| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051333139144
Date of advice: 31 January 2018
Ruling
Subject: Goods and services tax and the sale of commercial premises
Question
Is the proposed sale of a property by the Partnership, a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
No, the proposed sale of the property by the Partnership is not a taxable supply under section 9-5 of the GST Act.
Relevant facts and circumstances
The Partnership began a retail and antiques and collectibles business through a retail shopfront.
The Partnership was registered for GST.
The Partnership purchased a commercial property to service stock storage requirements (warehouse) and provides an area for a furniture restoration workshop. The property has no phone or internet connection and was not used as a retail outlet or office by the Partnership.
The sale of the property to the Partnership was a taxable supply, a tax invoice was issued by the vendor and the Partnership claimed input tax credits for the purchase.
The Partnership carried on trade through various retail shop premises until the last shop front closed.
The Partnership cancelled its GST registration and a GST adjustment was made at the time of the cancelation of the registration. The adjustment made was in relation to stock still held at the time for which input tax credits had previously been claimed. The property did not require a GST adjustment as it had been held for longer than the required five adjustment periods.
The Partnership has continued to wind down its business through stock reduction by way of internet sales.
To date the Partnership business is substantially wound down and the property is no longer required in the business.
The partners of the Partnership have decided to sell the property.
This ruling is provided on the basis that at the time the property is actually sold by the Partnership, its character as a commercial property/warehouse has not changed and the projected GST turnover from the sale of the Partnership’s remaining stock does not exceed the registration turnover threshold.
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 23-5
A New Tax System (Goods and Services Tax) Act 1999 Section 188-10
A New Tax System (Goods and Services Tax) Act 1999 Section 188-25
Reasons for decision
Summary
The proposed sale of the property is the mere realisation of a capital asset and therefore proceeds from the sale will not be included in the calculation of the GST registration threshold.
Detailed reasoning
Section 9-5 states that 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 for GST, 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 proposed sale of the property by the Partnership for consideration under a standard land contract will meet the requirements of subsection 9-5(a), (b) and (c) of the GST Act. Further, as the property is a commercial property, its sale will not constitute a GST-free or input taxed supply.
What remains to be determined is if the subsection 9-5(d) of the GST Act will apply to the Partnership at the time of supply of the property.
The Partnership cancelled its GST registration. Therefore we need to consider if the Partnership is required to be registered at the time of sale of the property.
Under section 23-5 of the GST Act, you are required to be registered if:
a) you are *carrying on an *enterprise, and
b) your *GST turnover meets the *registration turnover threshold (currently $75,000).
Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover (GSTR 2001/7) provides the Commissioner’s view in relation to GST turnover.
Paragraph 9 of GSTR 2001/7 provides that you have a GST turnover that meets a particular turnover threshold under subsection 188-10(1) of the GST Act when:
(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.
The current GST turnover is the turnover for a particular month and the preceding 11 months and the projected GST turnover is the turnover for a particular month and the next 11 months. In both cases, the calculation is based on the GST exclusive value of supplies made.
Under section 188-25, when calculating your projected annual turnover, you do not include any supplies made or likely to be made by transfer of ownership of capital assets, or as a result of ceasing to carry on an enterprise or substantially and permanently reducing the size and scale of an enterprise.
GSTR 2001/7 discusses the meaning of ‘capital asset’ at paragraphs 31 to 36.
Meaning of 'capital assets'
31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.
32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.
33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).
34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.
35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.
36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.
Whilst the property may have been purchased as, and treated for many years as a capital asset, for the purposes of section 188-25, we must determine the character of the asset at the time of supply.
Where at the time of the proposed sale of the property, its character remains essentially the same as it was when it was used in the business, that is it is a commercial property capable of being used as a warehouse/workshop, its disposal will be the mere realisation of a capital asset by the Partnership. The sale proceeds will not be taken into account in determining the Partnership’s projected GST turnover.
Where the projected GST turnover from the remaining stock at the time of disposal of the property is below the registration turnover threshold, the Partnership will not be required to be registered for GST. Hence not all the requirements of section 9-5 of the GST Act will be met and therefore the sale of the property will not be a taxable supply and no GST is applicable to the sale.
However, if at the time of sale of the property it has been developed and the character of the property is changed as a result of this development, then it may no longer be a capital asset of the business and depending on the nature of the development the supply may be of a revenue nature.
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).
