Edited version of private advice

Authorisation Number: 1051744213760

Date of advice: 27 August 2020

Ruling

Subject: GST and sale of a commercial property

Question 1

Is the sale of a specified commercial property (the Property) a sale of a capital asset for the purposes of paragraph 188-25(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is your GST registration turnover threshold $150,000 for the purposes of sections 23-5 and 23-15 of the GST Act and Division 23 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer

Yes.

Question 3

If your current and projected GST turnovers pursuant to sections 188-10, 188-15 and 188-20 of the GST Act are less than $150,000 on a specified date,

(i)    are you entitled to apply for cancellation of your GST registration, effective from a specified date, under section 25-55 of the GST Act, and

(ii)   will the Commissioner cancel your GST registration?

Answer

Yes.

Question 4

Will the day of the supply of the Property be the settlement date in light of Goods and Services Tax Ruling GSTR 2000/28 Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract (GSTR 2000/28)?

Answer

Yes.

Question 5

Will you make a taxable supply under section 9-5 of the GST Act and be required to remit GST to the ATO on the supply of the Property?

Answer

No.

Relevant facts and circumstances

You have been registered for GST for many years. You account for GST on a cash basis and have quarterly tax periods.

You have always been a non-profit body and exempt from income tax. However, as your revenue from your specified activities (the specified activities) has been declining in the recent years, you applied for an income tax private ruling on the recommendation of your tax agent.

On a specified date you received a private ruling, authorisation number XXX, confirming that you are a society, association or club established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and are therefore exempt from income tax under section 50-1 of the ITAA 1997.

You are the owner of the Property. The Property is a commercial building with a car park.

You have been conducting your enterprise from the Property for many years. The Property has been used for many years to generate revenue from the specified activities of your members.

The Property is currently used for the specified activities and for lease to tenants. The waning of membership has resulted in you supplementing your income by entering into specified commercial leases.

You and a specified entity (the Purchaser) entered into the Contract of Sale of Real Estate (the contract) on a specified date.

You provided a copy of the contract.

The contract price is $X plus GST. A deposit of 10% was paid upon signing the contract and the balance is due at settlement. Settlement is scheduled for a specified date.

The deposit has been released to you under section 27 of the Sale of Land Act 1962 (Vic).

The contract provides that the Property is sold subject to the existing leases as set out in the leases attached to the contract.

You and the Purchaser have agreed in the contract that the supply of the Property will be a mixed supply for the purposes of section 9-80 of the GST Act. That is the supply will be taxable to the extent that the Property has been used by you for the specified activities and a GST-free supply of a going concern under section 38-325 of the GST Act to the extent that the Property is sold subject to leases.

The contract provides a method for apportioning the sale price of the Property between the GST-free and the taxable parts.

Under the contract, you are liable for the periodic outgoings and entitled to the rent and other income up to and including the day of settlement.

The Purchaser is not entitled to possession of the Property or the receipt of rents and profits before the date of settlement.

The Property is sold as is. You will not renovate the Property or undertake any other substantial works prior to settlement.

The Property is treated as a capital asset in your balance sheet and will remain so until the day of settlement.

You intend to apply to the Commissioner for cancellation of your GST registration effective from a specified date that is prior to settlement. By this date you are confident that your GST turnover apart from the proceeds of sale of the Property, will be substantially less than $150,000. Your belief is based on your recent revenue and your decision to cease all the specified activities post-settlement and proceed with dissolution in accordance with your constitution.

In addition, for the 12-month period prior to the cancellation date, you will have a GST turnover of less than $150,000.

You provided a summary of your revenue from various sources for specified financial years.

Prior to cancelling of your GST registration, you will not receive any consideration for the supply of the Property and will not change the basis on which you account for GST from cash to non-cash.

Your constitution prohibits distribution of profits and property to your members while you are functioning and upon dissolution. You will not change or amend your constitution before settlement. Once you have sold the Property, you will distribute the net assets to other non-profit bodies that carry on the specified activities and wind-up.

The Purchaser is registered for GST.

You and the purchaser are not related entities and are dealing at arm's length.

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 23-15

A New Tax System (Goods and Services Tax) Act 1999 section 25-55

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 section 188-25

A New Tax System (Goods and Services Tax) Act 1999 Division 99

A New Tax System (Goods and Services Tax) Act 1999 Division 165

A New Tax System (Goods and Services Tax) Regulations 1999 section 23-15.02

Reasons for decision

Question 1

Is the sale of the Property a sale of a capital asset for the purposes of paragraph 188-25(a) of the GST Act?

