its capacity as trustee for entity B, is registered for GST.

You owned or controlled a number of accommodation complexes and accommodation facilities and have sold a number of these leaving a specified number of accommodation complexes (the core accommodation complexes) including the accommodation complex which is the subject of this ruling. (the property)

The property is located in Australia and was acquired in ddmmyyyy.

The acquisition of the accommodation complex included:

· the business assets (including the property)

· the shares in an entity which held the management rights for the property

· the agreement to develop a specified number of residential premises using existing contracts

· options over any future developments by the vendor.

Your intention at the time of acquisition was to make input taxed supplies of residential accommodation.

A number of years after the acquisition of the property you were subject to a takeover. A month after this, you entered into a construction contract to continue the development of the residential premises. This construction project ceased some months later due to lack of finance.

You were placed into voluntary administration at ddmmyyyy. The Administrator appointed a consultant to represent him in relation to his dealings with the Australian Taxation Office, including dealings with the property. The consultant applied for this ruling on your behalf.

Receiver managers were also appointed over the assets comprising the property.

You supplied a number of documents in support of your contentions. A summary of the relevant documents are set out below:

· A letter from the administrator confirming that the consultant is authorised to act on behalf of the relevant entities.

· Letter from the director of the new controlling entity which provides that from the beginning of the new ownership all options for industry aggregation were on the table including property disposals.

· Various documents which updated the public on your plans and expectations.

· Various internal documents including minutes of Directors meetings.

· Email correspondence between you and a business broker.

· Strategic Review Report sets out a number of options to be considered.

· Action plan from the Strategic review-outcomes presented to financiers .

· A second report Project A which outlines strategic options that were considered:

o Continue on a standalone basis; or

o Merge with another entity; or

o Sell assets and return capital to unit holders.

Page X includes a statement that the accountant's suggestions are to continue on a stand alone basis and divest non-core assets.

Page XX shows that option 3 to sell all assets was discounted.

Page XY the sale of non-core assets and the retention of certain accommodation complexes assets (core accommodation complexes) was adopted.

Note some documents were supplied that related to a time period after the specified periods.

· A third report

· Correspondence setting out that there were a number of interested parties in acquiring the core accommodation complex properties

· Various emails in relation to interest from an entity in relation to the 'sale/purchase' of the core accommodation complexes.

Your consultant made the following contentions in relation to this ruling application:

· Your intention was to build the residential premises for lease in the short term and then sell them as taxable new residential premises.

· You formed an intention, not later than a specified date, to ultimately sell all of your real properties, and your associated entities, that controlled the accommodation complexes and accommodation facilities they held as at that specified date.

· It was agreed very early in the sell-off program that a core group of core accommodation complexes would be retained till last, partly because they were a strategic group of accommodation complexes, but also because the 'management rights' to those particular accommodation complexes were held by another entity.

· The core accommodation complexes were always intended to be the last of the properties to be sold. Selling the property was only ever part of a decision to sell all of the Accommodation complexes. The intentions and actions were in respect of all Accommodation complexes not just the specified property;

· Project A was put into place to sell the final accommodation complexes.

· The failure of this project to conclude a sale of the remaining portfolio of core accommodation complexes, led to Project B (dated a specified date) and other very public and very certain attempts to sell the remaining accommodation complexes through the engagement of numerous third party advisers and service providers.

· The factual situation that followed (from a specified date) shows that it would not have been possible to have formal projects in place to sell the final accommodation complexes, within a period of just over a year after that date, unless the intention to do so was formed well before then.

· Most of the information, documents and contentions made in relation to this ruling application, relate to the sale of all of the properties previously held.

· When you were taken over, and a new Director was appointed, there was an immediate intention formed to extract the maximum return for your unit holders.

· The entity which took control of entity C knew from the very beginning that a complete asset sell down, leaving certain accommodation complexes till last, was a clear and unequivocal strategy and intention.

· The Media Release on a specified date was the first definitive statement to the market that properties would be sold. That was followed by the Chairman of the Board, announcing that a strategic review had already commenced.

· Cash flow 'reforecasts' included inflows of proceeds arising from property sales which could only have occurred if the intention to carry that out had been formed well before then, as the making of public announcements.

· The information provided in support of this ruling should be read in conjunction with a number of specified documents:

Relevant legislative provisions

Divisions 11 and 129 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1

An entity that is registered or required to be registered for GST is entitled to input tax credits for creditable acquisitions that it makes. A creditable acquisition is made if an entity makes an acquisition solely or partly for a creditable purpose and the other requirements of section 11-5 are met.

