Edited version of your written advice

Authorisation Number: 1012941925408

Date of advice: 25 January 2016

Ruling

Subject: GST and sale of commercial property

Question

Will the sale of the property, by the co-owners, located in Australia be subject to the goods and services tax (GST)?

Advice

No. The sale of the property, by the co-owners, located in Australia, will not be subject to GST. As the supply of the property will not be done in the course of an enterprise that the co-owners are carrying on under paragraph 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant fact

The co-owners of the property located in Australia (property) inherited the property when their parent passed away. The co-owners of the property do not jointly have an Australian business number (ABN) and are not registered for GST.

The property is a commercial property and was previously used by the parent to run a business from. When the parent became ill one of the co-owners, XYZ, continued to operate the business.

XYZ continues carrying on the business from the property after the death of the parent and is registered for GST. The other co-owners made an offer to XYZ in regard to purchasing the other 3/4 of the property and XYZ declined the offer.

The co-owners entered into a written family agreement and agreed to the following:

• The sale of the property will be delayed until XYZ retires no later than the age of 65.

• If XYZ chooses to continue operating the business past the age of 65, the property is to be sold and the original rule from the parent's Will applies and all funds from the sale of the property are to be disbursed equally between the owners.

• XYZ can continue to operate the business from the property rent free. To use the property rent free, XYZ is required to pay all associated outgoings and running costs related to the property.

XYZ pays all the expenses relating to the property (total annual amount is under $75,000) and has never requested any contribution from the other co-owners. The income derived from the business is for XYZ and is not shared with the other co-owners.

If the property is to be sold, it will be sold with a lease attached to enable XYZ to continue to operate the business on the property.

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 23-5

Detailed reasoning

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

GST is payable on a taxable supply. You will make a taxable supply under section 9-5 of the GST Act 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.

All of the above requirements must be satisfied for the supply of the commercial property to be a taxable supply under section 9-5of the GST Act.

Paragraph 9-5(a) of the GST Act

The co-owners will satisfy paragraphs 9-5(a) of the GST Act when they sell the property as they will make the supply for consideration.

Paragraph 9-5(b) of the GST Act

The definition of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) an activity or series of activities done:

• in the form of a business;

• on a regular continuous basis, in the form of a lease, licence or other grant of an interest in property;

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

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on what constitutes an enterprise for the purposes of eligibility for registration for an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to GST.

• In the form of a business

The co-owners are not in the business of purchasing and selling properties. The supply of the property will therefore not be made in the course of an enterprise in the form of a business under subsection 9-20(1) of the GST Act.

• On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The co-owners are supplying the property to XYZ (one of the owners of the property) on a continuous basis so that XYZ can run the business from the property. In this instance the co-owners are considered to be carrying on an enterprise in the form of a lease, licence or other grant of an interest in property under subsection 9-20(1) of the GST Act.

However, under paragraph 9-20(2)(c) of the GST Act, an enterprise does not include an activity or series of activities done by an individual (other than a trustee of a charitable fund, or a fund covered by item 2 if the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain.

The co-owners are not deriving any income from XYZ when XYZ uses the property and the co-owners have no expectation to make a profit when XYZ uses the property since, XYZ is paying for the costs related to the property that the co-owners would normally pay if XYZ was not using the property to run the business from. Further the co-owners are not providing the property to XYZ in a businesslike manner.

In this instance, when the co-owners provide the property to XYZ we consider the co-owners are not carrying on an enterprise by virtue of paragraph 9-20(2)(c) of the GST Act since they are not supplying the property to XYZ with an expectation of profit.

The sale of the property will therefore not be made through an enterprise in the form of a lease, licence or other grant of an interest in property under subsection 9-20(1) of the GST Act.

• In the form of an adventure or concern in the nature of trade

The co-owners are not in the business of purchasing and selling properties. In this instance, their sale of the property will be a 'one-off' or isolated real property transaction.

In regard to isolated or one-off transaction, paragraphs 262 and 263 of MT 2006/1state:

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. ...

Further paragraph 244 of MT 2006/1 states:

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Based on the facts received and as discussed above, the co-owners will not be selling the property through an enterprise despite the fact that XYZ is using the property to run the business from. Accordingly, the property is being held by the co-owners as an asset and therefore the disposal of the property will not amount to trade for GST purposes.

Hence, the co-owners will not be selling the property in the form of an adventure or concern in the nature of trade under subsection 9-20(1) of the GST Act.

Summary

When the co-owners sell the property, the supply of the property will not be done in the course of an enterprise that the co-owners are carrying on under paragraph 9-5(b) of the GST Act.

Paragraph 9-5 (c) of the GST Act

The supply of the property will be connected with Australia as the property is located in Australia. The co-owners will satisfy this paragraph.

Paragraph 9-5 (d) of the GST Act

Under section 23-5 of the GST Act, an entity is required to be registered for GST if:

a) the entity carries on an enterprise; and

b) the entity's GST turnover (current or projected) meets the registration turnover threshold (currently $75,000).

As discussed above, when the co-owners sell the property, the supply of the property will not be done in the course of an enterprise that the co-owners are carrying on under paragraph 9-5(b) of the GST Act.

Accordingly, the co-owners do not satisfy this paragraph as they will not be required to be registered for GST when they sell the property.

Summary

As all the paragraphs in section 9-5 of the GST Act will not be satisfied, the supply of the property will not be a taxable supply and therefore no GST will be payable on the sale of the property.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).