Summary

The sale of the Property is a sale of a capital asset and therefore disregarded when working out your projected GST turnover.

Detailed reasoning

Paragraph 188-25(a) of the GST Act requires you to disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours when calculating your projected GST turnover.

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, explain the meaning of 'capital asset'. Paragraphs 31, 32 and 36 state:

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.

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.

You have been using the Property for many years to generate revenue from the specified activities of your members. The Property is currently used for the specified activities and for lease to tenants. The Property will be sold as is and subject to current leases. The Property is treated as a capital asset in your balance sheet and will remain so until the day of settlement.

The property is a capital asset of your enterprise for the purposes of paragraph 188-25(a) of the GST Act. Provided the Property remains a capital asset until the day of settlement, the proceeds of the sale of the Property are to be disregarded when calculating your projected GST turnover.

Question 2

Is your GST registration turnover threshold $150,000 for the purposes of sections 23-5 and 23-15 of the GST Act and Division 23 of the GST Regulations?

Summary

You are a non-profit body therefore your GST registration turnover threshold is $150,000.

Detailed reasoning

Section 23-15.02 of the GST Regulations provides that the registration turnover threshold for non-profit bodies, for the purpose of paragraph 23-15(2)(b) of the GST Act, is $150,000.

The Commissioner's view of when a society, association or club is not carried on for the purpose of profit or gain is explained in Taxation Ruling TR 97/22: Income tax: exempt sporting clubs (TR 97/22).

Paragraph 22 of TR 97/22 relevantly provides:

22. We accept a club as being non-profit where, by operation of law (for example, a statute governing a club's activities) or by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club's actions must, of course, be consistent with the prohibition.

On a specified date you received a private ruling, authorisation number XXX, confirming that you are a society, association or club established for the encouragement of a game or sport and are therefore exempt from income tax.

You advised that your constitution prohibits distribution of your profits and assets to your members while you are functioning and upon dissolution. You will not change or amend your constitution before settlement. Once you have sold the Property, you will distribute the net assets to other non-profit bodies that are carrying on the specified activities and wind-up.

Based on the above, you are a non-profit body for the purposes of the GST Act. Your GST registration turnover threshold therefore is $150,000.

Question 3

If your current and projected GST turnovers pursuant to sections 188-10, 188-15 and 188-20 of the GST Act are less than $150,000 on a specified date,

(i)     are you entitled to apply for cancellation of your GST registration, effective from a specified date, under section 25-55 of the GST Act, and

(ii)    will the Commissioner cancel your GST registration?

Summary

(i)            As your current GST turnover and your projected GST turnover is less than $150,000 you can cancel your GST registration effective from the specified date.

(ii)           The Commissioner will cancel your GST registration.

Detailed reasoning

(i)

Section 23-5 of the GST Act provides 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.

As you are a non-profit body your GST registration turnover threshold is $150,000.

Pursuant to subsection 188-10(1) of the GST Act you have a GST turnover that meets the registration turnover threshold if:

(a)  your current GST turnover is $150,000 or more, and the Commissioner is not satisfied that your projected GST turnover is below $150,000, or

(b)  your projected GST turnover is $150,000 or more.

Under section 188-15 of the GST Act, subject to certain exclusions, your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Under section 188-20 of the GST Act, subject to certain exclusions, your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

You intend to cancel your GST registration with effect from the specified date. You advised that you are confident that at that time your GST turnover will be substantially less than $150,000.

Where your GST turnover is less than $150,000 you may apply to cancel your GST registration as you are not required to be registered for GST.

This is supported by the view outlined in GSTA TPP 070 which states:

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.

(ii)

Subsection 25-55(1) of the GST Act states that the Commissioner must cancel your GST registration if:

(a)    you apply for cancellation of registration in the approved form

(b)    at the time you applied for cancellation of registration, you had been registered for at least 12 months, and

(c)    the Commissioner is satisfied that you are not required to be registered for GST.

You have been registered for GST for many years. You stated that you will apply to the Commissioner for your registration to be cancelled effective from the specified date. You also advised that at the time of cancellation your GST turnover will be substantially less than $150,000.

Based on the information provided, the Commissioner will cancel your GST registration.

