Edited version of private advice

Authorisation Number: 1051732339800

Date of advice: 06 August 2020

Ruling

Subject: GST adjustments and cancelling registration

Question 1

Are you required to be registered pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

If you cancel your GST registration, will you have an increasing adjustment in regard to your acquisition of property situated at a specified location (the Property), in accordance with section 138-5 of the GST Act?

Answer

No

Question 3

If you cancel your GST registration, will your supply of the Property be treated as a taxable supply for the purposes of section 9-5 of the GST Act?

Answer

No - where your registration is cancelled prior to the earlier of when the supply of the Property is made, or when an event triggers attribution (i.e. receipt of consideration or issuing of an invoice relating to the supply).

Question 4

If your GST registration is cancelled, will you continue to be entitled to the input tax credits on creditable acquisitions it made previously?

Answer

Yes - to the extent the acquisitions are made for a creditable purpose.

Question 5

If your GST registration is cancelled, will you be required to account for an increasing adjustment in relation to acquisitions other than the acquisition of the Property, in accordance with Division 129, Division 130 or Division 138 of the GST Act.

Answer

See 'Reasons for decision'

This ruling applies for the following period(s)

1 July 2017 - 30 June 2022

The scheme commences on

1 March 2003

Relevant facts and circumstances

You are registered for GST.

You account for GST on a non-cash (accruals) basis.

You reported GST quarterly for the tax periods commencing dd/mm/yyyy and concluding on dd/mm/yyyy.

You reported GST on an annual basis for tax periods commencing dd/mm/yyyy.

You own the Property which is situated at a specified location (the Property). The Property land area is xx.xx hectares and is classified as a mixed-use zone (Urban Growth zone).

A Contract of Sale was executed for your purchase of the Property in mm/yyyy for a price of $x,xxx,xxx (plus GST). The sale of the Property to you was treated as a taxable supply by the Vendor.

Settlement of the Property was in mm/yyyy.

You claimed an amount of $xxx,xxx as an input tax credit in respect of the acquisition of the Property.

The Property has a number of assets physically constructed on the land, including two residential dwellings and structures related to horse-raising operations e.g. office, stables, water tanks and sheds.

You currently lease a significant portion of the Property (greater than 95% of the Property land area) to a third party which uses this land area for horse farming related activities (e.g. rental of offices, rental of horse stables, etc.).

During the financial year ending 30 June 2019 you received sales revenue equal to approximately $xxx xxx on account of these commercial leasing activities.

The two residential dwellings are situated on the remaining portion of the Property (less than 5% of the total Property land area).

One of the residential dwellings is currently vacant, with the other residential dwelling being rented to a third party under a 12-month residential lease agreement. During the yyyy financial year, you received sales revenue equal to approximately $xxx xxx on account of the residential leasing activities. You commenced your leasing activities in yyyyy (or thereabouts).

You anticipate that the yyyyy and yyyyy sales income for the commercial leasing activities and the residential leasing activities will remain broadly consistent with the respective incomes received for the yyyy financial year.

With the exception of the residential and commercial leasing activities outlined above, you do not carry on any other business activities.

At or around the time of purchasing the Property in yyyy, you had an intention to subdivide the land area and sell the subdivided land parcels. Your intention has never been to construct new dwellings on the land. Your intention to subdivide the Property changed shortly after the initial acquisition where you decided to hold the land and lease the land and dwellings to third parties. You have subsequently lodged your income tax returns consistent with this activity (i.e. commercial leasing activities).

In or around yyyy Council rezoned an area of land including the Property from Farming Land to an Urban Growth Zone.

At the time of purchasing the Property, there was no known rezoning of the Property to urban zone. You did not lobby or actively take steps to persuade the relevant planning authority to rezone the land to urban zone.

During mm/yyyyy you made a decision to cease your leasing activities and sell the Property.

Over the last 24 months you have incurred approximately $x,xxx,xxx in costs related to improving the value of the land prior to sale. You intend to claim the input tax credits (approximately $xxx,xxx) associated with these costs.

Approximately $x,xxx,xxx of these costs related to the construction of a road on the Property. The owner of the adjoining property required road access to their property due to the commencement of their own property development activities. Accordingly, the adjoining property owner requested that you construct a road on the Property. You and the adjoining property owner shared the costs of the associated engineering surveying and road construction.

