Edited version of private advice

Authorisation Number: 1052360706001

Date of advice: 18 February 2025

Ruling

Subject: GST - assets

Question 1

Will you have an increasing adjustment under section 135-5 or 135-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect of your purchase of the property at (address) if you cancel your GST registration with effect from the end of the day of settlement of sale to you?'

Answer 1

No.

Relevant facts and circumstances

You are registered for GST. You applied for GST registration on (date). You have been registered for GST with effect from (date).

You purchased a commercial property, (address). The property comprises of offices and a reception.

The contract date was (date). Settlement date was (date).

You purchased the property to lease out. The property sale was subject to a pre-existing lease. You will generate leasing revenue of less than $XX a year from the property. You do not own other properties.

You and the vendor agreed in writing that the sale of the property was a supply of a going concern.

Your current GST turnover and projected GST turnover are each less than $XX.

You will apply to the Australian Taxation Office (ATO) for cancellation of your GST registration with effect from the end of the day of settlement.

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 38-325

A New Tax System (Goods and Services Tax) Act 1999 section 135-5

A New Tax System (Goods and Services Tax) Act 1999 section 135-10

Reasons for decision

Summary

You will not have an increasing adjustment under section 135-5 or 135-10 of the GST Act as you are not using the property to make input taxed supplies.

Detailed reasoning

Subsection 135-5(1) of the GST Act requires a purchaser of a GST-free supply of a going concern to make an increasing adjustment if they intend that some or all of the supplies made through the enterprise to which the supply of the going concern relates will be supplies that are neither taxable supplies nor GST-free supplies. An increasing adjustment is a type of GST liability.

Subsection 135-5(1) of the GST Act states:

You have an increasing adjustment if:

(a)          you are the recipient of a supply of a going concern, or a

supply that is GST-free under section 38-480; and

(b)          you intend that some or all of the supplies made through the enterprise to which the supply relates will be

supplies that are neither taxable supplies nor GST-free supplies.

Subsection 135-5(2) of the GST Act states:

•                     The amount of the increasing adjustment is as follows:

•                     1/10 x Supply price x Proportion of non-creditable use

•                     Where:

•                     proportion of non-creditable use is the proportion of all the supplies

•                     made through the enterprise that you intend will be supplies that are

•                     neither taxable supplies nor GST-free supplies, expressed as a

•                     percentage worked out on the basis of the price of those supplies.

•                     supply price means the price of the supply in relation to which the increasing adjustment arises.

Section 135-10 of the GST Act provides that later adjustments may be required if the input taxed proportion of the purchaser's actual supplies is different to that planned.

Subsection 135-10(1) of the GST Act states:

If you are the recipient of a supply of a going concern, or a supply that is GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to:

(a)          the proportion of all the supplies made through the enterprise that you intend will be supplies that are neither taxable supplies nor GST-free supplies; and

(b)          the proportion of all the supplies made through the enterprise that are supplies that are neither taxable supplies nor GST-free supplies; in the same way as that Division applies:

(a)          in relation to the extent to which you made an acquisition for a creditable purpose: and

(b)          in relation to the extent to which a thing acquired is applied for a creditable purpose.

Paragraph 6.255 of the Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 (EM) explains sections 135-10 and 135-10 of the GST Act. It states:

Under the general rule for supplies there will be GST included in the price for an acquisition. If the acquisition is not entirely for a creditable purpose you are not entitled to a full input tax credit for it. This means that you bear some of the cost of the GST on the acquisition in proportion to your private or input taxed use. However, if the thing you acquire is GST-free and you use it only partly for a creditable purpose there is no GST for you to bear. This applies to acquisitions of going concerns that are supplied GST-free.

Further, paragraphs 6.256 to 6.258 of the EM state:

Division 135 provides for an adjustment to ensure that you account for GST in proportion to the private or input taxed use of a going concern that you acquire. The adjustment increases your net amount by an amount equal to the GST you would bear on the acquisition if it had been a taxable supply to you. The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit you would have been entitled to for the acquisition if the supply had been a taxable supply. This is the effect of section 135-5.

This means that you only get a going concern GST-free to the extent that you intend to make taxable supplies with it.

If what you actually use the going concern for is different from what you intended to use it for when you acquired it, you will have an adjustment for change in creditable purpose under Division 129.

ATO Interpretative Decision ATO ID 2007/180 Goods and Services Tax GST and 'supplies made through the enterprise' for the purposes of Division 135 states:

It can be seen from the above statements in the EM that the underlying objective of Division 135 of the GST Act is to provide for oneor more adjustments to ensure that a recipient of a GST-free supply of a going concern accounts for GST to the extent that the going concern is used for non-creditable purposes.

