Edited version of private advice

Authorisation Number: 1051570363551

Date of advice: 27 August 2019

Ruling

Subject: GST and supply of commercial property as a capital asset

Question

Is your supply of a commercial property (the Relevant Property) a taxable supply in accordance to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act)?

Answer

No.

This ruling applies from the date of this ruling, to a date 4 (four) years from the date of this ruling.

Relevant facts and circumstances

The partnership (you), has been the registered proprietors of a commercial property (the Relevant Property). The Relevant Property was supplied by the partnership for GST purposes. You were registered for GST on, however you deregistered the GST registration on XXX (a date before the settlement date of the supply of the Relevant Property).

We have received a copy of:

·         the Contract of Sale of Real Estate (Contract)

·         the Particulars of sale under the Contract listed the Relevant Property. The price was $X, and the words underneath the price was 'The price includes GST (if any) unless the words plus GST appear in this box'. There was no word 'plus GST' in the box. The settlement date was due on Y.

·         the Contract included the words' subject to lease' and the lease was attached.

The Purchasers are registered for GST. They purchased the Relevant Property at an auction.

The Contract does not indicate the sale was a going concern. No special conditions applied with respect to GST.

You have given us the total rental amount for the Relevant Property, up to the date of the settlement of the supply of the Relevant Property. The rent income exceeded the GST turnover threshold of $75,000.

The Purchasers' representatives stated to your representatives as follows:

·         the Contract was silent on the issue of GST

·         each of the parties was registered for GST

·         the sale of the Relevant Property was not a going concern; and

·         the purchase price was GST inclusive

The Purchasers' representatives requested a tax invoice from you for the GST component of the purchase price. You replied to the Purchasers that the sale of the Relevant Property was a going concern for GST purposes hence no tax invoice would be provided.

You cancelled your GST registration before the date of the settlement and your representatives wrote to the Purchasers, stating you were not registered for GST and repeated that no tax invoice would be provided. The Purchasers' representative replied that the retrospective cancellation of GST registration of the partnership should not be valid because the rental income of the Relevant Property exceeded the GST turnover threshold of $75,000 so the partnership would be required to be registered for GST. The letter also stated that although the Vendors sought to seek the Purchasers' consent in writing to vary the Contract to reflect that it is the sale of a 'GST going concern', the Purchasers are not agreeable to such variations.

The Purchasers stated they intend to claim input tax credits on the purchase. Settlement occurred on ZZZ. You are not sure whether the Purchasers had claimed input tax credit following settlement.

You state you are not required to be registered for GST because the projected GST turnover, calculated from the date of settlement was effectively $0, due to the leasing enterprise being terminated on that date. As soon as the Relevant Property was sold, the partnership's only income producing asset was disposed. The sale proceeds of a capital asset are not factored into the calculation of the current nor the projected GST turnover.

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(d)

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 188-15

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

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

Reasons for decision

Summary

You satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the supply of the Relevant Property that you make is for consideration, the supply of the Relevant Property is made in the course of the leasing enterprise you are carrying on, and the Relevant Property is located in the indirect tax zone respectively.

However, you do not satisfy paragraph 9-5(d) of the GST Act because you are neither registered nor required to be registered for GST. Hence the supply of the Relevant Property is not a taxable supply.

Detailed reasoning

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied.

We consider that the application of section 9-5 of the GST Act will apply from the perspective of the partnership, who is the supplier of the commercial property. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. You have agreed that the supplier of the Relevant Property is the partnership. For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property

Requirements of a taxable supply:

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

·         it makes a supply for consideration;

·         the supply is made in the course or furtherance of an enterprise that it carries on;

·         the supply is connected with the indirect tax zone; and

·         the entity is 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.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as the supply that you make is for consideration, the supply is made in the course of the leasing enterprise you are carrying on, and the Relevant Property is located in the indirect tax zone respectively.

