Edited version of private advice

Authorisation Number: 1051538470193

Date of advice: 1 July 2019

Ruling

Subject: Goods and services tax - sale of business premises

Question

When the partnership sells the property, will it be making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No, the partnership will not be making a taxable supply and GST will not be payable.

This ruling applies for the following period

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You and your spouse are not registered with an Australian business number (ABN) nor registered for GST.

Together, you are registered as a partnership and were registered for GST for a short period of time in the past.

You are also the directors of Company A which is registered for GST. You have 50% ownership each in the Company.

You acquired, as joint tenants, a property located in town A (the Property) after 20 September 1985. At the time of your purchase there was an existing business (the Business) operating from the Property. You purchased the Business and the Property together. You provided the values of each of them at acquisition.

You provided details of the property.

At the time of purchase, structures on the Property included an office (without rooms or kitchen); a donga for use as a kitchen and some sheds.

Since the purchase of the Property, you have not carried out any improvements or developments on the land.

The Company continued to operate the Business you acquired. The aggregated turnover of the Business is below $2 million. The Property is used in the course of carrying on the Business through the Company. You don't carry out other business activities somewhere else.

The Company did not pay any rent to you for their use of the Property however they pay the outgoings on the Property.

You currently co-own several other properties. One of them is rented out.

You have not previously owned or co-owned any other properties that have been sold.

You have listed the Property and provided details of the expected proceeds.

You are both over 55 years of age and are significantly reducing your involvement and time spent working in the business.

Relevant legislative provisions

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

The A New Tax System (Goods and services Tax) Act 1999 section 9-40

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

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

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

Reasons for decision

In this reasoning, unless otherwise stated:

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

·        all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

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

Taxable supply

Under section 9-40, an entity must pay the GST payable on any taxable supply that the entity makes. Section 9-5 provides that:

You make ataxable supplyif:

(a) you make thesupplyforconsideration; and

(b) thesupply is made in the course or furtherance of anenterprise that you *carry on; and

(c) thesupplyis *connected with the indirect tax zone (Australia); and

(d) you are *registered, or *required to be registered.

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

We consider that your activities of providing the Company with the use of the Property and the Business are an enterprise that you carry on.

You will sell the Property for consideration in the course of your enterprise and the supply will not be input taxed. Therefore, where you are required to be registered for GST and you do not sell the Property as a going concern the supply will be a taxable supply.

Where you decide to sell the Property together with the operating Business, all the requirements specified in section 38-325 of the GST Act must be satisfied for the sale of the Property to be the GST-free sale of a going concern.

More information in relation to the sale of a going concern is available on a public ruling Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?(GSTR 2002/5).

GST registration

Where an entity is not already registered for GST, section 23-5 requires an entity to be registered for GST if:

(a) the entity is carrying on an enterprise; and

(b) the entity's GST turnover meets the registration turnover threshold, which is generally $75,000.

Both of these criteria need to be met for an entity to be required to be registered for GST.

In your case we consider that you are carrying on an enterprise of licensing the Property and the Business to the Company. Therefore, it is relevant to determine whether your GST turnover satisfies the GST registration turnover threshold, which is currently $75,000 in your case.

Registration turnover threshold

Subsection 188-10(1) provides that an entity has a GST turnover that meets the registration turnover threshold if:

·        the entity's current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the registration turnover threshold, or

·        the entity's projected GST turnover is at or above the registration turnover threshold.

An entity's projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In addition, we need to consider whether the sale of the Property will be included in the projected GST turnover.

Section 188-25 provides that when calculating an entity's projected GST turnover, the entity does not include any supplies made, or likely to be made by the entity:

·        by way of transfer of ownership of a capital asset, or

·        solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of the entity's enterprise.

Capital asset

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of 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.

The GST Act does not define the term "capital asset". However, GSTR 2001/7 explains that 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. They may be described as the business entity, structure or organisation set up or established for the earning of profits.

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. 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. Therefore, the character of an asset must be determined at the time of expected supply.

In this case, your turnover is generally below $75,000. Accordingly, it is necessary to determine whether your projected GST turnover meets the threshold. You are required to be registered for GST if your projected GST turnover is at or above $75,000.

You provided the Property to the Company for use as their business premises. Although you do not receive any rent from the Company, the Company pays for all the outgoings in relation to the Property. As such, we consider the Property is your capital asset and the sale proceeds of the Property will be excluded from the calculation of your projected GST turnover.

Conclusion

This means your projected GST turnover will be below $75,000. Your GST turnover will not meet the GST registration turnover threshold. Therefore, you will not be required to register for GST under section 23-5 for the sale of the Property. This also means you will not meet all the requirements of section 9-5 and your supply of the Property will not be a taxable supply, and GST will not be payable on the sale. This is unless on or prior to the settlement date of the sale of the Property you carry on any other enterprise or enterprises for which the GST turnover meets the GST registration turnover threshold, or you voluntarily choose to register for GST.

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