Edited version of private advice

Authorisation Number: 1051533370596

Date of advice: 20 June 2019

Ruling

Subject: GST and registration

Question 1:

Was the sale of your property (the Property) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer:

No. Accordingly GST was not payable on the sale.

Question 2:

If the answer to question 1 is 'yes', are you eligible to apply the margin scheme pursuant to Division 75 of the GST Act?

Answer:

Not applicable as the answer to question 1 is 'no'.

Relevant facts and circumstances

Entity A (the Trustee or You) is not registered for GST. Entity B is the Trustee.

Entity A is in full pension mode. You have a number of income producing assets including commercial properties leased to businesses and a share portfolio. You only acquire commercial properties to provide long term rental income.

In yyyy you purchased a commercial property (the Property) as a GST-free going concern with a tenant in place. The Property is approximately n square meters in size and is located within a commercial and residential complex built in yyyy. The Property does not have street frontage, is in the residential section of the complex, and is only accessible through the secured entrance for the residential apartments. The complex is managed under an Owners Corporation (OC) structure.

In yyyy your long term tenant vacated the Property. The tenant did not require street access. From then onwards you began to look for another tenant unsuccessfully. The access issue made it difficult to find a new tenant. In addition, the OC had received complaints about the Property being a single commercial property in the residential section with access through the residential entry. The OC suggested you convert the Property into a residential apartment and they approved a change in use of the Property.

In yyyy, you made an application to the specified local council to amend the building's planning permit, which was granted in mmyyyy. You carried out renovations/modifications by adding a bathroom, a kitchen and a storage cage in the basement of the complex at a total cost of around $. The works were completed in mmyyyy and in mmyyyy a certificate of occupation was granted. On ddmmyyyy, the council advised you, due to the change of use from office to an apartment, of new street numbering.

In mmyyyy, you entered into a sale contract for the Property which settled in mmyyyy. You notified the purchaser that there was no withholding for GST at settlement.

The conversion of the Property was undertaken, solely because of the circumstances resulting in you inability to lease the Property, to enable you to sell the Property and purchase another commercial property for rental.

At no time was it your intention to undertake a residential development, nor would you repeat this exercise. You did not purchase the Property with a plan to renovate and sell for profit. You do not normally buy and sell properties given the costs involved including stamp duty. It was a one-off sale transaction.

Your GST turnover is under $75,000.

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 9-40

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

In this reasoning, note:

·  all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)

·  all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

An entity must pay the GST payable on any taxable supply that the entity makes.

Section 9-5 states that an entity makes a taxable supply if all of the below conditions are satisfied, that is:

(a)    the entity makes thesupplyforconsideration

(b)    thesupplyis made in the course or furtherance of anenterprisethat the entity carries on

(c)    thesupplyisconnected with the indirect tax zone (Australia)

(d)    the entity is registered, orrequired to be registered, for GST

However, thesupplyis not ataxable supplyto the extent that it isGST-free or input taxed.

You sold the Property in Australia for consideration in the course or furtherance of your leasing enterprise satisfying paragraphs 9-5(a), (b) and (c). Further, the supply of the Property in your situation was neither GST-free nor input taxed.

Accordingly, we must determine if you also satisfied paragraph 9-5(d), that is, were you required to be registered for GST when you sold the Property. If so, you would have made a taxable supply.

An entity is required to be registered for GST if the entity is carrying on an enterprise and their GST turnover meets the GST registration turnover threshold, currently $75,000.

As your GST turnover was below the registration turnover threshold, of relevance is whether the proceeds from your sale of the Property should have been included in your GST turnover. Your projected GST turnover must be determined.

An entity's projected GST turnover at a time during a particular month is the sum of the values of all supplies that the entity makes or is likely to make during that month and the next 11 months. Any supply made by way of transfer of ownership of a capital asset is disregarded.

Accordingly, determining your requirement to register for GST when you sold the Property was dependent on whether the Property was a capital asset at the time of the sale.

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 discusses the meaning of a 'capital asset' at paragraphs 31 to 36.

Capital assets are often referred to as structural assets and are used by an entity to produce income. Capital assets are to be distinguished from revenue assets. 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.

The Property was a capital asset used to derive rental income in your leasing enterprise. You decided to convert the Property to a residential apartment for sale when you could not find a tenant because of the access issue and the OC suggested the conversion because of complaints from residents.

We have taken into consideration the following factors in determining whether the Property remained a capital asset:

·  You acquired the Property with a tenant in place to earn rental income.

·  You would have continued to lease the Property to earn rental income if it had not been for the above issues.

·  You have other commercial properties that you lease.

·  You sold the Property with the intention to purchase another commercial property to earn rental income.

·  You did not have an intention to renovate and sell the Property for profit.

·  The value of the renovation was minimal.

Taking in to consideration your unique circumstances and the above factors we consider the Property at the time of the sale remained a capital asset.

Accordingly, the sale price of the Property is disregarded from the calculation of your projected GST turnover, your GST turnover did not meet the GST registration turnover threshold, and you were not required to be registered for GST.

Therefore, you did not satisfy all the requirements of a taxable supply when you sold the Property and GST was not payable.

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