Edited version of private ruling

Authorisation Number: 1011519673447

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Ruling

Subject: GST and the sale of property

Question 1

Will your supply of property be a taxable supply?

Answer

Yes. Your supply of property will be a taxable supply.

Question 2

If you cancel your GST registration prior to the supply, will you be required to remit GST on the supply?

Answer

If you are not registered, or required to be registered, for GST at the time of the supply of the property, you will be not required to remit GST on the supply of the property.

Question 3

If you cancel your GST registration, will you be required to make any GST adjustments?

Answer

You may be required to make GST adjustments under division 138 of the GST Act.

Relevant facts and circumstances

You are a company that is registered for GST.

You bought and refurbished a commercial property (the property). There has been no material change to the property since then.

The property was within an area zoned 'residential' with existing use rights.

Your tax agent has advised that the property was used as an office and showroom by the company until the relevant date. You subsequently leased it to tenants who used the property as a showroom and office until a later date.

The property has been vacant since that date despite efforts to sell or lease the property.

The property does not have any bedrooms and has never been used for residential purposes.

You are now looking to sell the property, however you are unsure of your GST obligations on the supply.

You do not carry any other enterprise and have no other assets besides the property.

Your current GST turnover is below $75,000.

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 division 38,

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,

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

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

Question 1

In accordance with section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are required to pay the GST payable on any taxable supply that you make. Section 9-5 of the GST Act provides that you make a taxable supply if:

a. you make a supply for consideration

b. the supply is made in the course or furtherance of an enterprise that you carry on

c. the supply is connected with Australia, and

d. you are 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 your case, you will make the supply for consideration, the supply will be made in the course or furtherance of an enterprise that you carry on, the property is situated in Australia and you are currently registered for GST.

Section 195-1 of the GST Act provides that the definition of residential premises is land or a building that:

a) is occupied as a residence or for residential accommodation, or

b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

You have advised that the property is commercial premises, and provided the following information to support this assertion:

· the property has never been used for residential accommodation

· you have advised that prospective buyers are looking to convert the property into residential premises, which indicates that the property is not currently residential premises

· the property is zoned 'residential', but you bought it with existing use rights (you have non-conforming use rights). Goods and Services Tax Ruling GSTR 2000/20 is about commercial residential premises. Part one discusses residential premises. Paragraph 36 explains that a certain zoning, or a change of zoning cannot, by itself, alter the character of premises.

Consequently, although the property is zoned as residential, the premises do not have the characteristics of residential premises. Your property is therefore commercial premises.

As the property has been vacant for a few years the supply will not be a GST-free supply of a going concern. In your circumstances, there is no other provision within the GST Act under which your supply of the property will be a GST-free supply.

Subsection 40-65(1) of the GST Act provides that the supply of real property is input taxed, but only to the extent that the property is residential premises. You have advised that your property is commercial premises. Consequently, your supply of the property will not be an input taxed supply under section 40-65(1) of the GST Act. In your circumstances, there is no other provision within the GST Act under which the supply of your property will be an input taxed supply.

Therefore, you will be making a taxable supply and will be liable to remit GST on the supply.

Question 2

If, prior to the supply of the property, you deregister for GST, the question arises as to whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold of $75,000 ($150,000 for a non-profit body). However, you may still choose to register for GST even though you are not required to do so, provided you are carrying on an enterprise or you intend to carry on an enterprise from a particular date.

In accordance with subsection 188-10(1) of the GST Act, your GST turnover meets a particular turnover threshold if:

a) your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

b) your projected GST turnover is at or above the turnover threshold.

You advised that your current GST turnover is less that $75,000. We therefore need to determine whether your projected GST turnover will be at or above $75,000 at the time of supply of the property.

Division 188 of the GST Act defines 'GST turnover'. Your projected GST turnover is the GST exclusive values of all supplies connected with Australia that you have made, or are likely to make, during the current month and the next 11 months. However, your projected GST turnover does not include input taxed supplies.

In addition, paragraph 188-25(a) of the GST Act provides that in working out the projected annual turnover, any supplies made or likely to be made by way of transfer of ownership of a capital asset are disregarded. The GST Act does not define the term 'capital assets'. Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected turnover (GSTR 2001/7) provides guidance on the calculation of the GST turnover. The meaning of capital assets is discussed in paragraphs 31 to 36 of GSTR 2001/7.

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.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. That is, 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 nature even if such a disposal is an occasional or one-off transaction.

In your case, the property was used before being leased to tenants. The property has been retained by you to produce income, and hence the proposed supply of the property is considered to be the transfer of a capital asset under paragraph 188-25(a) of the GST Act.

Accordingly, the proceeds from the supply of the commercial premises will not be included in the calculation of your projected GST turnover. As the proceeds from the supply of the property are not included in your GST turnover, and provided the values of all the other supplies you make are below the registration turnover threshold, your GST turnover will be below the registration turnover threshold and you will not be required to be registered for GST.

If you are not registered, or required to be registered, for GST at the time of the supply, your supply of the property will not meet all of the requirements of a taxable supply. As your supply of the property will be not be a taxable supply, you will not be required to remit GST on that supply.

Question 3

Division 138 of the GST Act provides that if you cancel your GST registration, you have an increasing adjustment if, immediately before the cancellation takes effect, your assets include anything in which you were, or are, entitled to an input tax credit.

However, you do not have an increasing adjustment in respect of an asset if the last adjustment period for your acquisition of the asset has ended before your GST registration is cancelled. The precondition of section 138-5 of the GST Act is that you were, or are, entitled to an input tax credit for the assets held immediately before cancellation.

Further information is contained in our publication, Leaving the GST system (NAT 14829-07.2010), which is available on our website.