Subsection 11-15(1) provides that you acquire a thing for a creditable purpose to the extent that the acquisition is made in carrying on your enterprise. However, subsection 11-15(2) provides that an acquisition is not for a creditable purpose to the extent that the acquisition is of a private or domestic nature or to the extent that it relates to making supplies that would be input taxed.

Goods and Services Tax Ruling GSTR 2008/1 titled 'when do you acquire anything or import goods solely or partly for a creditable purpose?' provides guidance on the factors for determining whether an acquisition (or importation) is for a creditable purpose.

The creditable purpose test in section 11-15 focuses on an entity's intended use of an acquisition or, in other words, an entity's planned use. If an acquisition relates to supplies that would be input taxed, paragraph 11-15(2)(a) precludes it from being for a creditable purpose. Paragraph 104 of GSTR 2008/1 explains that paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as it relates to supplies that are to be made in the future. Division 129 then focuses on the actual usage and adjusts accordingly if the actual use of the thing differs from the intended use.

An objective assessment of the facts and circumstances is required to determine whether an entity's 'planned use' is for a creditable purpose for the purposes of Division 11.

Paragraph 29 of Goods and Services Tax Ruling GSTR 2009/4 'new residential premises and adjustments for changes in extent of creditable purpose' explains that if new residential premises are constructed for lease and the planned use is supported by an objective assessment of the surrounding facts and circumstances, the entity's acquisitions will relate solely to making supplies that would be input taxed. It follows that the acquisitions would not be for a creditable purpose.

Your consultant submits that your initial intention was to construct the residential premises to lease to residents under the 'rental model'. Substantive construction did not commence until later and ceased some months later due to a lack of funding.

However, your consultant further submits that no later than ddmmyyyy, your intention changed - as you formed an intention to sell all of the real properties owned by you and your associates, that controlled the accommodation complexes and accommodation facilities held by your economic group. Your consultant considers that from this time, your acquisitions were made wholly for a creditable purpose as they relate to the future sale of the residential premises as taxable supplies of new residential premises. That is, your 'planned use' of acquisitions made on and from this date, were solely for a creditable purpose.

In support, your consultant refers to the documentation provided in support of this application (as outlined in the 'facts') as evidence of your intention to sell the property from the specified date

We provide the following comments in response:

· While the letter you supplied from the director of the takeover company shows that all options, including property disposals, were being considered the documentation does not evidence that you had formed an intention to sell as at the specified date.

· Your consultant contends that the takeover company knew from the very beginning that a complete asset sell down, leaving the core accommodation complexes till last was a clear and unequivocal strategy and intention. - The evidence supports that when you were taken over there was a willingness and intention to consider all options. However, there is no indication that an intention or plan to undertake a particular course of sale of particular assets had been formed.

· A dated Media Release indicated that changes would occur as a result of the RE being taken over by the company but did not evidence the intention to sell the property.

· The dated Media Release is said to be the first definitive statement to the market that the properties would be sold. While we agree that this media Release shows an indication of an intention to sell assets, this is in relation to the sale of the accommodation assets so that you could hold on to your core assets and focus on operating them.

· Your consultant advised that it was agreed very early in the sell-off program that a core group of accommodation complexes would be retained till last. There were reports of expected or proposed sales of accommodation assets in the various minutes however, the documentation provided does not evidence that the core group of accommodation complexes would be held for sale as part of a staged strategy to sell the property assets. Rather they show that the intention was to retain the core accommodation complexes to 'maintain higher quality assets within the core business'.

· The emails between one of your directors and a business brokers refer to an 'unsolicited buyer' interested in purchasing the accommodation facilities who expressed an interest in viewing accommodation complex property. The emails suggest a willingness on your part to consider an unsolicited offer to purchase the property, rather than evidencing an intention formed to sell it.

· Although you provided evidence of various sales these sales do not indicate any plan to sell the specified property. Rather they indicate that the accommodation facilities were to be sold and the property was to be kept.

· The discussion on finance in the Strategic review report and other documents indicates that sales of non-core assets would be undertaken to enable you to retain and operate the core accommodation complexes, one of which is the property.

· Your cash flow 'reforecasts' included inflows of proceeds arising from property sales and your tax agent submits that this could only have occurred if the intention to carry that out had been formed well before then. On our reading, the reforecasts indicate that no property sales of the accommodation complexes were expected and all sales of properties were in regards to the Accommodation facilities.

· Your business plans, the strategic review and the Project A report further indicate that your intention was to retain the core accommodation complexes (which includes the property) and indicates that there was no intention to sell this property.