The remaining costs incurred (approximately $xxx,xxx) relate to the acquisition of third party services from consultants and obtaining planning permits to progress the subdivision of the Property in readiness for sale.

You incurred these costs in connection with the intention to realise the maximum sale value of the Property.

You recently listed the entire Property for sale. That is, no marketing activities were undertaken to list subdivided lots for individual sale. You recently entered into a Contract of Sale with an unrelated third party to sell the Property for an agreed purchase price of $xx,xxx,xxx.

Settlement is expected to occur in mm/yyyy.

You do not have a history of buying and selling developed land or land for development.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Paragraph 9-5(d)

Section 9-20

Division 11

Section 11-15

Subsection 11-15(1)

Subsection 11-15(2)

Section 11-20

Section 23-5

Paragraph 23-5(a)

Section 40-35

Section 40-65

Division 129

Subsection 129-20(1)

Subsection 129-20(3)

Paragraph 129-20(3)(c)

Division 130

Subsection 130-5(1)

Division 138

Section 138-5

Subsection 138-5(1)

Subsection 138-5(2)

Subsection 138-5(3)

Subsection 188-10(1)

Section 188-15

Paragraph 188-15(1)(a)

Section 188-20

Paragraph 188-20(1)(a)

Section 188-25

Section 195-1

Reasons for decision

In this ruling,

§  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), that are referred to are available on the ATO website ato.gov.au

Question 1

Are you required to be registered pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Section 23-5 states that you are required to be registered for GST if:

a)    you are carrying on an enterprise; and

b)    your GST turnover meets the registration turnover threshold (currently $75,000 unless you are a non-profit body).

The term 'enterprise' is defined in section 9-20 and includes 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.

In this case you have been leasing the Property since your acquisition in yyyy. These activities fall within the scope of an 'enterprise' for GST purposes and as such paragraph 23-5(a) is satisfied.

The next issue to consider is whether your GST turnover is $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that 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 less than $75,000; or

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

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively.

The leasing of residential premises is an input taxed supply pursuant to section 40-35. Therefore, your turnover generated from the leasing of the residential premises (approximately $xxx xxx in the yyyy financial year) is excluded from both your current and projected GST turnover calculations.

Furthermore, section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or 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; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

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 of this Ruling.

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.

Taking into account the facts of this case, we consider the sale of the Property would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating your projected GST turnover. The Property was not intended to be acquired for the primary purpose of resale. Furthermore, you have derived your rental income from the use of the Property as opposed to the trading of properties.

Given the above, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST.

Question 2

If you cancel your GST registration, will you have an increasing adjustment in regard to your acquisition of property situated at a specified location (the Property), in accordance with section 138-5 of the GST Act?

Subsection 138-5(1) provides that you have an increasing adjustment if:

a)    your registration is cancelled and

b)    immediately before the cancellation takes effect, your assets include anything in respect of which you were, or are, entitled to an input tax credit.

In this case you acquired the Property (settlement was in mm/yyyy) for consideration of $x,xxx,xxx (plus GST) and claimed an input tax credit of $xxx,xxx in respect to the acquisition of the Property in your Business activity statement (BAS) for the quarterly tax period ending dd/mm/yyyy. Therefore, in the situation your GST registration is cancelled prior to your supply/sale of the Property, subsection 138-5(1) will be satisfied.

However, subsection 138-5(3) provides that an adjustment will not arise under section 138-5 if:

a)    there were one or more adjustment periods in relation to the acquisition of the asset; and

b)    the last of those adjustment periods has ended before the cancellation or your registration takes effect.

Subsection 129-20(1) contains the definition of an 'adjustment period'. In this case, pursuant to subsection 129-20(1), the first adjustment period applying to the acquisition of the Property is the tax period ending dd/mm/yyyy.

Subsection 129-20(3) provides that given the GST exclusive value of the Property of $x,xxx,xxx, the number of adjustment periods applying is ten. Thus, the final adjustment period applicable in relation to your acquisition of the Property is the tax period ending dd/mm/yyyy.

Therefore, in accordance with subsection 138-5(3) you will not have an increasing adjustment in regard to the Property upon the cancellation of your registration.

Question 3

If you cancel your GST registration prior to the settlement of the Property, will your supply of the Property be treated as a taxable supply for the purposes of section 9-5 of the GST Act?

