Edited version of private ruling

Authorisation Number: 1011481529858

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Ruling

Subject: GST and sale of property

Question:

Was the sale of your property a taxable supply?

Answer: Yes.

The sale of your property was taxable, but only to the extent of the sale of commercial premises.

Relevant facts:

You are not registered for goods and services tax (GST).

The partnership is registered for GST.

You and your partner bought a property pre July 2000. The property is a commercial and residential property.

The partnership carried on an enterprise in part of the commercial premises.

The other part of the commercial premises and its residential area were tenanted.

The rental income was included in partners' personal tax returns in equal shares. The interest was claimed under the partnership and profits were distributed equally between you and your partner.

The partnership carried out extensive renovations and rebuilding works on the site, following the expiration of the lease agreement. The original building was restored and a new home was also built at the rear.

Since the renovation and rebuilding works were completed the property was used solely by you and your partner.

You and your partner moved into the new home at the rear and intended to stay for the rest of your lives.

During and after the renovation and rebuilding work, no part of the property had been leased out.

The partnership claimed interest and depreciation as a deduction on the commercial portion of the property. The profits were distributed equally between the partners.

The partnership claimed input tax credits for GST purposes on the construction of the commercial portion.

Following the death of your partner, any profit from the partnership was distributed to you.

You sold the property within a year of your partner's death.

At the time of the sale, you were living on the property and still continuing your business.

Reasons for decision

Taxable supply

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides that you make a taxable supply if:

· you make the supply for consideration; and

· the supply is made in the course or furtherance of an enterprise that you carry on; and

· the supply is connected with Australia; and

· you are registered, or required to be registered.

However the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, the supply of the property was made for consideration; the supply was connected with Australia and the partnership is registered for GST. Accordingly, the supply of the property satisfied the requirements of paragraphs (a), (c) and (d) of section 9-5 of the GST Act.

Therefore, what remains to be determined is whether the sale of the property was in the course or furtherance of an enterprise that you carry on at the time of sale, thus satisfying the requirement of paragraph 9-5(b) of the GST Act.

If all the above requirements were satisfied, then we need to consider if the sale of the property was GST-free or input taxed.

Carrying on an enterprise

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity, or series of activities done:

· in the form of a business

· in the form of an adventure or concern in the nature of trade, or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of the 'entity carrying on an enterprise' for the purposes of entitlement to an Australian Business Number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Whether or not an activity or series of activities amount to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. An enterprise includes an activity or series of activities, done in the form of a business. Further, an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. However, it does not extend to the mere realisation of investment or private assets such as the family home and private cars.

This means that an asset sold at a profit, does not, of itself, result in the activity being commercial in nature. Therefore, we need to determine whether the sale of your property constitutes an activity (solely or partly) in the course of an enterprise.

In your case, you and your partner jointly purchased the property prior to the introduction of GST. Part of the commercial premises, including the residential area was leased to a tenant for commercial and residential purposes. The remainder of the commercial premises continued to be used by the partnership to carry on its enterprise. Accordingly, the partnership has continually used the property in the course of carrying on an enterprise.

You have stated that the relevant business deductions were claimed under the partnership and profits were distributed equally to the partners. Further, input tax credits had been claimed in respect of the renovation expenses incurred, to the extent that they were related to your commercial purposes.

At the time of the sale of your property, no part of the property was subject to lease; however, you were still carrying on your partnership enterprise, using the original building which had been restored. As such, part of the property was used in carrying on your enterprise. Accordingly, we conclude that you were carrying on an enterprise in connection with part of the relevant property. Therefore, the sale of the property was partly in the course or furtherance of an enterprise and to that extent, the sale of the property meets the requirements of a taxable supply under section 9-5 of the GST Act.

Further, section 195-1 of the GST Act defines carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise. The activities of ceasing the trade are considered as carrying on an enterprise for GST purposes.

Goods and Services Tax Ruling GSTR 2004/8 (GSTR 2004/8) contains the Australian Taxation Office (ATO) view on decreasing adjustments on supplies. It also considers the meaning of in the course or furtherance in relation to an enterprise. Paragraph 29 of GSTR 2004/8 states:

Given the broad meaning of in the course or furtherance, a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

Therefore, the sale of the property in winding up your enterprise is a supply made in the course of your enterprise.

