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Ruling

Subject: GST and the sale of commercial property

Question

Was the sale of the commercial property (property) from the supplier to you, partly a taxable supply and partly a GST-free supply of a going concern?

Decision

Yes, the sale of Area A of the property from the supplier to you was a GST-free supply of a going concern. The sale of Area B and Area C of the property to you were taxable supplies of commercial property.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

You are registered for GST.

Recently, you entered into a contract of sale with a supplier to purchase property for consideration of $ X plus GST. The settlement of the property occurred on the settlement date.

The supplier was registered for GST.

As per the property plan, the property consisted of:

· two separately identifiable and unconnected buildings as Area A and Area B; and

· a vacant area of land shown as Area C.

Area A was leased by Entity A under a separate lease entered between the supplier and Entity A. The lease was renewed prior to the settlement date and was in force on the settlement date.

Area B was leased by you under a 10 year lease entered between you and the supplier and was in force on the settlement date.

Area C was vacant land that was previously leased but was not leased at the time of sale. It was not marketed for lease either by the supplier or by you.

Between the time of entering into the contract of sale and the date of settlement, excluding Area C, the property was fully leased.

Apportioning the value of the property

Based on the advice provided by the supplier's agent, the GST exclusive value of the property was apportioned as follows:

Area A - estimated value $ A;

Area B - estimated value $ B;

Area C - estimated value $ C.

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 - Subsection 9-20(1)

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

Reasons for the decision

Unless otherwise specified, all references below are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Sale of Area A

Section 9-5 of the GST Act provides that:

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.

The supplier made the supply of Area A to you for consideration and satisfied paragraph 9-5(a) of the GST Act.

Paragraph 9-20(1)(c) of the GST Act provides that an enterprise is an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The supplier was leasing Area A to Entity A.

The lease remained in force on the settlement date. The supplier was carrying on an enterprise of leasing Area A to Entity A till the day of supply. The supply of Area A was made to you in the course or furtherance of this leasing enterprise and paragraph 9-5(b) of the GST Act was satisfied.

The supply was connected with Australia, as the property was located in Australia. Therefore, paragraph 9-5(c) of the GST Act was satisfied.

The supplier was registered for GST and paragraph 9-5(d) of the GST Act was satisfied.

Consequently, the sale of Area A satisfied the requirements of paragraphs 9-5(a)-(d) of the GST Act. However, it is necessary to ascertain whether the supply was a GST-free or an input taxed supply under any other provision of the GST Act.

Section 38-325 of the GST Act provides that:

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).

It is necessary to consider whether the sale of Area A to you satisfied the requirements of section 38-325 of the GST Act as a GST-free supply of a going concern.

As mentioned above, the supplier was carrying on a leasing enterprise on Area A. It is this leasing enterprise, for which the supplier must supply all the things necessary for its continued operation, in order for it be a supply of a going concern.

A thing is necessary for the continued operation of the leasing enterprise if the leasing enterprise could not be operated by the recipient in the absence of the thing. Two elements are essential for the continued operation of the leasing enterprise:

· the assets necessary for the continued operation of the leasing enterprise, which in this case is the property;

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the leasing enterprise, which in this case is the lease.

On the settlement date, the supplier transferred the property containing Area A and the relevant lease to you.

We consider that the contract of sale was an arrangement under which the supplier supplied to you all the things necessary to continue this leasing enterprise. The supplier carried on this leasing enterprise till the settlement date.

We consider that in supplying Area A to you, the supplier satisfied the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act as a supply of a going concern. It is necessary to consider whether it was a GST-free supply of a going concern.

Subsection 38-325(1)

As mentioned above, the supply of this going concern was for consideration. As the recipient, you were registered for GST. Therefore, paragraphs 38-325(1)(a) and (b) of the GST Act were satisfied.

General conditions of the contract of sale provided that, if the particulars of sale specify that the supply made under this contract is a 'going concern':

· the parties agree that this contract is for the supply of a going concern; and

· the purchaser warrants that the purchaser is or prior to settlement will be, registered for GST; and

· the vendor warrants that the vendor will carry on the going concern until the date of supply.

