Edited version of your written advice

Authorisation Number: 1051206409755

Date of advice: 27 March 2017

Ruling

Subject: Registration for Goods and Services Tax (GST) and sale of property

Question 1

Are you, the Vendors, required to be registered for GST at the time the contract for the sale of the property was entered into?

Answer

You are required to be registered for GST at the time the contract for the sale of the property was entered into.

Question 2

If settlement of the sale of the property takes place and the property has been vacant for a period of time up to the time of settlement, will you be required to be registered for GST?

Answer

You will not be required to be registered for GST at the time of settlement.

Question 3

Will the sale of the property be a taxable supply at the time of settlement?

Answer

The commercial portion of the sale of the property will be a taxable supply at the time of settlement as you are registered for GST. The residential portion of the sale of the property will be an input taxed supply.

Relevant facts and circumstances

A and B own a property in equal shares.

The property had been rented out to commercial and residential tenants. The commercial proportion is x% and the residential proportion is y% based on relative floor area.

A and B (Vendors) entered into a contract of sale (Contract) with C and D (the Purchasers) to sell the property.

At the time of entering into the Contract, the property was fully leased out to tenants.

The Contract is a standard land contract.

The Contract states that the sale is a taxable supply and the sale price is exclusive of the vendors' liability for GST.

At the time of entering into the Contract, the Vendors were not registered for GST. The Vendors then registered for GST at a later date.

The rental turnovers for the commercial portion of the property have always exceeded $75,000.

Although the Contract provided for a particular settlement date which has lapsed, settlement has not taken place due to disputes between the parties concerning GST implications.

The Purchasers believe that they do not have to pay GST on the sale of the property as the Vendors were not registered for GST at the time of entering into the Contract.

The leases on the property have expired and the tenants vacated the property. No new tenants were sought. The property is currently vacant and has been vacant for a while.

As the property is currently vacant, the Purchasers claim that the Vendors are not required to be registered for GST for the sale of the property.

Since entering into the Contract, the Vendors have not purchased any other commercial property in their joint names (ie under the same entity) and they do not intend to purchase any commercial properties in joint names in the future.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(d)

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 23-5(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 23-5(b)

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

A New Tax System (Goods and Services Tax) Act 1999 subsection 23-15(1)

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-10(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subparagraph 188-25(b)(i)

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

A New Tax System (Goods and Services Tax) Regulation 1999 regulation 23-15.01

Reasons for decision

Required to be registered for GST for the sale of the Property

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

* denotes a term defined in section 195-1 of the GST Act.

Carrying on an enterprise

Under section 195-1 of the GST Act, carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

An enterprise, as defined by subsection 9-20(1) of the GST Act, is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or ….

*denotes term defined by section 195-1 of the GST Act

Paragraph 10 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that an activity or series of activities is:

Essentially … any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

In this circumstance, the Vendors have been renting out the property to commercial and residential tenants. Such an act or acts amount to an activity or series of activities done on a regular or continuous basis, in the form of a lease. Therefore, the Vendors are carrying on an enterprise of commercial and residential leasing.

At the time of entering into the Contract, the property was leased out to commercial and residential tenants. Hence, the Vendors were carrying on an enterprise of commercial and residential leasing at that time. Thus, paragraph 23-5(a) of the GST Act is satisfied.

GST turnover meeting the registration turnover threshold

Section 195-1 of the GST Act provides that:

● GST turnover in relation to meeting a turnover threshold has the meaning given by subsection 188-10(1); and

● Registration turnover threshold has the meaning given by section 23-15.

Subsection 188-10(1) of the GST Act states that you have a GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

* denotes a term defined in section 195-1 of the GST Act.

Under subsection 188-15(1) of the GST Act, your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

Whereas projected turnover at a time during a particular month, as defined by subsection 188-20(1), is the sum of the value of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

Under section 40-35 of the GST Act residential rent is input taxed and therefore is excluded from the calculations of current turnover and projected turnover.

From the 1 July 2007 the registration turnover threshold for an entity that is not a non-profit body is $75,000. This is based on subsection 23-15(1) of the GST Act and regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999.

In this case, the property had been rented out to commercial and residential tenants. As residential rent is input taxed and is disregarded from the current and projected turnovers' calculations, only the rental incomes for the commercial premises are taken into in determining the Vendors' current and projected turnovers.

The rental turnovers for the commercial portion of the property have always exceeded $75,000. As a result, the Vendors' GST turnovers met the registration turnover threshold. Hence, paragraph 23-5(b) of the GST Act is satisfied.

This means that even though the Vendors were not registered for GST at the time of entering into the Contract, they were required to be registered for GST as section 23-5 of the GST Act is satisfied.

Question 2

Requirement to register for GST at settlement when the property has been vacant

The Vendors are required to be registered for GST when settlement takes place, if they are carrying on an enterprise and their GST turnover meets the registration turnover threshold at that time.

