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Authorisation Number: 1051292138747

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Date of advice: 27 October 2017

Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the property located in Australia (the Property)?

Answer

No.

Relevant facts and circumstances

You are the owner of the Property. The Property is in a single title with an area of several hectares and is zoned farming. The Property contains a number of premises and a shed/barn. There is also an area for a playground and sports court.

You purchased the Property and the sale to you was a taxable supply with the GST calculated under the margin scheme.

For a number of years, the Property was used for certain months of the year as student accommodation with individual leases and for the remaining months of the year it was used for holiday accommodation as fully self-contained apartments.

For a certain period, you used one of the units as your main residence.

In the last few years, the premises have been used for long term rentals.

All the premises have facilities for day-to-day living including cooking, laundry, bathroom and sleeping facilities.

The shed/barn is used for storage and is presently being leased to the people that lease the main house.

The playground and sports court were facilities set up when you purchased the Property. These facilities are available for the residents to use and are not leased to others.

You are registered for GST.

You provided a copy of the layout of the Property.

You provided a list describing each of the premises and the occupancy status as at a certain date.

Any vacant premises are listed for rent with a local real estate agent. The expired leases go to monthly periodic tenancies with a specified number of days-notice needed to vacate.

You intend to sell the Property with the existing leases in place and all furniture if required. The furniture is currently in storage as the properties are rented to long term tenants.

You intend to sell the Property for a certain sum. There is currently no prospective purchaser but the purchaser will probably be registered for GST and you and the purchaser will discuss an agreement in writing for the sale to be a supply of a going concern.

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 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 40-65(1).

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(c).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(b).

Reasons for decision

Summary

The sale of the Property is not a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The sale of the Property is an input taxed supply under subsection 40-65(1) of the GST Act to the extent that the property is residential premises to be used predominantly for residential accommodation.

Alternatively, the sale of the Property is a GST-free supply of a going concern if all the requirements under section 38-325 of the GST Act are satisfied.

Detailed reasoning

GST is payable on the sale of the Property if you are making a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

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

Based on the information provided, the sale of the Property satisfies the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act as follows:

● the sale of the Property is for consideration

● the sale of the Property is made in the course or furtherance of an enterprise that you carry on

● the sale is connected with Australia as the land is in Australia and

● you are registered for GST.

Hence, the requirement of paragraph 9-5(d) of the GST Act is also satisfied.

It remains to be determined whether the sale of the Property is input taxed or GST-free.

Input taxed

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) of the GST Act provides that the supply is not input taxed to the extent the residential premises are either commercial residential premises or new residential premises (other than those premises used for residential accommodation before 2 December 1998).

The term 'residential premises' is defined in section 195-1 to mean land or a building that:

a) is occupied as a residence or for residential accommodation or

b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation

(regardless of the term of occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) considers how the GST Act applies to supplies of residential premises.

Paragraphs 6 and 7 of GSTR 2012/5 consider the definition of residential premises and state:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

You advised that all the premises have facilities for day-to-day living including cooking, laundry, bathroom and sleeping facilities. The shed/barn is used for storage and is presently being leased to the people that lease the main house. The Property also includes a playground and sport courts, which were set up when you purchased the Property and they are currently available for the residents to use and are not leased to others.

In the last few years, the premises have been used for long term rentals.

Prior to that, the Property was used for certain months of the year as student accommodation with individual leases and for the remaining months of the year it was used for holiday accommodation as fully self-contained apartments. In addition, you used one unit as your main residence.

Based on the information you provided, the Property satisfies the definition of ‘residential premises” as the premises provide shelter and basic living facilities.

The next step is to consider whether the Property also falls within the scope of being ‘commercial residential premises’.

Commercial residential premises are defined in section 195-1 to include, amongst other things:

(a) a hotel, motel, inn, hostel or boarding house, or

(b) …

(f) anything similar to residential premises described in paragraphs (a) to (e).

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

Goods and Services Tax Ruling GSTR 2012/6 (GSTR 2012/6) considers how the GST Act applies to supplies of commercial residential premises and supplies of accommodation in commercial residential premises.

Based on the information provided, the sale of the Property is neither a supply of commercial residential premises nor a supply of new residential premises. Therefore, as the supply of the Property is of residential premises, the supply is input taxed under section 40-65 of the GST Act.

GST-free

As determined above, the supply of your property will be input taxed. However, if you choose to supply the Property as a going concern, and all the requirements of section 38-325 of the GST Act are met, the purchaser will be required to make an increasing adjustment under Division 135 of the GST Act.

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(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).

In order to determine whether the sale of the Property is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

75. Two elements are essential for the continued operation of an enterprise:

● the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

● the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Enterprise

We must first determine whether you are operating an ‘enterprise’ that is capable of being supplied as a going concern for GST purposes.

Section 9-20 of the GST Act defines ‘enterprise’ to include, amongst 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 (paragraph 9-20(1)(c) of the GST Act).

The Property contains a number of premises and a barn that are capable of separate residential leases. For the last few years you have leased the premises on the Property. Hence, you are operating a leasing enterprise in relation to the Property which is capable of being supplied as a going concern for GST purposes.

