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Edited version of your written advice

Authorisation Number: 1051214793259

Date of advice: 19 April 2017

Ruling

Subject: Sale of your interest in the commercial property

Question

Is the sale of your interest in the property subject to goods and services tax (GST)?

Answer

No, the sale of your interest in the property is not subject to GST. As such, no GST is payable on the sale.

Relevant facts and circumstances

You are not registered for GST.

You and the other two parties purchased, as tenants in common, the property.

The property consists of a commercial property for business use which has been split in half. Essentially, the property houses two separate sole trader businesses owned by one of the vendors and purchasers respectively.

You have not received any rent for allowing one of the vendors to operate their business in your share of the property but the vendor has paid your share of the outgoing costs of the property.

Both the sole traders were registered for GST at the time of purchase and each claimed the outgoing costs as expenses incurred in carrying on their respective enterprises throughout the years.

In 2016, the vendor who operates their sole trader business from the property has cancelled their GST registration as it fell below the $75,000 GST turnover threshold.

No one is currently renting your share of the property nor has it ever been rented to anyone. It is now used as storage.

In 2017, you entered into a contract of sale (the contract) to sell your interest in the property to the purchasers for consideration. The contract and purchase price (if GST is applicable) is subject to obtaining a ruling from the Australian Taxation Office with regards to the imposition or non-imposition of GST on the sale.

The vendor who operates their business in the property is not selling their business and there is nothing in the contract providing that the sale of your interest in the property is a sale of a going concern.

Upon settlement of the contract, the purchasers will own 100% of the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

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

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

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

Reasons for decision

Summary

Based on the information provided, the sale of your interest in the property is not subject to GST. This is because you are not carrying on an enterprise in respect of the property. As such, no GST is payable on the sale of your interest in the property to the purchasers.

Detailed reasoning

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies. Section 9-5 of the GST Act provides that you make a taxable supply if:

(Note: the asterisk * denotes a defined term in section 195-1 of the GST Act.)

The definition in section 9-5 of the GST Act expressly excludes from the definition of taxable supply a supply which is GST-free or input taxed. The circumstances in which a supply is GST-free or input taxed are found in Division 38 and Division 40 of the GST Act respectively.

To be a taxable supply, all of the elements of section 9-5 of the GST Act must be satisfied.

'Supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes amongst other things, a grant, assignment or surrender of real property (paragraph 9-10(2)(d) of the GST Act).

'Real property' is defined in section 195-1 of the GST Act as including:

Subsection 9-25(4) and section 195-1 of the GST Act provides that a 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 Australia.

From the facts provided, the supply is a supply of your interest in a property that is located in Australia to the purchasers for consideration. Further, the property is neither a GST-free supply under Division 38 of the GST Act nor an input taxed supply under Division 40 of the GST Act.

However, you are not registered for GST. Therefore, the issue to be determined in this case is whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered if:

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among 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 property.

A licence is generally a right to occupy a property where no formal lease agreement is in place. In addition, if this grant of a licence is done on a regular or continuous basis, it will be an enterprise for GST purposes.

From the facts provided, it is considered that you have supplied the other vendor with an implied licence to operate their business from the property on a regular or continuous basis. Therefore, your supply of this licence will satisfy the requirements to be an enterprise as per subsection 9-20(1) of the GST Act.

However, paragraph 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity or series of activities done by an individual, or a partnership (where all or most of the members are individuals), without a reasonable expectation of profit or gain.

We consider that a reasonable expectation of profit or gain requires more than a possibility, risk or chance of the profit or gain occurring. In fact, there should be a commercial basis underlying it.

We have been advised that the only consideration being received for the supply to the other vendor of a licence to use the property is the payment of the outgoing costs for your share in the property. Payments for a supply that only cover the costs of that supply will not usually generate a profit or gain.

Therefore, it is considered that there is no reasonable expectation of a profit or gain being made from your supply to the other vendor of a licence to use the property in their business.

Accordingly, you are not considered to be carrying on an enterprise for GST purposes and as such, the sale of your interest in the property has not been made in the course or furtherance of an enterprise that you carry on.

In addition, as you are not carrying on an enterprise for GST purposes, you are not entitled to be registered for GST.

As all the requirements of section 9-5 of the GST Act have not been satisfied, the sale of your interest in the property is not a taxable supply and thereby is not subject to GST. Accordingly, no GST is payable on the sale.

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