Section 9-5 provides 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 to the indirect tax zone (Australia); and

d)    you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

Goods and Services Tax Advice GSTA TPP 070; Goods and services tax: Is a party to a contract for the sale of a commercial property who deregisters for GST before settlement required to pay GST? explains that 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.

As discussed above, you are not required to be registered. Therefore, where you cancel your GST registration effective from a date prior to the earlier of the supply of the property or receipt of consideration or the issuing of a tax invoice in relation to the sale, paragraph 9-5(d) will not be satisfied and the sale of the Property will not constitute a taxable supply.

Furthermore, section 40-65 provides that the sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation. However, the sale is not input taxed to the extent the residential premises are 'commercial residential premise' or 'new residential premises'.

In this case, the Property consists of two residential premises that have been previously used to make input taxed supplies. The premises are neither 'commercial residential premises' nor 'new residential premises'. Therefore, the sale of the Property to some extent, will constitute an input taxed supply.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) discusses the area of land included in a supply of residential premises. Paragraph 46 of GSTR 2012/5 states:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

Question 4

If your GST registration is cancelled, will you continue to be entitled to the input tax credits on creditable acquisitions it made previously?

Section 11-20 provides that you are entitled to an input tax credit (ITC) for any 'creditable acquisition' that you make.

The term 'creditable acquisition' is defined in section 11-5 and provides that you make a 'creditable acquisition if:

a)    you acquire anything solely or partly for a creditable purpose; and

b)    the supply of the thing to you is a taxable supply; and

c)    you provide, or are liable to provide, consideration for the supply; and

d)    you are registered or required to be registered.

Pursuant to subsections 11-15(1) and 11-15(2) you will acquire a thing for a 'creditable purpose' to the extent you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

a)    the acquisition relates to making supplies that would be input taxed; or

b)    the acquisition is of a private or domestic purpose.

As discussed above, you are carrying on an enterprise of leasing. The leasing enterprise consists of making taxable supplies of leasing vacant land for the purposes of horse farming related activities and also making input taxed supplies of leasing residential premises.

Section 195-1 provides that the term 'carrying on' includes doing anything in the course of the commencement or termination of the enterprise.

In this case you have incurred approximately $x,xxx,xxx in costs over the course of the previous two years. These costs relate to the acquisition of third-party services from consultants, obtaining planning permits, and shared costs with the adjoining landowner for the construction of a road. The construction of the road (which cost approximately $x,xxx,xxx) was at the request of the adjoining landowner to allow access to the adjoining land owner's property.

You incurred such expenses in order to maximise the sale value of the Property. You hold valid tax invoices in respect of the acquisitions however, to date, you have not claimed an ITC in relation to those acquisitions.

It is common ground that that the acquisitions were made in the carrying on of your leasing enterprise and were taxable supplies to you (as evidenced by holding the relevant tax invoices issued by the suppliers). You also provided consideration and were registered at the time the acquisitions were made.

The issue to consider is whether the acquisitions relate to some extent to making input taxed supplies.

It is your view that the Property does not qualify as residential premises to be used predominantly for residential accommodation. As discussed previously, we consider that the sale of the Property includes a component of an input taxed supply of residential premises (being the two residential dwellings that have been rented separately from the major proportion of the Property).

Paragraphs 178 to 180 of Goods and Services Tax Ruling GSTR 2008/1; Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? states:

Acquisitions made in terminating an enterprise if the entity makes or has made supplies that are input taxed

178. An entity may continue to make its usual supplies in the course of terminating its enterprise, or it may cease to make these supplies.

179. If an entity continues making the same supplies, whether an acquisition relates to making supplies that would be input taxed is determined in the same way as it would have been prior to the entity beginning the process of termination.

180. If an entity ceases making its usual supplies and makes different supplies as part of terminating its enterprise, it is necessary to consider whether the acquisitions it makes relate to its past supplies or the supplies it is currently making.

Given the above, we consider that the acquisitions in question may, to some extent, relate to the supply of the Property that is an input taxed supply (i.e. the extent the sale of the Property is an input taxed supply of real property, that is, residential premises).