Carrying on an enterprise

The property is currently vacant as the leases finished and all the tenants vacated the property. No new tenants were sought.

As outlined above, carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. This concept is further explained by paragraph 140 of Miscellaneous Taxation Ruling MT 2006/1 The new tax system: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number which states that:

Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Paragraph 144 of MT 2006/1 then provides that:

In circumstances where assets have been sold …there may still be some other activities undertaken to terminate the enterprise. These activities may include the preparation of final accounts, activity statements, and income tax returns and the cancellation of the ABN and GST registration.

On the bases of the above paragraphs, even though the property is presently vacant and no new tenants were sought, the Vendors are still carrying on the enterprise of leasing the Property. This enterprise will not cease until the property is sold (ie title of the property has been transferred to the Purchasers) and the preparation of the final accounts, activity statement, income tax returns have been carried out by the Vendors and that the Vendors cancelled their ABN and GST registrations. Therefore, paragraph 23-5(a) of the GST Act is satisfied.

GST turnover meeting the registration turnover threshold

As the property is currently vacant and has been vacant for a while, the rental income for the commercial portion of the property is nil and will be nil until settlement. Thus, the Vendors' current GST turnover is and would be below the registration turnover threshold of $75,000.

If settlement takes place, the payment for sale of the commercial portion of the Property would be a lot more than $75,000. This means the Vendors' current GST turnover, at the time of settlement, will be above the registration turnover threshold. Furthermore, if this amount is included in the Vendors' projected GST turnover then it would be above the registration turnover threshold and as a result the Vendors would be required to be registered for GST based on paragraph 188-10(1)(a) of the GST Act.

However in calculating the projected GST turnover, subparagraph 188-25(b)(i) of the GST Act provides that any supply made, or likely to be made, by the Vendors as a consequence of ceasing to carry on an enterprise is disregarded.

An example of this is outlined in the Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.

Example 1: Ceasing to carry on an enterprise

48. James, a grazier, aged seventy, decides to retire from his farm. He holds a clearing sale and sells all his livestock, machinery and implements to various buyers. He receives $80,000 from the sale that will be included in his current GST turnover. He is not registered for GST, as his GST turnover from selling livestock is usually around $35,000.

49. If James has a GST turnover of $75,000 or more he is required to be registered for GST. Although he normally would have sold some of this livestock in his day to day operations, the whole herd has been sold at this time solely as a consequence of ceasing to carry on his enterprise. The effect of subparagraph 188-25(b)(i) is that the $80,000 is excluded from his projected GST turnover.

50. An objective assessment of James' projected GST turnover is below $75,000 taking into account his age and the permanent nature of his decision. His current GST turnover is above $75,000 but because his projected GST turnover is below $75,000, his GST turnover does not meet the registration turnover threshold. Thus, James is not required to register for GST.

Since entering into the Contract to sell the property, the Vendors have not purchased any other commercial and residential property in their joint names and they do not intend to purchase any in their joint names in the future. Thus, after settlement of this property the Vendors will cease to carry on an enterprise of commercial and residential leasing.

As a result, the amount that the Vendors receive for the sale of the commercial portion of the property is disregarded from the calculation of their projected GST turnover.

This means that at settlement, the Vendors projected GST turnover would be below the registration turnover threshold. Hence, according to subsection 188-10(1) of the GST Act, the Vendors do not have a GST turnover that meets the registration turnover threshold. Therefore, paragraph 23-5(b) of the GST Act is not satisfied and as a result the Vendors are not required to be registered for GST at the time of settlement.

Question 3

Will the sale of the property be a taxable supply at the time of settlement?

Under section 9-5 of the GST Act 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 the indirect tax zone; 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 property in this case is being sold for a certain amount of money so there is consideration being provided for this supply. Thus, paragraph 9-5(a) of the GST Act above is satisfied.

As the Vendors are carrying on an enterprise of leasing the property, the sale of the property is a supply made in the course or furtherance of the enterprise that the Vendors carry on. Hence, paragraph 9-5(b) of the GST Act is satisfied.

Subsection 9-25(4) of the GST Act provides that the supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone. Section 195-1 of the GST Act defines indirect tax zone to mean Australia. As the sale of the property takes place in Australia, this supply is connected to the indirect tax zone. This means paragraph 9-5(c) of the GST Act is satisfied.

The Vendors are currently registered for GST. If settlement takes place and the Vendors continue to be registered for GST then paragraph 9-5(d) of the GST Act is satisfied.

As all the criteria of section 9-5 of the GST Act are met, the sale of the Property is a taxable supply to the extent that it is not GST-free or input taxed.

Section 40-65 of the GST Act provides that a sale of residential premises is input taxed if it is not commercial residential premises or new residential premises.

The property in this case, contains both commercial and residential premises. As such only the supply of the commercial portion of the property is a taxable supply.

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