Edited version of private ruling

Authorisation Number: 1011656153908

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Ruling

Subject: GST and the sale of real property

Question 1

Is the supply by the trustee of a deceased estate (the Trustee) of two parcels of land comprising a number of lots a taxable supply on which goods and services tax (GST) is payable?

Answer 1

No, the supply by the Trustee of two parcels of land comprising a number of lots are not a taxable supply on which GST is payable?

Relevant facts and circumstances

The Trustee (you) will sell two parcels of land located in Australia as part of the administration of a deceased estate.

Prior to July 2000 the deceased and her spouse purchased as joint tenants land (the Property). The Property comprised:

§ Lot A

§ Lot B on which a house had been constructed and

§ Lot C

The deceased and her spouse had occupied the house situated on Lot B as their home.

Some years later the deceased and her spouse purchased a second parcel of land. The land was on a separately registered title described as Lot D and was vacant land with no improvements or buildings. Lot D was purchased to provide access to the Property.

On the death of her spouse the deceased became the legal owner of Lot A and B and Lot C and Lot D until her death.

The deceased continued to occupy the dwelling on Lot B until her death.

A company was formed (the Company) to operate a business on parts of the land.

The Company was granted rights to use Lot C and Lot D in its business and paid rent for the use of the land. The Company continued to pay rent for some 30 years after which it stopped making payments of rent.

The Company ceased to use Lot A but continues to use and be granted rights in relation to Lot C and Lot D notwithstanding it pays no rent. You have confirmed that the Company provides no other consideration in return for the use of Lot C or Lot D.

The Company was registered and continues to be registered for GST. You have advised that the Company is not an associate of yours for the purposes of Division 72 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

After the deceased's death you rented the dwelling previously occupied by the deceased situated on Lot B to tenants (the Tenants).

You provided a copy of a residential tenancy agreement (the Agreement) between you as Landlord and the Tenants. Under that Agreement the Landlord gives the Tenants the right to occupy the premises on Lot B which is a three bedroom house with off street parking.

The rent nominated in the Agreement is $X per week and the term of the Agreement is 12 months.

Neither you nor the deceased were or are registered for GST.

No other rights other than those granted to the Tenant and the Company have been granted in relation to the lots in question.

The Trustee will sell Lot C, Lot A, Lot B and Lot D together for the contract price.

Once the properties are sold you will not make any supplies the value of which are in excess of the current GST registration threshold of $75,000.

The Company has advised you that it is ceasing to operate its nursery business prior to the sale of the Lots.

Reasons for decision

Legislation

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides:

9-5 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.

The expression 'you' applies to entities generally, unless its application is expressly limited (section 195-1). An entity has the meaning given by section 184-1 and includes a trust (paragraph

184-1(1) (g) of the GST Act).

Under subsection 184(2) of the GST Act the trustee of a trust or of a superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

A 'supply' is defined in subsection 9-10 of the GST Act to include the grant, assignment or surrender of real property. 'Real property' is defined to include any right in or right over land, or a personal right to call for or be granted any interest in or right over land or a licence to occupy land or any other contractual right exercisable over or in relation to land.

GST free

Division 38 of 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 by the Trustee of the Property and Lot D will not come within any of the GST-free provisions.

Input taxed supply

Division 40 of the GST Act includes supplies involving the transfer of land which are input taxed and therefore not a taxable supply. As Lot B 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:

40-65 Sales of residential premises

(1) 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.

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation before 2 December 1998.

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."

40-35 Residential rent

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of *residential premises….or

(b) ….

There is no issue in the present matter that the sale of the Property and Lot D is of real property and that the sale meets the definition of a 'supply' under section 9-10 of the GST Act.

The dwelling constructed on Lot B comes within the definition of residential premises being occupied as a residence since it was acquired by the deceased and her spouse and more recently by the Tenants.

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

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

Since you are not registered for GST, the questions that arise under section 9-5 of the GST Act in respect of the sale of all of the Lots is whether you are required to be registered for GST in terms of section 23-5 of the GST Act.

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' to include 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.

Paragraph 9-20(2)(b) of the GST Act states that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby.

