Edited version of your private ruling

Authorisation Number: 1051809833957

Date of advice: 30 March 2021

Ruling

Subject: GST and the sale of a residential property

Question

Will the proposed sale of the property be a taxable supply for the purposes of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999?

Answer

No. The sale will not be a taxable supply.

This ruling applies for the following period:

7 October 20xx to 30 June 20XX

The scheme commences on:

7 October 20XX

Relevant facts and circumstances

The property is currently registered in the name of AA, BB and CC as Executors of the Will of Mr DD who died in 20XX (Executors of the Estate).

The Property was formerly known as "Lot X".

The late DD purchased the Property (being an area of approximately XX,XXX square metres) in.YYYY.

The late DDDD built a house on the Property which he used as his residence for YY years.

Since DD's death, the Property has been leased out as residential premises, for the domestic use of the same tenant for over NN years. Originally, a lease was entered into between the registered owners of the Property and the tenant. However, once the lease ended the tenant remained living in the premises as a tenant at will and has done for over YY years.

Initially there was a boundary fence around the Property of ring lock and barbed wire to contain cattle which were grazing on the Property. Adjoining neighbours later replaced the fences. There are no fences or other forms of demarcation on the Property.

The only improvement that had been carried out on the Property was to remove peat and replace it with sand. The land was low lying and there was a dampness problem. A council engineer was consulted and advised that the peat be removed down to solid sand before placing sandfill on the land.

The process of removing and replacing the peat commenced in the 19AAs, took place over a number of years and concluded in 19CCs.

The Executors of the Estate are not registered for GST, even though the Estate derives income from letting residential accommodation to a third party.

The Executors' accountant, prepares and lodges a Partnership Tax Return on behalf of the three registered owners of #1 EE Street, ASUBURB which relates to the residential rental derived from the Property.

The Property adjoins the property known as, being Lot ### on Deposited Plan held under Certificate of Title Volume #### Folio ### (#3 EE Street, ASUBURB), which is registered in the names of AA and BB as tenants in common in equal shares. #3 EE Street, ASUBURB was formerly known as "Lot Y".

By an Invitation to Treat, dated XX September 20XX, ABC Limited (ACN NNN NNN NNN) was provided to purchase the Property and #3 EE Street, ASUBURB from their respective registered owners for the total Purchase Price of $XX,XXX,XXX exclusive of GST.

The Invitation to Treat was accepted by the three registered owners of the Property and two registered owners of (#3 EE Street, ASUBURB (i.e. the Sellers) on XX October 20XX.

The Invitation to Treat is conditional on the registered owners of both properties (i.e. the Sellers) obtaining a Private Ruling on the GST consequences of the sale of #1 EE Street, ASUBURB and #3 EE Street, ASUBURB from the Australian Taxation Office (ATO).

The Letter of Invitation to Treat states:

"GST This offer is exclusive of GST, on the basis that the Sellers are not registered for GST and therefore GST is not applicable for the sale of the Properties.

In YYYY, FFFFF & Associates made application to ATO for a private ruling on whether the sale of The Property and #3 EE Street, ASUBURB would be subject to GST.

On DD/MM/YYYY, the ATO provided a private ruling to the Executors of the Will of Mr DD. We have been advised by their solicitor that there have been no physical changes to the property since this ruling was received.

At the time of the MM/YYYY ruling application, the Estate was not registered for GST (which continues to be the case).

Based on the application of section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and the definition of "residential premises", in YYYY the ATO concluded that a sale of the property would not give rise to a liability to GST because the whole of the property had only ever been rented out as "residential premises" for the domestic use of the tenant. Accordingly, in YYYY The ATO found that the sale of the Property was an input taxed supply.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(2)

Reasons for Decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Under section 9-5 a supply will be a taxable supply if:

a)    the supply is made for consideration

b)    the supply is made in the course or furtherance of an enterprise that is carried on by the supplier

c)    the supply is connected with the indirect tax zone (Australia), and

d)    the supplier 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.

In this case the supply of the Property will be made for consideration satisfying paragraph 9-5(a).

Section 9-20 provides that the term 'enterprise' includes, among other things, 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.

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

In this case we consider that you are carrying on an enterprise for GST purposes being activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property in your capacity as trustee administering the estate of the Deceased. The sale of this leased property is considered to be an activity related to the carrying on of this enterprise. Thus paragraph 9-5(b) is satisfied.

The Property is situated in Australia and therefore the requirement of paragraph 9-5(c) is also met.

As you are not currently registered for GST, the next issue to consider is whether you are required to be registered for GST.

Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

As discussed above, it is considered that the rental of the Property constitutes an 'enterprise' for GST purposes.

The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if:

a)    your current GST turnover is at or above the threshold ($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.

Your 'current GST turnover' is the sum of your turnover for the current month and the previous 11 months. Your 'projected GST turnover' is the sum of your turnover for the current month and the next 11 months.

Your 'projected GST turnover' is the sum of your turnover for the current month and the next 11 months.

The definitions of 'current GST turnover' and 'projected GST turnover' exclude the value of any supplies that are input taxed. The supply of residential premises by way of lease, hire or licence is an input taxed supply pursuant to section 40-35. Therefore, turnover derived from the rental of the Property is disregarded in the calculations of your current and projected GST turnover.

In addition, paragraph 188-25(a) provides that when calculating your projected GST turnover you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether your sale of the Property is also excluded from the calculation of your projected GST turnover.

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 (GSTR 2001/7) discusses what is regarded as a 'capital asset' at paragraphs 31 to 36.

While not specifically defined for GST purposes, the term 'capital assets' generally refers to those assets that make up the profit yielding subject of an enterprise and 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.

In this case, the Property was acquired by the late Mr DD in 19XX, was used as the primary residence of Mr DD for NN years and subsequently leased/rented for over MM years.

Given the facts in this case, we consider the sale of the Property constitutes the transfer of a capital asset for the purposes of section 188-25 and will therefore be disregarded when calculating your projected GST turnover.

As the proceeds from the leasing of the Property and the subsequent sale of the Property are disregarded when calculating your projected GST turnover, your projected GST turnover will be below the GST registration turnover threshold and you are not required to be registered.

As all of the positive limbs of section 9-5 have not been satisfied, the sale of the Property will not be a taxable supply and GST will not be applicable to the sale.

Other relevant comments

Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, the sale is not input taxed to the extent the residential premises are commercial residential premises or new residential premises.

In your case, the Property is neither commercial residential premises nor new residential premises.

The term 'residential premises' is defined in section 195-1 as land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises outlines the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities (bedroom, bathroom, and living facilities).

The Property in this case contains a residential dwelling (house) that displays the features of shelter and basic living facilities thus satisfying the definition of 'residential premises'.

Paragraph 46 of GSTR 2012/5 explains that there is no specific restriction, on the area of land that can be included in 'residential premises'. 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 enjoyed in conjunction with the residential building.

In this case there are no fences or other forms of demarcation on the Property. We consider that the physical characteristics of the land and building as a whole indicate that the balance of the land is to be enjoyed in conjunction with the house.

Given the above, we consider the sale of the Property will be an input taxed supply of residential premises pursuant to section 40-65.

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