· Your consultant contends that early in the process Project A was put into place to sell the final accommodation complexes. From our reading of the statements included in the Project A report, you were open to considering all options however the report presented the following three options:

o Continue on a standalone basis or

o Merge with another entity or

o Sell all assets and return capital to unit holders.

The report shows that while you had adopted parts of option 1 and 2, option 3 was discounted. Rather, as part of the Standalone option the sale of non core assets had been adopted and the sale of the core property assets was an option that was not adopted or recommended.

· Your consultant made reference to a 'number of public attempts to sell the core accommodation complexes including the property'. The documentation provided does not contain evidence of any public attempts to sell the property prior to specified period.

On an objective assessment of the facts and taking account of your circumstances, we consider that the information provided does not evidence that the property was intended to be sold from ddmmyyyy. This is because:

· Prior to ddmmyyyy although you were considering all options no particular intention was formed in regards to the portfolio of the accommodation complexes and accommodation facilities.

· On ddmmyyyy a strategy of selling off accommodation assets was begun with the view that the funds from these sales would enable you to hold on to a set of core accommodation complex assets of which the property was one.

· On ddmmyyyy a buyer was allowed to view the property but no intention to sell had been formed or planned as at this date. This was an unsolicited enquiry coming from the stated intention to sell the accommodation facilities.

· During the year 20XX the strategy of selling off the Accommodation assets was being actively pursued and the concept of core assets to be held was clearly established.

· Project A indicated you had discounted the sale of the core accommodation complex assets including the property and in addition it was not recommended to sell all assets and return capital to unit holders.

Therefore we find that you are not entitled to GST credits for acquisitions made in relation to the construction of the residential premises in the property because your intention or planned use at the time of making the acquisitions was not for a creditable purpose.

Question 2

When circumstances arise such that premises which were only intended to be used for making input taxed supplies are then applied in a manner which shows that they are intended to be sold at a future date, consideration must be given to the application of Division 129.

GSTR 2009/4 sets out when an adjustment for a change in extent of creditable purpose arises under Division 129 of the GST Act. It provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose.

As set out in the answer to question 1 we found that the intention for the acquisitions for the construction of the residential premises up until the date when construction ceased was to make input taxed supplies. In addition we found that the material you supplied did not support an intention to sell the property prior to the specified date.

Paragraphs 31 to 35 of GSTR 2009/4 discuss when a 'thing' is applied in carrying on an entity's enterprise.

31. To ascertain whether an adjustment arises for a change in extent of creditable purpose under Division 129 it is necessary to determine the extent to which a thing has been applied for a creditable purpose up until the end of the relevant adjustment period.

32. Subsection 129-50(1) provides that an entity applies a thing for a creditable purpose to the extent that the entity applies it in carrying on its enterprise. …..

33. The meaning of the term 'apply', in relation to a thing acquired or imported, for the purposes of the GST Act is provided in section 129-55 (set out in paragraph 19 of this Ruling). The meaning of apply in section 129-55 is an inclusive definition. Therefore, in addition to the specific references incorporated in the provision, the meaning of apply in section 129-55 also encompasses the ordinary meaning of the term. The ordinary meaning of 'apply' relevantly includes 'to put to use; employ'³⁴ or 'to devote to some specific purpose'³⁵ or 'make use of as relevant or suitable; employ'.³⁶ This indicates the similarity and relevance of 'use' to the meaning of 'apply'.

34. In accordance with the specific references to supply, consume, dispose of and destroy in section 129-55, a thing will be applied in carrying on an entity's enterprise when it is sold, or otherwise disposed of in the course of the entity's enterprise. For example, the sale of a thing constituting part of an entity's trading stock will be an application of that thing pursuant to section 129-55.

35. In accordance with the ordinary meaning of 'apply', a thing that is being held in connection with an entity's enterprise, even though it may not yet have been supplied, consumed or physically utilised, will have been devoted to or put to use in the entity's enterprise. In other words, the thing will have been applied in the entity's enterprise if an objective assessment of the facts and circumstances demonstrates that the thing has been allocated or dedicated to a particular use (or uses) in the enterprise. For example, the holding of trading stock for the purpose of sale in an entity's enterprise will be an application of the trading stock. Similarly, the holding of spare parts in reserve to repair enterprise machinery, as required, will be an application of the spare parts.

Further analysis is presented at paragraphs 36 to 38 of GSTR 2009/4 which focuses on whether or not new residential premises are being held for the purpose of sale. We acknowledge that the partly constructed premises are not new residential premises. However, the underlying principles in GSTR 2009/4 are equally relevant in determining whether the partially completed premises were held for sale from ddmmyyyy as contended by your consultant.