Paragraph 9-20(2)(c) of the GST Act states that an enterprise does not include an activity, or series of activities done by an individual or partnership (all or most of the members of which are individuals) without a reasonable expectation of profit.

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.

MT 2006/1 states that 'the mere disposal of investment assets does not amount to trade' (paragraph 259). Nor is an entity carrying on an enterprise where there are isolated real property transactions that amount to the mere realisation of a capital asset. This contrast with circumstances where land is sold that was purchased with the intention of resale at a profit. The Commissioner considers these activities to be an enterprise.

Leasing enterprise/sale of real property

You have advised that since August 2010 you have engaged in a series of activities done on a regular and continuous basis in the form of a lease in respect of the residential premises located on Lot B. Under the terms of the Agreement with the Tenants rent of $XXX.00 per week was payable to you for those residential premises. Such activities come within the definition of an enterprise under subsection 9-20(1) of the GST Act.

You further advise that you continue to grant rights to use Lot C and Lot D to the Company to operate its business. However, you have received no rent in respect of those rights. You have confirmed that the Company has provided no other consideration in return for the use of Lot C or Lot D.

Where the Trustee is an individual without a reasonable expectation of profit or gain from engaging in the activities, the Trustee is not carrying on an enterprise in making a supply of Lot C and Lot D by way of lease, licence or grant of an interest in property. Neither are you engaging in a leasing enterprise in relation to Lot A which according to the facts provided, is not the subject of any lease, licence or other grant of an interest in real property.

You confirmed that the Company is not an associate of yours for the purposes of Division 72 of the GST Act. In the event that it is eventually determined that the Company is an associate of yours, Division 72 of the GST Act would still not come into operation in respect of the supplies made by you to the Company.

In such circumstances you are not carrying on a leasing enterprise in respect of supplies of Lot C, Lot D or in respect of Lot A. The activities involved in selling the Lot C and Lot D and Lot A amount to the mere disposal of these capital assets and will not, without more, constitute an enterprise. Neither the requirement of paragraph 9-5(b) of the GST Act or the first requirement of section 23-5 of the GST Act that you carry on an enterprise will be satisfied. Accordingly the supplies of Lot C, Lot D and Lot A will not be taxable supplies on which GST is payable.

However, as discussed above by engaging in the leasing activities in respect of Lot B you are carrying on an enterprise and satisfy the first requirement of section 23-5 of the GST Act in respect of the sale of that lot. Accordingly, consideration needs to be given to whether the Trustee's GST turnover meets the registration turnover threshold with the sale of Lot B.

Your GST turnover meeting the registration turnover threshold

Section 23-15 of the GST Act provides that your registration turnover threshold is $50,000 or such higher amount as the regulations specify. Regulation 23-15.01 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 have made, or are likely to make, during the 12 months ending at the end of that month.

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.

Supplies excluded from the calculation of current GST turnover and projected GST turnover include:

§ supplies that are input taxed

§ supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act) or

§ supplies not made in connection with an enterprise that you carry on.

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.

On the facts provided, none of the Lots were bought to be sold in the course of trading operations and all of the Lots including Lot B have been used at some time to derive income from leasing and as such are capital assets for the purpose of paragraph 188-25(a) of the GST Act.

In the month you sell Lot B, Lot A, Lot C and Lot D your current GST turnover will be the sum of the values of all the supplies (excluding the input taxed supplies of residential premises and supplies that are not connected with an enterprise you carry on) that you have made, or are likely to make, during the month in which you will sell the properties and the preceding 11 months. In your present circumstances, your current GST turnover will be below the registration turnover threshold as will your projected GST turnover.

In the event that it was determined that you were carrying on an enterprise in relation to the sale of Lot C and Lot D as well as in respect of Lot A your projected GST turnover would still be below the registration turnover threshold, because, in selling Lot C and Lot D and Lot A you would be disposing of capital assets which are, along with input taxed supplies (Lot B) excluded from the calculation.

You have confirmed that in whatever month the sale of Lot B and the other Lots takes place the value of supplies you make 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 as 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 (paragraph 9-5(d) of the GST Act). Accordingly, the supply by you of Lot B, Lot A, Lot C and Lot D will not be a taxable supply and, as such, GST will not be payable.