Edited version of your private ruling

Authorisation Number: 1012503482008

Ruling

Subject: GST and property

Question 1

Will the sale of Unit W, subject to tenancy under commercial leasing, be a GST-free supply of a going concern?

Answer

Yes, if all the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Question 2

Would it be acceptable for you to allocate the selling price of Unit Y based on the area basis before calculation of the margin and the GST applicable on the margin?

Answer

You can use any reasonable basis to apportion the consideration. However, apportionment must be undertaken as a matter of practical commonsense. The basis you choose must be supportable in the particular circumstances.

Question 3

Will the sale of the two residential flats, that is Units X and Z, be input taxed?

Answer

Yes.

Question 4

How do you calculate the margin and the GST payable under the margin scheme for a mixed supply?

Answer

For guidance, please refer to section 9-80 of the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You own properties that are near each other, almost identical and are of similar age and construction. The total building and land areas are also similar. These properties have a shared driveway to access the rear of the property which has parking areas for all tenants.

Property A comprising of:

· Commercial office unit (referred to as Unit W). Original lease expired some time ago, now on a month by month lease basis.

· Residential flat (referred to as Unit X). Residential tenancy agreement expiring soon.

· The properties are independent to each other and have their own amenities and facilities.

· The commercial office unit occupies AA% of the area of this property and the residential flat is BB% of the area of the property.

Property B comprising of:

· Commercial unit (referred to as Unit Y). You operate your professional practice from this unit.

· Residential flat (referred to as Unit Z). Original residential tenancy agreement expired a few years ago, now on a month by month lease basis.

· The units are used/operate independently of each other, with their own facilities and amenities.

· The commercial unit and the residential flat occupy the area of the property equally.

Post 1^st July 2000, you entered into a Put & Call Option Deed with the recipient for the sale of the above properties.

On exercise of either option, a contract for sale of the said properties will arise for an agreed sale price.

The parties to the Option Deed have agreed that should GST be payable, then the margin scheme is to be applied to work out the GST payable on the supply and the purchaser will pay an additional amount to you, equal to the GST payable on the proposed sale calculated under the margin scheme.

You wish to allocate the initial agreed sale price amount equally as the properties are almost identical.

Unit W will be a taxable supply; however you (and the Grantee) believe that they may be able to treat it as a GST free sale of a Going Concern. You would supply this commercial unit in its current condition and with the above tenancy position. The Grantee (or their nominated purchaser) would be able to continue to lease this unit as commercial leasing if they wish to.

Unit Y will be supplied as a 'vacant possession'. The parties agree that the margin scheme will be applied to the sale of this commercial unit.

Unit X and Y the parties agree to treat the proposed sale as an input taxed supply.

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 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-80(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-80(2)

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-325(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

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

Reasons for decision

Question 1

Will the sale of Unit W, subject to tenancy under commercial leasing, be a GST-free supply of a going concern?

Taxable supply

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

(asterisks denote a term defined in section 195-1 of the GST Act)

In your case, the supply of Unit W to the purchaser will be for consideration, it will be made to the purchaser in the course of an enterprise carried on by you, you are registered for GST and the supply is connected with Australia.

Hence, the supply of Unit W by you to the purchaser will be a taxable supply under section 9-5 of the GST Act; unless this supply satisfies the requirements of a GST-free supply of a going concern under section 38-325 of the GST Act or an input taxed supply under subdivision 40-C of the GST Act.

As it is a commercial unit, the supply by you will not be an input taxed supply.

Supply of a going concern

A supply is a GST-free supply of a going concern when all of the requirements of section 38-325 of the GST Act are satisfied. A two-step approach is required to determine firstly whether the supply is a supply of a going concern and if it is, whether the supply of the going concern is GST-free for the purposes of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains the Commissioner's view on supply of a going concern and when a supply of a going concern' is GST-free.

The 'supply of a going concern' is defined under subsection 38-325(2) of the GST Act:

(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).

Subsection 38-325(2) of the GST Act requires that the elements of that subsection be satisfied in relation to an enterprise.

The term supply of a going concern is a statutory term, which as defined in subsection 38-325(2) of the GST Act requires the following:

· an arrangement

· an identified enterprise

· the supplier supplies all the things necessary for the continued operation of the enterprise; and

· the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

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

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. 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 in 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, which in aggregate, may comprise the 'supply of a going concern', 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.. ..

In this case, upon exercise of either option, a contract of sale for the sale of the property will arise.

In our view, this would evidence an arrangement which satisfies one of the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraph 29 of GSTR 2002/5 provides that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). It is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The term enterprise is defined in section 9-20 of the GST Act and includes, amongst other things, 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 the property.

Paragraphs 64 to 66 of GSTR 2002/5 state:

Periodic Tenancies and Tenancies at Will Circumstances

64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern.

65. However, if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

66. The law of the States and Territories may prescribe certain requirements which will have to be met in respect of the creation or assignment of such tenancies. A supplier who occupies premises under a periodic tenancy therefore can supply the right to occupy the premises to a recipient and would not be precluded from making a supply of a going concern in circumstances where the premises were a thing necessary for the continued operation of the relevant enterprise.

