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Edited version of your written advice
Authorisation Number: 1013095627485
Date of advice: 22 September 2016
Ruling
Subject: GST and apportionment of sale of land
Questions:
(1) Is the sale of property made by the entity a taxable supply?
(2) If the sale is a taxable supply, what proportion of the supply is taxable?
Answers:
(1) Yes, the entity has made a taxable supply of property.
(2) The 40/60 taxable and 40% input taxed apportionment is accepted.
Relevant facts:
• Two taxpayers (you) own the property to be sold.
• You use the property partly as your principal place of residence and own it as joint tenants.
• The house on the property is not new residential premises.
• You operated an enterprise on the property. You are registered for GST as individuals and as a partnership.
• You never received rent from the partnership for use of the property by the partnership.
• You negotiated with a land developer (developer) to sell the property, and contracts for the sale of the property were exchanged.
• You ceased your business operations.
• You will not carry on your enterprise on the property again after the sale.
• The developer is registered for GST, and does not intend to carry on any farming activities.
The following advice was provided:
Question 1
Is the sale of the property (or part of the property) a taxable supply?
You are both registered for GST, and there is also a GST registered partnership in place. In order to be a taxable supply under paragraph 9-5 of A New Tax System Goods and Services Tax) Act 1999 (GST Act), the sale of the property has to be made in the course or furtherance of an enterprise, which is the case here. We note that the sale also fulfils the other three requirements of section 9-5 of the GST Act. However, the property was partly occupied as a residence by you and the property was also partly used to carry on an enterprise.
The land was never listed as a partnership asset, no rent was received for the land and the land was leased on a tenancy at will to the partnership by you as individual owners. You did not create a separate entity (such as a company or trust) to support the existence of a lease.
No tenancy at will exists under your circumstances. That is because tenancies at will are usually transitory in nature and recognised to exist on a temporary basis, usually at the end of a legally created lease when, for example, the lessee is not able to vacate the premises by a certain date, or some other unforeseen event prevents the lease from continuing under its originally agreed terms. GSTR 2002/5 Goods and services tax: when is 'a supply of a going concern' GST-free? also refers to the transient nature of 'a mere tenancy at will' with the words: '… a brief holding over upon expiration of a lease …' at paragraph 64. Consequently, whatever the circumstances of its creation, a tenancy at will cannot be the kind of long term arrangement you describe in your submission, and it must exist between two separate legal entities. You did not create a separate legal entity for that purpose and so we do not consider a valid lease existed.
We consider that the sale of land is a taxable supply to the extent that it was not used as residential premises (see below).
Question 2
If the sale of the property (or part of the property) is a taxable supply, what proportion of the sale would be seen as a taxable supply?
We are of the view that the part of the property which was used for the farming business was used to carry on an enterprise and the sale of that part of the property will constitute a taxable supply. We also note that a house was situated on another part of the same property, which was used as residential premises by you and are of the view that the sale of that part of the property constitutes an input taxed supply of residential premises.
Since we have found that the sale of land is prima facie a taxable supply, the issue of apportionment must be considered as some part of the property was used as residential premises.
There is support for the view that apportionment of a sale price can be made when a property is sold. Consolidated Explanatory Memoranda to A New tax System (Goods and Services Tax) Act 1999, under the heading ''Supply of residential premises - Subdivision 40-B and 40-C' states at paragraph 5-164:
…. residential premises will only be input taxed to the extent that the premises are to be used predominantly for residential accommodation. For example, if you have a flat on top of a shop, the supply of the shop will be taxable.
The principle expressed above applies to your circumstances and so we consider that the sale of your land can be apportioned. After considering the explanations provided, an apportionment or 60% taxable and 40% input taxed is reasonable.
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