Mixed supply

Where the supply consists of separately identifiable taxable and non-taxable parts the supply is considered as a mixed supply. In a mixed supply, the identifiable taxable and non-taxable supplies need to be individually recognised and consideration in respect of such a supply needs to be apportioned, in order to work out the GST payable on the taxable part of the supply.

As provided in the facts, the original building was renovated and used for commercial purposes. A new home was built at the rear for you and your partner to live in. Accordingly, the property contained both commercial and private residential components.

Private residential premises

You state that following the extensive renovations and rebuilding works that you carried on the property, you occupied part of the property as your residential premises. You moved into the newly constructed residential premises at the rear of the original building and it became your private residence.

Further, you state that it was your intention to remain at that premises for the rest of your lives.

Accordingly, the property had not been used solely for the purpose of carrying on an enterprise. As such, we consider that the use of the property has been for dual purposes, private residential and commercial purposes.

However, following the death of your partner early last year, you decided to sell the property as a whole (a mixed supply of residential and commercial premises). Accordingly, the sale of that part of the property used as your residential premises was a mere realisation of private assets as it was not in the course of an enterprise that you carry on. Therefore, in respect of residential portion of the property, the requirement of paragraph 9-5(b) of the GST Act was not satisfied.

As the sale of residential part of the property does not meet all of the requirements of section 9-5 of the GST Act, the sale of that part was not subject to GST. The sale was outside the scope of the GST Act.

As a result, it is not necessary to determine whether the sale of that part of the property was GST-free or input taxed.

Commercial premises

As stated in the facts, part of the property had been continually used by the partnership for the purpose of carrying on its enterprise; previously the partnership also carried on an enterprise of leasing. At the time of the sale, the renovated building was used for commercial purposes.

The sale of this portion was in the course or furtherance of an enterprise that you carry on and therefore, that part of the sale is subject to GST.

In conclusion, the sale of your property was taxable but only to the extent that it represented a sale of commercial premises.

Apportionment

Section 9-80 of the GST Act deals with supplies that are partly taxable and partly GST-free or input taxed. Where there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion the consideration to the parts of the mixed supply. However, the apportionment must be justifiable in terms of reasonableness.

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) contains the Australian Taxation Office view on apportioning the mixed supply. These methods are discussed in paragraphs 92 to 113 of GSTR 2001/8. As explained in GSTR 2001/8, a reasonable method for apportioning a mixed supply will depend on the circumstances of each case.

Paragraph 92 of GSTR 2001/8 states:

92. Where there is no legislative provision specifying a basis for apportionment you may use any reasonable method to apportion the consideration to the parts of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances.

Paragraph 94 of GSTR 2001/8 states:

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

Paragraph 97 of GSTR 2001/8 highlights direct methods that can be used:

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the supply. A direct method usually gives you the most accurate measure of the consideration for the taxable part of the supply you make. Such methods may include:

· the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103);

· the relative amount of time required to perform the supply (see paragraphs 104 to 105); and

· the relative floor area in a supply of property (see paragraphs 106 to 108).

Accordingly, you can use any reasonable method to apportion the consideration for a mixed supply. The method you use must be supportable and you should keep records that explain the method used in your calculation.

More information

If an entity is registered for GST and not carrying on an enterprise, it must apply to the commissioner for the cancellation of its registration. The application must be made in the approved form and lodged within 21 days after the day on which the entity ceased to be carrying on any enterprise (section 25-50 of the GST Act). The relevant form 'Application to cancel registration' is available on our web site www.ato.gov.au.

An entity is required to make an increasing adjustment under subsection 138-5(1) of the GST Act, for the acquisition of assets prior to the cancellation of its GST registration.

Subsection 138-5(1) of the GST Act provides that the entity has an increasing adjustment for cessation of registration if:

· its registration is cancelled; and

· immediately before cancellation takes effect, its assets include anything in respect of which it was, or is, entitled to an input tax credit.

The increasing adjustment is attributable by the entity to its net GST in its concluding tax period if it retains assets for which input tax credits have been or are entitled to be claimed.