Edited version of private ruling

Authorisation Number: 1011660097280

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Ruling

Subject: GST and sale of property

Question

Will your supply of the property be a taxable supply?

Answer

No, your supply of the property will not be a taxable supply.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased the property in 2008.

Your intention was to keep the property as a long term asset, to be used as an office by partner X. You regard the property as a capital asset.

The property was purchased as residential premises, however it is zoned commercial.

Since acquiring the property, you have removed the kitchen stove. Apart from this it is a regular house that is used as an office.

From 2008, partner X has used the property as an office for his accounting practice, but does not pay anything for this.

For the last five months, an unrelated entity has occupied one room of the property.

The unrelated entity pays you $800 per month for this and for the use of other amenities in the property.

You own four other residential rental properties. All of the properties were purchased as a long term investment.

You do not have any other enterprise activities.

You are not registered for GST, however you are registered individually.

Although you have not marketed the property, you have been approached by a prospective buyer and are considering selling the property. You do not propose to sell the property as part of a GST-free going concern.

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

As defined in section 9-5 of the GST Act, a supply is taxable if it is:

§ made for consideration

§ made in the course of furtherance of an enterprise carried on by the entity making the supply

§ connected with Australia, and

§ made by an entity registered or required to be registered.

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

In your situation, there are no provisions in the GST Act that would make your supply of the property a GST-free supply

Input taxed supplies

In accordance with section 40-65 of the GST Act, 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 (regardless of the term of occupation).

However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

You advised that the property was supplied to you as residential premises. The minor modifications that you have outlined would not be sufficient to change the physical characteristics of the property to something other than residential premises

In accordance with section 40-75 of the GST Act, residential premises are new residential premises if they:

§ have not been previously sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

§ have been created through substantial renovations of a building; or

§ have been built, or contain a building that has been built, to replace demolished premises on the same land.

From the information provided, the property does not meet the definition of new residential premises set out in section 40-75.

Therefore, from the facts provided, your supply of the property will be an input taxed supply of residential property.

You advised that the property was supplied to you as residential premises. The minor modifications that you have outlined would not be sufficient to change the physical characteristics of the property to something other than residential premises

Further, even if the modifications to the property are sufficient to change its character to commercial property, you supply of the property will only be a taxable supply if it meets all of the requirements of section 9-5 of the GST Act, including that you are either registered or required to be registered for GST.

Consideration.

You will receive consideration for the supply of the property.

Enterprise

As defined in subsection 9-20(1) of the GST Act an enterprise includes an activity, or a 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; or

You have allowed partner X, to use the property on a continuous basis since 2008. For the last 5 months, you have allowed an unrelated entity to use part of the property in exchange for consideration of $800 per month. Therefore, you are conducting a leasing enterprise in accordance with the above definition.

Connected with Australia

You will be making a supply for consideration of property located in Australia, therefore the supply will be connected with Australia.

Required to be registered

You are not registered for GST. Therefore, it needs to be determined whether you are required to be registered.

As provided in section 23-5 of the GST Act, you are required to be registered if:

§ you are carrying on an enterprise, and

§ your GST turnover meets the registration turnover threshold (currently $75,000).

Section 188-10 of the GST Act provides that your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

As provided in subsection 188-10(1) of the GST Act, your GST turnover meets a particular threshold if:

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

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

Before the sale (settlement) of your property, your current GST turnover consists only of the payment from an unrelated entity. However, at the time of settlement of your property, the sale proceeds will also be included in your current GST turnover, which will consequently exceed the registration turnover threshold.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold.

Paragraph 188-25(a) of the GST Act provides 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.

You have stated that you consider the property a capital asset. The GST Act does not define the term capital asset. The meaning of 'capital asset' is discussed in Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GST 2001/7). Paragraphs 31 to 36 of GSTR 2001/7 explain that generally, the term capital assets refers to those assets that make up the profit yielding subject of an enterprise.

Capital assets are distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent, or incidental to, the carrying on of a business. 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 asset even if such a disposal is an occasional or one-off transaction.

The property that you are selling is a capital asset and the proceeds of the sale will not be included in your projected GST turnover.

It follows that your GST turnover will not meet the registration turnover threshold and you are not required to be registered for GST.

As you are not registered, nor required to be registered for GST, the sale of the property will not be a taxable supply.

Division 72

As a partnership and its partners are associates under the GST Act, Division 72 may apply to supplies between a partnership and its partners.

Subdivision 72-A of the GST Act may apply to a supply made between a partnership and its partners where the supply is without consideration. The effect of this subdivision is that such a supply is not stopped from being a taxable supply where the recipient of the supply either is not registered or required to be registered, or acquires the thing supplied otherwise than solely for a creditable purpose.

As Partner X is registered for GST and is occupying the premises solely for a creditable purpose, Division 72 of the GST Act has no application and therefore the GST exclusive market value of the supply is not taken into account to calculate your turnover threshold.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

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 9-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5,

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

A New Tax System (Goods and Services Tax) Act 1999 Division72.