Edited version of private ruling

Authorisation Number: 1011649666549

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Ruling

Subject: GST and the sale of real property

Question

Is the supply by you of two adjoining parcels of land a taxable supply on which goods and services tax (GST) is payable?

Answer

No, the supply by you of two adjoining parcels of land is not a taxable supply on which GST is payable.

Relevant facts and circumstances

You purchased as joint tenants two vacant adjoining parcels of land.

Each parcel of land is on a separately registered title. described as:

§ Lot 1 on which a residential dwelling had been constructed (Lot 1) and

§ Lot 2 comprising vacant land with no building entitlement other than to construct a farm shed (Lot 2).

You purchased Lot 1 and Lot 2 with the intention of building a family residence.

Subsequently because of the size of the land you decided to commence a beef cattle operation using both lots.

Initially your beef cattle operation involved breeding livestock but later reverted to buying and fattening steers before selling.

You occupied the residential house on Lot 1 as your home until 2005.

After you moved out of the residential house in 2005 it remained vacant until March 2009 when you leased the residential house to a tenant (the Tenant).

A formal lease with monthly market rent was entered into. That lease operated until the lease expired. The Tenant continues to occupy the residential house on a monthly tenancy, paying rent by the month.

The Tenant's rights are limited to the house and what is considered to be the 'backyard' located on Lot 1. You retain the right to use the remainder of Lot 1 for your beef cattle operation.

The Tenant has offered to buy Lot 1 and Lot 2.

If sold individually or together the sale price of each of the lots will exceed $75,000.

The prospective buyer does not intend to continue the farming enterprise.

You continue to operate the beef cattle operation which will cease if the land is sold. You do not propose to enter into any new enterprise at any time in the future.

Over the years various improvements have been made to the land such as fencing, dams, access roads, power lines, phone lines and sheds. Deductions have been claimed for income tax purposes in relation to improvements under depreciation and capital works provisions in addition to revenue expenditure such as rates.

You have registered a partnership for income tax and obtained an Australian Business Number. Neither you individually nor you in partnership are registered for goods and service tax (GST).

You make no other supplies either individually or in partnership that would affect your GST turnover. You confirm that at whatever time the land sale takes place your turnover from your farming activities will be under the GST registration turnover threshold.

Detailed reasoning

Legislation

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1.

GST free

The GST Act includes supplies involving the transfer of land which is GST-free and therefore not a taxable supply. On the facts provided, the sale of Lot 1 and Lot 2 will not come within any of the GST-free provisions.

Input taxed supply

The GST Act includes supplies involving the transfer of land which are input taxed and therefore not a taxable supply. As Lot 1 has a dwelling constructed on it and is leased before sale relevant provisions of Division 40 of the GST Act apply as follows:

Section 40-65 of the GST Act provides that a sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

The expression 'residential premises' is defined in s 195-1 as follows:

residential premises means 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;

(regardless of the term of the occupation or intended occupation) and includes a *floating home."

Under section 40-35 a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises.

The dwelling constructed on Lot 1 comes within the definition of residential premises being occupied as a residence you and more recently by the Tenant. The supply of Lot 1 does not come within the definition of new residential premises under subsection 40-75(1) of the GST Act. Accordingly the sale of Lot 1 is to the extent it is residential premises an input taxed supply under Division 40 of the GST Act.

Is the supply of real property connected with Australia, made for consideration and not GST-free?

In the present circumstances Lot 1 and Lot 2 will be supplied for consideration (being the contract price), the properties are connected with Australia (being real property in Australia) and the sale of Lot 1 and Lot 2 will not come within any of the GST-free provisions of the GST Act. Some part of Lot 1 will involve the sale of residential premises and as such to that extent will be input taxed under section 40-65 of the GST Act.

Since you are not registered for GST, the questions that arise in your circumstances is whether you are required to be registered for GST in terms of section 23-5 of the GST Act and to the relevant criteria in section 9-5 of the GST Act that you must be carrying on an enterprise such that the supplies you make will be in the course or furtherance of that enterprise.

Registered or 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 are carrying on an enterprise, and

§ your GST turnover meets the registration turnover threshold.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act defines the term 'enterprise' as an activity or series of activities done in the form of a business or 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.