Division 138 - Cessation of Registration

When you cancel your GST registration, you are required to make an increasing adjustment under subsection 138-5(1) of the GST Act in respect of each thing included in the assets on hand for which you were or are entitled to an input tax credit, to cancel those input tax credits.

Further, as you account for GST on the cash basis, you will also need to consider section 138-15 of the GST Act.

Question 4

Will the day of the supply of the Property be the settlement date in light of GSTR 2000/28?

Summary

As the Property is sold under a standard land contract, the Property is supplied at settlement.

Detailed reasoning

GSTR 2000/28 provides at paragraph 13:

For purposes of this Ruling, a standard land contract is a written contract for the sale of land that provides for:

·         the payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement; and

·         the payment of the balance of the purchase price upon settlement.

Paragraphs 14 and 15 of GSTR 2000/28 state:

14. A 'deposit' under land law is an earnest given to bind the bargain; it is a guarantee that the purchaser means business; and on completion, it becomes part payment of the purchase price ...

15. 'Settlement' refers to that stage in the completion of a standard land contract where the transfer in the purchaser's favour and certificate of title are exchanged for the purchase price. It is at this stage that the purchaser (or the purchaser's agent) obtains:

·         unconditional possession of a registrable instrument of transfer; or

·         an instrument of transfer that would be registrable once stamped.

At paragraph 25, GSTR 2000/28 provides that when you make a taxable supply of land under a completed standard land contract, you attribute the GST payable to the tax period in which settlement occurs. This applies if you account for GST on a cash basis or if you do not account for GST on a cash basis.

Paragraph 27 of GSTR 2000/28 states that Division 99 of the GST Act applies to a deposit paid under a standard land contract. As a result, the payment of a deposit under a standard land contract will not trigger attribution of GST payable or input tax credits at the time the deposit is paid. This is the case if you account for GST on a cash basis or if you do not account for GST on a cash basis.

In your case the Purchaser paid a 10% deposit upon signing the contract and the balance is due on settlement. The deposit has been released to you pursuant to section 27 of the Sale of Land Act 1962 (Vic).

Paragraphs 86 and 87 of GSTR 2000/28 state:

Standard land contracts in Victoria - early release of deposit

86. In Victoria, section 27 of the Sale of Land Act 1962 (Vic) permits the earlier release of deposit moneys by the stakeholder for the vendor's benefit where the contract is not subject to any condition enuring for the benefit of the purchaser, and where the purchaser has accepted title or may be deemed to have accepted title.

87. Although the deposit is released by the stakeholder to the vendor, the deposit retains its character as a deposit until it is forfeited or applied as consideration. Division 99 still applies to such a deposit. The early release of that deposit does not trigger GST payable on the supply or input tax credits for the acquisition before settlement unless the deposit is forfeited. This is the case, irrespective of the basis you use to account for GST.

Paragraph 6 of GSTR 2000/28 states:

6. This Ruling does not cover a sale of land on terms or by instalment, whether under a standard land contract or otherwise. Generally, under a contract for a sale of land on terms or by instalment the purchaser is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of land. The specific terms of such contracts need to be examined to determine the GST consequences.

You stated that the Purchaser is not entitled to possession of the Property or the receipt of rents and profits before the date of settlement.

Based on the information provided the sale of the Property is under a standard land contract therefore the Property is supplied at settlement.

Question 5

Will you make a taxable supply under section 9-5 of the GST Act and be required to remit GST to the ATO on the supply of the Property?

Summary

You will not make a taxable supply of the Property if you are not registered or required to be registered for GST at settlement.

Detailed reasoning

In your case, the Property is a capital asset of your enterprise and its disposal does not amount to an enterprise, particularly as no further work is being done to prepare the Property for sale. Further, the sale is being undertaken as part of the winding up of your enterprise. It is also accepted that the contract is a standard land contract and, as outlined in GSTR 2000/28, the GST on the sale is attributable to the tax period in which settlement occurs. Additionally, your projected GST turnover for the specified period will be less than $150,000.

Based on the facts of this case, we consider that it remains a legitimate election for you to cancel your GST registration and the Commissioner must cancel your registration if the requirements of subsection 25-55(1) of the GST Act are met.

Consequently, if you cancel you GST registration before settlement, and at the time of settlement you are not required to register for GST, the supply will not be a taxable supply as it will not meet all the requirements of section 9-5 of the GST Act.

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