You stated that you were registered for GST on ....however you deregistered the GST registration on a date before the settlement date. Hence the partnership was not registered for GST, at the time the sale of the commercial property was settled.

As you are not registered for GST at the time of settlement of the Contract, it needs to be established whether or not you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Sub section 188-10 (1) of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a)    your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b)    your projected GST turnover is at or above $75,000.

Sub section 188-10 (2) of the GST Act provides that your GST turnover does not exceed the registration turnover threshold if:

a)    your current GST turnover is at or below $75,000 and the Commissioner is not satisfied that your projected GST turnover is above $75,000; or

b)    your projected GST turnover is at or below $75,000.

Current GST turnover:

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. You stated you only had the rental income generated by leasing the Relevant Property over the years, and the rental income is as follows....

At some point in time, your current GST turnover (the sum of the values of all supplies made in a particular month plus the previous 11 months) was at or above $75,000. Please note that you are required to be registered for GST from that point in time (both your projected and current GST turnover exceeded the threshold of $75,000).

Projected GST turnover

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

The sale proceeds of a capital asset:

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours. Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

In addition, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you, solely as a consequence of ceasing to carry on an enterprise

You have stated that the commercial property is a capital asset of your leasing enterprise, and that your leasing enterprise will cease upon the sale of your only capital asset used for your leasing enterprise.

Based on those facts, section 188-25 of the GST Act applies, therefore, the sale proceed of the Relevant Property is excluded from the calculation of your projected GST turnover.

If your projected GST turnover for a particular month, plus the next 11 months, is under the GST turnover threshold of $75,000, then you are not required to be registered for GST per paragraph188-10 (2) (a) of the GST Act.

Hence you do not satisfy paragraph 9-5(d) of the GST Act because you are neither registered nor required to be registered for GST.

Goods and Services Tax Advice GSTA TPP 070 Goods and services tax: (GSTA TPP 070) considers the situation where a GST registered entity enters into a contract for the sale of property and deregisters for GST prior to settlement. It is available on this link:

https://www.ato.gov.au/law/view/document?docid=GSA/GSTA070/NAT/ATO/00001

Is a party to a contract for the sale of a commercial property who deregisters for GST before settlement required to pay GST?

Answer

No, the unregistered party is not required to pay GST. However, the Commissioner will not cancel the party's registration unless certain requirements are satisfied.

...

Explanation

The Commissioner must cancel an entity's registration if the entity is not required to be registered and the other requirements of section 25-55 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Under paragraph 188-10(2)(b) an entity is not required to be registered if its projected annual turnover is at or below the turnover threshold. In calculating projected annual turnover, section 188-25 provides that any supplies made, or likely to be made, by way of transfer of a capital asset are disregarded.

Commercial property is a capital asset

If the commercial property is a capital asset, and the value of all other projected supplies is less than the registration turnover threshold, the supplier is not required to be registered. If the requirements of a taxable supply under section 9-5 are tested upon entry to the contract, the supply is a taxable supply. If they are tested upon settlement of the contract, the supply is not a taxable supply.

Section 9-5 does not express when the requirements for a taxable supply should be tested. The Commissioner's view is that the elements of section 9-5 should be tested at the earlier of when the supply is made, or when an event triggers attribution. The commercial property is supplied at settlement. Thus, as the supplier does not issue an invoice or receive consideration for the supply before settlement, the supplier does not need to examine the requirements of 9-5 until settlement. As the supplier is not registered or required to be registered at settlement, no taxable supply is made. Therefore no GST is payable and no tax invoice must be issued.

Following GSTA TPP 070, you are not required to test the requirements of section 9-5 until the settlement date. As you were not registered at settlement nor were you required to be registered at settlement, section 9-5(d) is not satisfied. Therefore your supply of the Relevant Property is not a taxable supply.

However, section 138-5 of the GST Act may apply to impose an increasing adjustment to your concluding tax period in respect of the commercial property held as an asset at the time of cancelling registration.

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