In this case, the original lease expired some time ago, now it is on a month by month lease basis. According to paragraph 65 above, the new short term periodic tenancy may be capable of assignment.

All things necessary for the continued operation of the enterprise

To satisfy paragraph 38-325(2)(a) of the GST Act, you must supply all of the things necessary for the continued operation of this leasing enterprise.

The things that are necessary will depend on the nature of the enterprise. A thing is necessary for the continued operation of an enterprise if that enterprise could not be operated by the purchaser in the absence of the thing.

Paragraph 80 of GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise':

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Further, paragraph 108 of GSTR 2002/5 refers to the supply by a lessor of the benefits of covenants under a lease. All of the things necessary for the continued operation of a leasing enterprise include the supply of the property and the covenants (lease).

Paragraphs 149 to 151 of GSTR 2002/5 state:

Continued operation

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.¹⁸ A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. A supplier is unable to supply all of 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 enterprise engaged in an 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 is not operating.

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In your case, Unit W is under a commercial lease agreement.

Provided that this enterprise is not only being 'carried on', but is also operating, then you will satisfy the requirements under paragraph 38-325(2)(a) of the GST Act. You will supply to the recipient all of the things necessary for the continued operation of this enterprise when you sell the unit subject to the lease.

Day of supply

Paragraph 141 of GSTR 2002/5 explains that all of the activities of the enterprise must be active and operating on the day of supply. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is also operating.

In this case, if you warrant that you will carry on the leasing enterprise until the day of supply, you will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act

Provided all the requirements of subsection 38-325(2) of the GST Act are met, the supply of Unit W will be a 'supply of a going concern'.

GST-free supply of a going concern

Subsection 38-325(1) of the GST Act states:

(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.

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration. In this case, the supply of Unit W will be for consideration.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST.

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern.

If all the requirements under subsections 38-325(1) and 38-325(2) of the GST Act are satisfied, the supply of Unit W to the recipient will be a GST-free supply of a going concern.

Question 2

Would it be acceptable for you to allocate the selling price of Unit Y based on the area basis before calculation of the margin and the GST applicable on the margin?

Under section 9-40 of the GST Act, you must pay the GST payable on any taxable supply that you make. Where a supply is input taxed, no GST is payable on the supply.

From the information provided, the sale of the properties will be a mixed supply that is partly taxable (commercial units) and partly input taxed (residence units).

As GST is payable in respect of the taxable supply of the commercial units, it is necessary to apportion the consideration received for the sale of the properties between the taxable supplies and the input taxed supplies.

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) provides guidance on the apportionment of consideration for a supply that includes taxable and non-taxable parts.

We have extracted some paragraphs from GSTR 2001/8 for your information.

Reasonable methods of apportionment

92. Where, as in the case of supplies covered by section 9-75, there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.

96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.

Direct methods

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 actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

· the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

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

· the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

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

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

GSTR 2001/8 gives an example of such a direct method of apportionment, using relative amounts of rental consideration:

The relative amounts of rental consideration

103E. Sometimes it may be appropriate to ascertain the value of a taxable part of the supply having regard to rental returns.

Example 15C - commercial and residential premises

103F. Hilary is registered for GST. She sells a property that consists of commercial premises and residential premises. The property is on a single title and is currently untenanted, although the commercial part was recently rented for $1,000 per week and the residential part for $500 per week . Hilary may reasonably apportion two thirds of the consideration for the sale (the same proportion the rent for the commercial premises bears to the total rent of $1,500) to the commercial part and one third to the residential part to ascertain the value of the taxable part.

Alternatively, it may be reasonable for an entity to apportion the consideration for a mixed supply by reference to the relative floor area of the property being supplied. Paragraphs 106 to 108 state:

Relative floor area in a supply of property

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 - commercial and residential premises

107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts.

108A. The taxable proportion is therefore 50 %. Applying the formula in section 9-80, the taxable value of the actual supply is calculated as ($ 2000 x 10)/( 10 + 0.5). The value of the taxable part is $952.38 and the GST payable is $95.23.

As noted in GSTR 2001/8, apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Question 3

Will the sale of the residential flats, that is Units X and Z, be input taxed?

Section 40-65 of the GST Act provides that 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).

However, the sale is not input taxed to the extent that the residential premises are:

· commercial residential premises, or

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

Section 195-1 of the GST Act defines residential premises to mean land or a building that:

· is occupied as a residence, or for a residential accommodation; or

· 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).

From the facts provided, Units X and Z are residential premises. As such, the sale of these units will be input taxed under section 40-65 of the GST Act.

Question 4

How do you calculate the margin and the GST payable under the margin scheme for a mixed supply?

Section 9-80 of the GST Act provides a method for calculating the value of taxable supplies that are partly GST-free or input taxed.

(1) If a supply (the actual supply) is:

(a) partly a *taxable supply; and

(b) partly a supply that is *GST-free or *input taxed;

the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

(2) The value of the actual supply, for the purposes of subsection (1), is as follows:

*Price of the supply x 10

10 + Taxable proportion

where:

Taxable proportion is the proportion of the value of the supply that represents the value of the taxable supply (expressed as a number between 0 and 1).

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