Subsection 38-325(2) of the GST Act

As you are currently leasing the Property, you are required to supply to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

For you to make the supply of a going concern, you must assign to the recipient all existing lease agreements and the benefit of any existing covenants under the lease. That is, the lessees will continue to lease the premises under the current terms of the existing lease and the recipient is bound by the terms of the existing lease. Where the existing lease is not assigned, but the Purchaser and the lessee enter into a new lease, then that portion of the supply will not be a GST-free supply of a going concern.

You advised that you intend to sell the Property with the existing leases in place and all furniture if required. The furniture is currently in storage as the properties are rented to long term tenants.

Some of the residential premises are leased on a monthly periodic basis while others are leased under formal agreements. There are also residential premises that are currently vacant but are marketed for rent.

Paragraph 65 of GSTR 2002/5 discusses a periodic tenancy:

65…if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period and therefore has a legally enforceable right to occupy the premises for the period.

A periodic tenancy may be capable of assignment, which means that the recipient of the Property will be able to continue the enterprise of leasing if they choose to.

Furthermore, paragraph 151 of GSTR 2002/5 explains that the activity of leasing a building that has previously been leased to a tenant remains an enterprise of leasing for the purposes of section 9-20 of the GST Act during the period of temporary vacancy when a new tenant is being actively sought by the owner of the building. Paragraph 152 of GSTR 2002/5 mentions this may include the appointing of a leasing agent to find tenants for the remaining area.

Hence, provided the current leases continue to be in place at the time of settlement and any vacant premises are being actively marketed for leasing; the purchaser will be able to continue the enterprise of leasing if it chooses. In this instance, you will be supplying to the purchaser all of the things that are necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5).

You intend to sell the Property with the leases intact. Provided you continue to carry on the leasing enterprise until settlement when title, property, risk and profits of the enterprise will be passed on to the purchaser then you will be carrying on the leasing enterprise until the day of supply under paragraph 38-325(2)(b) of the GST Act.

Therefore, under these circumstances, the sale of the Property will be a supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(1) of the GST Act

For the supply of a going concern to be GST-free, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.

In this case, the sale of the Property will be for consideration. Hence, the requirement of paragraph 38-325(1)(a) of the GST Act will be satisfied.

You advised that there is currently no prospective purchaser. You further advised that you and the purchaser will discuss an agreement in writing for the sale to be a supply of a going concern.

Paragraph 186 of GTR 2002/5 explains that the recipient must be registered with effect from a date on or before the day of the supply. Paragraph 161 of GSTR 2002/5 provides that the day of the supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

Furthermore, paragraph 181 of GSTR 2002/5 explains that 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in a form that clearly evidences that they agree that the supply is a 'supply of a going concern'. Paragraph 182 of GSTR 2002/5 provides that this agreement must be made on or before settlement day.

Provided the Purchaser is registered or required to be registered for GST at settlement and you and the purchaser agree in writing that the supply is of a going concern, the requirements of paragraphs 38-325(1)(b) and 38-325(1)(c) of the GST Act will be satisfied.

In these circumstances, where all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the supply of the Property is a GST-free supply of a going concern.

Therefore, the sale of the property will either be an input taxed supply of residential premises or a GST-free supply of a going concern.

Additional information

A recipient of a 'supply of a going concern' that intends to make supplies which are neither taxable nor GST-free will be required to make an increasing adjustment under Division 135 of the GST Act.

Subsection 135-5(1) of the GST Act provides that an entity has an increasing adjustment where:

● it is the recipient of a supply of a going concern; and

● it intends that some or all of the supplies to be made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

If the Purchaser continues to operate the leasing enterprise in respect of the residential premises, it would fall into this category given the supply of residential premises is input taxed rather than taxable or GST-free.

Refer to example 33 at paragraphs 202 to 204 of GSTR 2002/5:

Example 33: availability of input tax credits

202. Gerald acquires a block of flats which are subsequently let as residential premises for several years. Gerald sells the property to Grace with existing leases intact. The supply is for consideration, Gerald and Grace are both registered for GST and they agree in writing that the 'supply is of a going concern'. In the course of the sale, Gerald consults a solicitor and utilises the services of a real estate agent.

203. As the acquisition of the premises by Gerald is for the purpose of making input taxed supplies, it is not acquired for a creditable purpose and input tax credits are not available in relation to the acquisition. The acquisitions made in the course of the leasing activities, such as plumbing and painting, are also not acquisitions for a creditable purpose. The input tax credits in relation to these acquisitions are not available to Gerald.

204. The supply of the premises as a 'supply of a going concern' is GST-free and acquisitions made in the course of making that supply are made for a creditable purpose. The input tax credits in relation to the acquisition of legal services and real estate services are available to Gerald.^[22]

Footnote 22 of GSTR 2002/5 states that as Grace intends to continue to lease the premises for residential purposes, she will be making wholly input taxed supplies and will have an increasing adjustment under section 135-5.

Goods and Services Tax Determination GSTD 2012/1 discusses the GST consequences following the sale of residential premises that are subject to a lease.

All publications referred to above are available on our website www.ato.gov.au

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