Edited version of private ruling

Authorisation Number: 1011716482637

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST and sale of property

Question 1

Will the sale of a property to a third party by the executor of the deceased estate be subject to goods and services tax (GST) under scenario A, given below? If it is subject to GST, can they apply the margin scheme and who will be liable to pay GST?

Answer

No, the sale of the property to a third party by the executor of the deceased estate will not be subject to GST under scenario A. Where the sale of a property is not subject to GST, the margin scheme has no application and therefore, the question in relation to application of the margin scheme has not been addressed.

Question 2

If the property is sold under scenario B below, will the sale be subject to GST? If so, who will be liable to pay GST?

Answer

No, if the property is sold under scenario B, the sale of the property will not be subject to GST.

Question 3

Is the estate required to be registered for GST?

Answer

No, if the deceased estate is not carrying on an enterprise, it is not required to be registered for GST.

Relevant facts:

Following the death of a family member, probate was granted some time ago.

The estate has a number of beneficiaries, who have inherited a property. The property was originally purchased by the deceased family member jointly with her late husband many years ago. Following the death of the spouse, the abovementioned deceased family member became the sole owner of the property.

The deceased person lived on the property for a long time prior to their death.

Two family members have carried on a business on the property and they have made improvements to the property in the course of carrying on their enterprise. The business has occupied most of the property.

Some of the beneficiaries are acting as the executors of the deceased estate, including one of the owners who carries on the business.

Whilst the first mentioned deceased family member was alive, there was no rental or leasing arrangement between the owner of the property and the owners of the business. The owner did not receive any payment from the two family members for the use of the property by a business.

Following the death of the family member, the estate became the legal owner of the property and the executors of the estate decided to request the owners of the business to pay rent to the estate at the commercial rate, until the property is sold.

The executors of the estate demanded payment of rent, by issuing a demand letter through a solicitor to the owners of the business. However, they have refused to pay any rent, but the executors of the estate did not take any follow up action.

They sought legal opinion on the matter from two legal advisors. According to one opinion, the estate is entitled to receive rental payments from the owners of the business. Whilst the other opinion was that the estate has no such entitlement for rent payments.

The business is still operating on the property and the owners of the business insist that they remain on the property until such time the property is either sold to a third party or they acquire it themselves to continue the business.

The estate of the deceased is not registered for GST; however, the business conducted on this property is registered for GST.

The executors of the deceased estate have been presented with two offers in respect of the property, as provided in the following scenarios.

Scenario A

The executors have received an offer from an unrelated party requesting vacant possession of the land at settlement. As such, the business will not be operating on the property by the time settlement occurs. The land will be developed as a housing estate.

The prospective buyer has indicated that they would be applying the margin scheme and that the sellers need to find out the estate's tax obligations with regard to the sale.

Scenario B

The executors have also received an offer from the owners of the nursery for an equal amount as in scenario A. It is expected that the business would continue on the property. In their offer, they have indicated that the purchase price would include any GST payable.

Reasons for decision

1. Sale of the property to a third party

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

Under section 9-5 of the GST Act, you make a taxable supply if:

· the supply is for consideration,

· it is made in the course or furtherance of an enterprise that you carry on,

· 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 executor of the deceased estate will be selling the property for consideration and the sale of the property is connected with Australia. Hence, the first and third elements above will be satisfied. Therefore, we need to consider whether the sale of the property will be in the course or furtherance of an enterprise that the estate carries on and if it is, whether the estate is required to be registered for GST. If all four above elements are satisfied, then we need to see whether the supply will be GST-free or input taxed.

Are you carrying on an enterprise?

The term 'enterprise' under the GST Act has a wider meaning than the term 'business'.

An enterprise is defined in subsection 9-20(1) of the GST Act and it states, amongst other things, an enterprise is 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

Miscellaneous Taxation Ruling: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the Commissioner's view regarding carrying on an enterprise.

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.

Paragraph 244 of MT 2006/1 states: 

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

 Further, paragraph 259 of MT 2006/1 states:

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The realisation of investment assets does not amount to trade.

In this case, the property was inherited by a number of beneficiaries, following the death of the first mentioned family member. It had been the private residence of the deceased for a very long time. Following the death, now the executors of the deceased estate wish to sell the property. The estate does not use the property for any business, although two family members, who are also the beneficiaries of the estate, have been using the property to carry on a business.

Paragraph 159 of MT 2006/1 states:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Further, paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

The sale of the property in this case will be an isolated transaction. In order to determine whether the sale is of a revenue nature, it is necessary to consider if the activity is of carrying on a business or an adventure or concern in the nature of trade, as opposed to the mere realisation of a capital asset. Assets can change their character but cannot have a dual character at the same time.

You state that neither the deceased, nor the estate used the property for business purposes or received any consideration in respect of the use of the property by the owners of the business, other than taking care of the rates and the land taxes of the property. This arrangement appears to be of a private nature.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making scheme. Paragraph 265 of MT 2006/1 provides that if several of these factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

These factors are as follows:

· there is a change of purpose for which the land is held;

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

· there is a coherent plan for the subdivision of the land;

· there is a business organisation (for example, a manager, office and letterhead);

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

· buildings have been erected on the land.

However, it is also necessary to examine the facts and circumstances of each particular case. This may require consideration of the factors outlined above. There may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In applying the above factors to this case we found that:

· the property was the place of residence of the deceased, and subsequently became an asset of the deceased estate, although it is used by two of her sons for a business purpose;

· the estate of the deceased did not acquire additional land to be added to the original land;

· the estate does not have a coherent plan for the subdivision of the land;

· currently the estate has not received monetary consideration for the lease of the land.

Further, it is accepted that where there is an executor of a deceased estate, the executor's essential function is to call in the deceased's estates, discharge all debts and pay all expenses, and finally distribute the assets in accordance

Having given consideration to the above factors, it is our view that the sale of the property will not be in the course of carrying on an enterprise, or an adventure or concern in the nature of trade by the deceased estate for the purposes of section 9-20 of the GST Act.

Further, under section 23-5 of the GST Act an entity is required to be registered for GST, if:

· the entity carries on an enterprise and

· the entity's GST turnover meets the registration turnover threshold.

On the facts provided, the deceased estate is not carrying on an enterprise; it is not required to be registered for GST.

For an entity to have made a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

In this case, we are of the view that the sale of the property by the executors of the deceased estate will not be in the course or furtherance of an enterprise it carries on. Consequently, as the estate does not meet all the requirements of section 9-5 of the GST Act then the asset that will be sold in the course of administration of the deceased estate will not be considered as a taxable supply.

Accordingly, we advise that GST will not be payable on the sale of the property by the deceased estate under scenario A. Where the supply is not subject to GST, the application of the margin scheme will not be a relevant issue.

2. Sale of the property under Scenario B

For the same reasons discussed above, the sale of the property to the owners of the business under scenario B will fail to satisfy all the requirements of section 9-5 of the GST Act. Therefore it will not constitute a taxable supply and the executors of the deceased estate will not be liable to pay GST in respect of the sale of the property.

3. GST registration

As the deceased estate does not carry on an enterprise for the purposes of section 9-20 of the GST Act, the estate is not required to be registered for GST. (Refer to the reasons for decision discussed above).

Please note that where the stated facts, upon which this ruling is based on, changes to any extent, (for example, if the estate become successful in collecting rental payments from the owners of the nursery for the relevant period), you may lodge another request for a ruling, as you may no longer be able rely on this ruling.