We consider that you and the supplier agreed in writing that the sale of Area A was a supply of a going concern and satisfied paragraph 38-325(1)(c) of the GST Act.

Taking into account all the above facts, we accept that the sale of Area A to you was a GST-free supply of a going concern.

Sale of Area B

Area B was supplied to you by the supplier for an estimated GST exclusive value of $ Y. Therefore, paragraph 9-5(a) was satisfied.

A few years ago, you entered into an agreement with the supplier to lease the buildings in Area B for a period of 10 years. Under subsection 9-20(1) of the GST Act, the supplier carried on a leasing enterprise on Area B of the property, up to the settlement date. Therefore, the supplier made this supply in the course or furtherance of an enterprise carried on by the supplier and satisfied paragraph 9-5(b) of the GST Act.

The supply was connected with Australia as the property was located in Australia. The supplier was registered for GST. Therefore, paragraphs 9-5(c) and (d) were satisfied. Accordingly, paragraphs 9-5(a)-(d) of the GST Act were satisfied. It is necessary to ascertain whether the sale of Area B to you was a GST-free or an input taxed supply under any provision of the GST Act. In particular, it is necessary to consider whether this supply was a GST-free supply of a going concern under section 38-325 of the GST Act.

It is also necessary to ascertain whether the supply satisfied the requirements of subsection 38-325(2) as a supply of a going concern.

We consider that the supplier carried on the leasing enterprise on Area B until the settlement date. Therefore, the requirements of paragraph 38-325(2)(b) of the GST Act were satisfied.

It has to be recognised that on the settlement date, you became the owner of Area B. From that day onwards, you ceased to lease the premises of Area B from the supplier. In effect, the leasing enterprise ceased to operate from the settlement date.

Therefore, the supplier did not supply to you all of the things that are necessary for the continued operation of the leasing enterprise, as the leasing enterprise came to an end on the settlement date. Consequently, the requirements of paragraph 38-325(2)(a) were not satisfied. Accordingly, there was not a supply of a going concern under an arrangement.

As a result not all the requirements of section 38-325 were satisfied. Therefore, the sale of Area B to you was not a GST-free supply of a going concern. It was a taxable supply under section 9-5 of the GST Act.

Sale of Area C

You have informed us that Area C is a block of vacant land and currently not leased to any entity. In addition you or the supplier do not actively market it for a lease. However, it had been previously leased.

The supply of this land was made for consideration and the requirements of paragraph 9-5(a) of the GST Act were satisfied.

It is necessary to consider whether the supplier made this supply in the course or furtherance of an enterprise carried on by the supplier.

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) refers to the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) considers whether MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraph 1 of GSTD 2006/6 provides that MT 2006/1 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the GST Act. The principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraphs 262 - 302 of MT 2006/1 refer to isolated transactions and sale of real property. The following paragraphs are relevant in determining whether the supply of Area C was made in the course or furtherance of an enterprise carried on by the supplier.

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.¹¹¹

As per the given facts, it is quite evident that the supplier was earning an income through the lease of Area A and B. In addition the vacant land in Area C has been previously leased. Considering these facts, it is reasonable to assume that when the supplier purchased this property, the supplier would have intended to earn an income through the lease of the property and make a profit on the resale of the property at some future date.

We consider that the activities connected with the purchase and lease for a period and subsequent sale of Area C were activities in the conduct of a profit making undertaking or scheme and therefore, an adventure or concern in the nature of trade. These activities amount to carrying on an enterprise on Area C and the requirements of paragraph 9-5(b) were satisfied.

The supply of Area C was connected with Australia as the land was located in Australia. The supplier was registered for GST. Therefore, the requirements of paragraphs 9-5(c) and (d) of the GST Act were satisfied.

Sale of vacant land is not a GST-free or an input taxed supply under any provision of the GST Act. Accordingly, the sale of Area C to you was a taxable supply.

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