Paragraph 44 of GSTR 2009/4 explains:

An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity's enterprise. Such an assessment requires a weighting up of the evidence that supports a finding that the premises are being held for the purpose of sale or that the premises are being held as an investment asset or for some other purpose. There must be satisfactory evidence to support a conclusion that the premises are being held for the purpose of sale, or for some other purpose. A single piece of evidence may not be sufficient where there is other evidence which suggests a contrary purpose. In such cases all of the evidence must be considered and weighed up in reaching a decision.

Paragraph 45 of GSTR 2009/4 confirms that although one factor may not be sufficient on its own, in conjunction with others it would demonstrate whether or not partially constructed premises are held for sale. The following are some examples of facts and circumstances that we would expect to be present where premises are being held for sale:

· marketing of the premises for sale, such as, listing the premises for sale with a real estate agent or agents, advertising the premises for sale in relevant publications or via Internet advertising websites for real property, arranging 'open for inspection' times, and showing prospective buyers through the premises;

· income tax treatment of the development as trading stock rather than as a capital asset (since treatment as a capital asset would imply that the premises are being held for investment or leasing purposes);

· finance documents including loan applications and documentation provided as part of the loan application process supporting the planned sale of the premises;

· business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale;

· accounting reports and financial statements supporting the holding of the premises for sale;

· past activities of the entity in carrying on the enterprise of selling new residential premises (however, it is noted that, in some cases, special purpose vehicle entities may be established for the express purpose of undertaking a single residential property development for the purpose of sale); and

· in the case of a building or complex made up of multiple stratum units, actual arm's length sales of some of the listed units (although, in some cases this may be countered by evidence that the entity only intended to sell some of the premises while intending to lease others).

In support of their contentions, your consultant refers to the documentation provided in this application (as outlined in the 'facts') as evidence of your application to the sale process of the property from ddmmyyyy. On this basis your consultant submits that the property was held for sale from that date.

After an objective assessment of the facts and taking into account your circumstances, we consider that the information provided does not support that there has been a change in the extent of creditable purpose for your acquisitions associated with the construction of the residential premises prior to the specified dates. In regards to the factors listed in paragraph 45 of GSTR 2009/4 we have summarised our findings below:

· The evidence supports that when you were taken over there was a willingness and intention to consider all options. However, there was no indication that a plan to undertake a particular course of sale of particular assets had been formed.

· The Media Release of ddmmyyyy is said to be the first definitive statement to the market that the properties would be sold. As previously noted this media release is in relation to the sale of the accommodation assets so that you could hold on to your core assets, including the property and focus on operating them. This does not show that the property or the core accommodation complexes were held for sale.

· The emails between a broker and one of your directors refers to an 'unsolicited buyer' interested in purchasing the accommodation facilities who expressed an interest in also viewing the property. The emails suggest a willingness on your part to consider an offer to purchase the property, rather than evidencing an application to the sale process. In addition you supplied contemporaneous documents which showed that you had decided not to sell the premises.

· Although you provided evidence of various sales these sales did not include plans to sell the property prior to the specified date. Rather they indicate that the accommodation facilities were to be sold and the property was to be held.

· A dated Media Release declared your intention to sell the accommodation facilities and retain the core accommodation complex assets. It does not support (as contended) that the property was held for sale.

· Your planning process as set out in the Strategic Review and Project A indicate that you had discounted the option of selling these properties and planned to use funds from the sale of the accommodation assets to retire debt and focus on the operation of these accommodation complexes.

· The dated letter submitted shows that you were reviewing your property portfolio and considering all options, including property disposals, however the letter does not evidence that you had decided to apply the property for sale rather than continue leasing it.

· From our reading of the Project A report, you were open to considering all options, the following three recommendations were presented:

1. Continue on a standalone basis or

2. Merge with another entity or

3. Sell all assets and return capital to unit holders.

The report shows that option 3 had been discounted suggesting that the property would be held for lease and not for sale.

· Your consultant made reference to a 'number of public attempts to sell the core accommodation complexes including the property. The documentation provided does not contain evidence of any public attempts to sell the property prior to the specified dates.

The evidence provided does not support the view that the property was held for sale prior to the specified periods. Therefore you are not entitled to make a decreasing adjustment in relation to the acquisitions used in the construction of your partially completed residential premises prior to those periods.

We note that you did supply evidence of active marketing of the property however this evidence was dated after the specified periods.

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