In this context, it is appropriate to interpret the phrase 'supplies made through the enterprise' for the purposes of paragraphs 135-10(1)(a) and 135-10(1)(b) of the GST Act to include a supply that is a sale of the enterprise itself.

It accords with the purpose of Division 135 of the GST Act and the policy intent of the GST Act as a whole to view the sale of the enterprise itself as a use of the going concern acquired. This view results in an appropriate amount of GST being accounted for in relation to the acquisition of the going concern that reflects the proportion of its non-creditable use. The alternative view that the sale of the enterprise itself is not a supply 'made through the enterprise' would, contrary to the policy and legislative context of the GST Act, result in an adjustment which does not reflect the total use of the enterprise acquired. This in turn could result in an underpayment or overpayment of GST depending on whether the sale of the enterprise is a taxable supply, an input taxed supply or a GST-free supply.

GST-free supply of going concern

A supply of a going concern may be GST-free under subsection 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act defines supply of a going concern. It states:

A supply of a going concern is a supply under an arrangement under which:

(a)          the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b)          the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Subjection 38-325(1) of the GST Act states:

The supply of a going concern is GST-free if:

(a)          the supply is for consideration; and

(b)          the recipient is registered or required to be registered; and

(c)          the supplier and the recipient have agreed in writing that the supply is of a going concern.

Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) sets out the two elements that are essential for the continued operation of an enterprise. It states:

75. Two elements are essential for the continued operation of an enterprise:

 the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

 the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

Paragraphs 149 to 151 of GSTR 2002/5 discuss the 'all things necessary for the continued operation of an enterprise' requirement in relation to leasing enterprises. They state:

149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise.

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building.

In accordance with paragraph 107A of GSTR 2002/5, where the identified enterprise is one of property leasing, the supply of the property subject to the existing leases is all that is required to satisfy paragraph 38-325(2)(a) of the GST Act.

We shall now consider whether the vendor supplied a going concern to you.

The vendor in your case suppled to you a property subject to an existing tenancy. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met.

Additionally, the vendor leased out the property up to the time of settlement. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.

Hence, the vendor supplied a going concern to you under subsection 38-325(2) of the GST Act.

We shall now consider whether the supply of this going concern meets the requirements of subsection 38-325(1) of the GST Act.

The property was sold to you for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met.

You were registered for GST when you purchased the property. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is met.

In your case, the vendor and purchaser agreed in writing that the sale of the property subject to the existing tenancy was the sale of a going concern. Therefore, the requirement of paragraph 38-325(1)(c) of the GST Act is met.

As the sale of the property meets the requirements of subsection 38-325(1) of the GST Act, the sale is a GST-free supply of a going concern.

Your intended and actual use of the property

The property is commercial. You acquired the property to lease to commercial tenants.

Your acquisition of the property does not relate to you making input taxed supplies (for example, supplying accommodation in residential premises, which is input taxed under section 40-35 of the GST Act).

As you acquired the property to make supplies that are not input taxed and you will use the property to make supplies that are not input taxed, you will not have an increasing adjustment under section 135-5 or 135-10 of the GST Act. This will be the case even if you cancel your GST registration with effect from the end of the date of settlement.

Additional information

The ATO may exercise discretion to cancel a taxpayer's GST registration if less than 12 months after being registered, the taxpayer applies for cancellation of registration and the ATO is satisfied that the taxpayer is not required to be registered.

The ATO may allow you to cancel your GST registration with effect from the end of the day of settlement as you are not required to be registered for GST.

In order for the ATO to consider allowing you to cancel GST registration with effect from that point in time, you must not have been operating on a GST-registered basis after that date.

A GST-registered entity operates on a GST-registered basis if:

•                     it collects GST from its customers; or

•                     it issues tax invoices or GST adjustment notes to its customers; or

•                     it holds itself out to other business as being registered for GST; or

•                     it lodges GST return forms with the ATO

If you are currently operating on a GST-registered basis, you would need to cease operating on a GST-registered basis in order for the ATO to allow you to cancel your GST registration.

Even if the ATO only allows you to cancel your GST registration from a date that is after the end of the day of settlement, you will not have an increasing adjustment under section 135-5 or 135-10 of the GST Act.

You can cancel your GST registration and any other roles or registrations together or separately:

•                     through Online services for business

•                     through your registered tax or BAS agent

•                     by phone on 13 28 66 - between 8.00am and 6.00pm, Monday to Friday

•                     by completing and posting via ordinary mail the Application to cancel registration (NAT 2955). The form can be obtained through online ordering.

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