The term 'carry on' in relation to an enterprise is described in section 195-1 of the GST Act as follows:

Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

The meaning of the term 'enterprise' as defined in the A New Tax System (Australian Business Number) Act 1999 (ABN Act) and is considered by the Taxation Office in Miscellaneous Taxation Ruling MT 2006/1. The discussion in that ruling is considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Leasing enterprise

You have advised that since you have engaged in a series of activities done on a regular and continuous basis in the form of a lease or other grant of an interest in property in respect of the residential premises located on Lot 1. You received monthly market rent for the residential premises. Such activities come within the definition of an enterprise under subsection 9-20(1) of the GST Act.

Beef cattle enterprise

Furthermore, since the late 1980's you have engaged in a series of activities done with respect to the beef cattle operation (that is, the continuous and regular purchase and sale of beef cattle) which also answers the definition of an enterprise under subsection 9-20(1) of the GST Act.

By engaging in the leasing activities and the beef cattle activities you are carrying on an enterprise and satisfy the first requirement of section 23-5 of the GST Act. As carrying on an enterprise includes doing anything in the course of termination of an enterprise, the sale of Lot 1 and Lot 2 notwithstanding that the leasing and beef cattle enterprises will cease as a result of the sale, are supplies made in the course or furtherance of an enterprise that you carry on for the purposes of paragraph 9-5(b) of the GST Act.

Your GST turnover meeting the registration turnover threshold

Section 25-15 of the GST Act provides that your registration turnover threshold is $50,000 or such higher amount as the regulations specify. Regulation 25-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 provides that for paragraph 23-15(1)(b) the amount of $75,000 is specified.

The meaning of GST turnover and how your GST turnover affects the way the GST Act applies to you is discussed in Goods and Services Tax Ruling GSTR 2001/7.

You have a GST turnover that meets a particular turnover threshold under subsection 188-10(1) of the GST Act if:

§ 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

§ your projected GST turnover is at or above the turnover threshold.

At a time during a particular month, your current GST turnover is, subject to certain exclusions, the sum of the values of all the supplies that you made, or are likely to make, during the 12 months ending at the end of that month other than supplies that are input taxed.

At a time during a particular month, your projected GST turnover is, subject to certain exclusions, 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 other than supplies that are input taxed.

Section 188-25 of the GST Act requires that in working out your projected GST turnover you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours and any supply made, or likely to be made, by you solely as a consequence of:

§ ceasing to carry on an enterprise; or

§ substantially and permanently reducing the size and scale of an enterprise.

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. Capital assets can include tangible assets such land on which a factory, shop or office stands and which are retained to produce income.

On the facts provided Lot 1 and Lot 2 having been used to derive income from leasing and from their use in the beef cattle operation make up the profit yielding subject of those enterprises and as such are capital assets for the purpose of paragraph 188-25(a) of the GST Act.

In the month you sell Lot 1 and Lot 2 your current GST turnover will be the sum of the values of all the supplies (beef cattle and sale of the properties, excluding the input taxed supplies of residential premises) that you made, or are likely to make, during the month in which you will sell the properties and the preceding 11 months. In your circumstances, your current GST turnover will be above the registration turnover threshold as the value of the supplies of the properties alone is more than $75,000.

Although your current GST turnover will be at or above the registration turnover threshold when you sell the land, your projected GST turnover will be below the registration turnover threshold. This is because, in selling Lot 1 and Lot 2, you will be disposing of capital assets in addition to ceasing to carry on your enterprises. Under section 188-25 of the GST Act, the proceeds from the sale of the properties will be excluded from the calculation of projected GST turnover, as is the value of input taxed supplies. You have confirmed that in whatever month the sale of Lot 1 and Lot 2 takes place the value of supplies from your beef cattle operation will be under $75,000.

As you will calculate your projected GST turnover to be below the registration turnover threshold, your GST turnover does not and will not meet that particular turnover threshold.

It follows that since your GST turnover will not meet the registration turnover threshold, you are not required to register for GST. Since you are not registered or required to be registered for GST, an essential requirement for a taxable supply will not be satisfied. The sale by you of Lot 1 and Lot 2 will therefore not be a taxable supply and, as such, GST will not be payable.