The phrase 'to the extent' in subsections 11-15(1) and 11-15(2) indicate a requirement to apportion

Goods and Services Tax Ruling GSTR 2006/4; Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) states at paragraph 18 that the use of the expression 'to the extent that' in the context of input tax credit recoverability in the GST legislation contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses.

In essence, any apportionment needs to be made on a fair and reasonable basis given the circumstances of your enterprise.

Therefore, you will be entitled to an ITC in relation to acquisitions to the extent you have determined on a fair and reasonable basis, that the acquisitions do not relate to your supplies of residential premises, either by way of lease or sale.

Question 5

If your GST registration is cancelled, will you be required to account for an increasing adjustment in relation to acquisitions other than the acquisition of the Property, in accordance with Division 129, Division 130 or Division 138 of the GST Act?

In reference to adjustments required pursuant to Division 129 and Division 130, the cancellation of your GST registration is not the event that would trigger an adjustment. In both cases, it is a change in the creditable purpose to which an acquisition is applied that will trigger the adjustment.

Division 129

Division 129 operates to make adjustments where your intended use of an acquisition as determined under Division 11 differs to your actual use or application of the thing acquired.

As discussed in the previous question, the use of the acquisitions referred to in this case, may be required to be apportioned for the purpose of determining the extent the acquisition was acquired for a creditable purpose and entitlement to an ITC under Division 11.

In the situation that the actual use of the thing acquired differs from the intended use as determined in claiming an ITC pursuant to Division 11 you may have an adjustment pursuant to Division 129. In circumstances where the actual use of the thing acquired up until the date of effect of the cancellation of your GST registration is the same as your initial intended use, you will not have an adjustment under Division 129.

Typically, for the purposes of Division 129 an adjustment period will end as at 30 June in a particular year. However, where an entity's GST registration is cancelled, the entity's tax period (concluding tax period) will cease as at the end of the day that the cancellation takes effect. In such cases, this tax period is an 'adjustment period for the purposes of Division 129.

Division 130

Subsection 130-5(1) provides that you have an increasing adjustment if:

a)    you made a creditable acquisition of goods; and

b)    the acquisition was solely for a creditable purpose; and

c)    you apply the goods solely to private or domestic use.

In this case, we do not consider the acquisitions referred to in previous questions to be applied solely to private or domestic use. As discussed above, the acquisitions have been made in the process of the termination of your leasing enterprise.

Therefore, you will not have an increasing adjustment pursuant to Division 130.

Division 138

As discussed above, subsection 138-5(1) provides that you have an increasing adjustment if:

(a)  your registration is cancelled and

(b)  immediately before the cancellation takes effect, your assets include anything in respect of which you were, or are, entitled to an input tax credit.

The application of Division 138 where an asset has undergone improvements and an entity cancels its registration is discussed in Goods and Services Tax Advice GSTA TPP 094; Goods and services tax: How is the final adjustment calculated when a building is renovated and the owner's GST registration is cancelled?

Whilst GSTA TPP 094 is written in the context of renovations made to an existing building, the same principles will apply in this case in relation to improvements of the Property, specifically the newly constructed road.

Applying the principles in GSTA TPP 094, the newly constructed road has become part of the Property as a whole and as such has its individual identity. The road, in itself, does not have a value and is taken into account in determining the market value of the Property in its entirety.

Any improvements made to the underlying asset (i.e. the Property) are considered things included in the assets you hold as at the date of the cancellation of your registration for the purposes of Division 138.

In this case, the cost of the road was approximately $x,xxx,xxx and was acquired within the past couple of years. The number of adjustment periods applicable pursuant to Division 129 is ten (paragraph 129-20(3)(c)). Therefore, the adjustment periods in respect to the acquisition of the road have not expired and given an expected settlement date of mm/yyyy, will not have expired prior to the cancellation of your GST registration.

As such, you will be required to make an increasing adjustment pursuant to Division 138.

The amount of the increasing adjustment is calculated in accordance with subsection 138-5(2).

As discussed above, the improvement to the Property (road) does not have a separately identifiable market value for the purposes of determining the amount of the increasing adjustment.

The methodology for calculating the market value of the improvements is contained in GSTA TPP 094:

Cost of improvements

Cost of improvement + x Value of property at cessation of registration

Value of property before

improvements

Please note that the above principles will apply to any other improvements made to the Property where all adjustment periods applicable in accordance with Division 129 have not expired as at the date you cancel your registration.

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