Edited version of your written advice

Authorisation Number: 1012685121206

Ruling

Subject: GST and purchase of mixed property

Question

Will your proposed purchase of a mixed residential and commercial property as a GST-free supply of a going concern, be subject to an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), once you continue with the leases on the two residential units?

Decision

Yes, your proposed purchase of a mixed residential and commercial property as a GST-free supply of a going concern will be subject to an increasing adjustment under Division 135 of the GST Act, once you continue with the leases on the two residential units.

Relevant facts and circumstances

You are considering purchasing a mixed investment property. The property is zoned 'General Business' and consists of two shops on the ground level and two residential units on the first level.

Your intention is to purchase the property as a GST-free supply of a going concern with the current leases intact.

You intent to register for GST effective from the settlement date of the property and continue the leases as they are set up now.

You expect to purchase the property for $M as a GST-free supply. However, your lawyer has advised you that after the acquisition of the property GST-free, you will be subjected to an increasing adjustment on account of the input taxed residential leases of the two units on the first level. If you have to pay GST on top of the purchase price, you cannot afford to purchase the property.

The current leases are as follow:

• Shop 1 at ground level - $A per week, which includes outgoings and GST.

• Shop 2 at ground level - $B per week, which includes outgoings and GST.

• Unit 1 on level one - $C per week.

• Unit 2 on level one - $D per week

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 135-1

Reasons for the decision

A supply of a going concern is GST-free, where the requirements of section 38-325 of the GST Act are met. 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 ascertain whether the supplier can supply a mixed property containing commercial and residential properties as a going concern.

Amongst other things, the ATO property issues register refers to sale of properties as GST-free going concerns and states:

Property that is part of a sale of a going concern can include any of the following:

• the premises when it is sold together with the assets and operating structure of the business

• a fully tenanted building where the property and all leases, agreements and covenants are included in the sale

• the sale of a partially tenanted building where the vacant part of the building is either being actively marketed for lease or undergoing repairs or refurbishment and all leases, agreements and covenants are included in the sale.

Accordingly, a mixed property as the one you propose to purchase can be supplied as a going concern provided at settlement the property is fully tenanted and all leases, agreements and covenants are included in the sale.

In order for the supply to be a GST-free supply of a going concern, all the requirements of section 38-325 of the GST Act must be satisfied.

Therefore, where you and the supplier satisfy the above requirements, the sale of the mixed property to you will be treated as a GST-free supply of a going concern.

Initial adjustments for supplies of going concerns

Section 135-1 of the GST Act provides that the recipient of a supply of a going concern has an increasing adjustment to take into account the proportion of supplies that will be made in running the concern that will not be taxable supplies or GST-free supplies. Later adjustments are needed if this proportion changes over time.

Subsection 135-5(1) of the GST Act provides that you have an increasing adjustment if:

(a) you are the recipient of a supply of a going concern; and

(b) you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

Subsection 135-5(2) of the GST Act provides that the amount of the increasing adjustment is as follows:

1/10 x Supply price x Proportion of non-creditable use

where:

'Proportion of non-creditable use' is the proportion of all the supplies made through the enterprise that you intend will be supplies that are neither taxable supplies nor GST-free supplies, expressed as a percentage worked out on the basis of the prices of those supplies.

In this case, the proportion of non-creditable use will be the rental income received for a particular period from the residential units calculated as a percentage of the total rental income received for the same period from the entire property.

'Supply price' means the price of the supply in relation to which the increasing adjustment arises. In this case, it will be the total GST exclusive price paid for the property at settlement.

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