Edited version of private ruling

Authorisation Number: 1011724978935

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Ruling

Subject: GST on the supply of a rural property

Question 1

Was the supply of a rural property (the property) in the recent year taxable?

Answer

Yes, the supply of the property in the recent year is partly taxable and partly input taxed. Therefore it is a mixed supply for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

You incorporated with the intention of carrying on an enterprise.

You acquired a rural property comprising of a residential premise located on a number of hectares of land.

The previous owner was required to dismantle and remove machinery relating to the enterprise they carried on.

In conjunction with an affiliated entity your intent was to build the infrastructure to carry on your enterprise.

You applied and received an Australian Business Number and became registered for GST.

In a particular year you applied for development approval with the local council to use the land for a particular use. Approval was declined.

A lease agreement was entered into after the property was acquired. The residential premise located on the property was leased to a third party for an amount of $XXX per week.

You advised that the tenants had access to the residential premises only. The lease agreement outlines that the tenants were responsible only for the immediate house yard.

The lease was renewed for a further 12 months by the same parties..

In the recent year you entered into a contract to sell the property.

The terms and conditions for the contract of sale of the house and land states:

GST: Where used in this Contract has the meaning used in the A New Tax System Goods and Services Tax Act 1999 and GST includes any applicable rulings issued by the Commissioner.

The contract of sale makes no further references to GST.

The property proceeded to settlement.

The house situated on the property was more than five years old at the time of settlement.

Reasons for Decision

A supply is taxable when it satisfies section 9-5 of the GST Act. This section provides that you make a taxable supply if:

· the supply is for consideration; and

· the supply is made in the course or furtherance of an enterprise that you carry on; and

· the supply is connected with Australia; and

· you are registered for required to be registered

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

In relation to your case, you have supplied the property and received consideration. Therefore, subsection 9-5(a) of the GST Act is satisfied. Furthermore, as the property is located in Australia, its supply is connected with Australia and therefore subsection 9-5(c) of the GST Act is satisfied. Given you are registered for GST, then subsection 9-5(d) of the GST Act is also satisfied. Thus it is necessary to establish if the supply of the property was made in the course or furtherance of an enterprise that you carry on in order to determine if the supply was a taxable supply.

The ATO view on the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number is provided by Miscellaneous Taxation Ruling MT 2006/1.

Goods and Services Tax Determination GSTD 2006/6 explains at paragraph1 that A New Tax System (Australian Business Number) Act 1999 (ABN Act) uses the definition of entity and enterprise that are contained in the GST Act. It goes on to say that the principles in MT 2006/1 apply equally to the terms entity and enterprise in the GST Act. Thus MT 2006/1 can be used to discuss your case.

Paragraphs 120 to 139 of MT 2006/1 explain when an enterprise is being carried on for the purposes of the ABN (and GST) Act. Paragraph 120 of MT 2006/1 states in part:

In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. The definition ensures that activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

Paragraphs 121 and 122 of MT 2006/1 further explain that given an identical definition of 'carrying on' an enterprise can be found in section 195-1 of the GST Act, it follows that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

Paragraph 123 of MT 2006/1 states:

In the Commissioner's view the term, 'doing anything in the course of the commencement....of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

Thus the above paragraph makes it clear that the fact that an ongoing enterprise does not eventuate is not a determinative factor in deciding whether one has commenced.

Paragraph 124 of MT 2006/1 states:

If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated.

In this case the property was acquired as part of your enterprise activities. Also as part of those activities, you applied for the development approval with the local authority and applied for and received an ABN and GST registration. Given these considerations we find that the disposal of the property was part of your enterprise and therefore subsection 9-5(b) of the GST Act is satisfied. This means the supply of the property is subject to GST except to the extent that it is GST-free or an input taxed supply.

There is no legislative provision in this case that allows the supply of the property to be GST-free, however consideration needs to be given to whether the supply is input taxed.

Subsection 40-65(1) of the GST Act explains that to the extent that the property is residential premises to be used predominantly for residential accommodation, then it will be an input taxed supply.

Subsection 40-65(2) of the GST Act states

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.'

Guidance on the Australian Taxation Office's (ATO) position of residential premises, including new and commercial, can be found in Goods and Services Tax Ruling GSTR 2000/20 concerning commercial residential premises which is available on our website, at www.ato.gov.au.

Based on your advice the premises are not commercial in nature nor are they new residential premises and thus the exclusion contained in subsection 40-65(2) of the GST Act does not apply. The lease agreement confirms that the premises were residential in nature. Thus the supply of the house is not taxable as it is an input taxed supply.

To determine how much land forms part of the residence, it will be necessary to examine the circumstances of each case to determine what part of the land is actually used for residential purposes. The value of this amount of land can then be included in the value ascribed to the residence.

We understand that the rental agreement in place provides the tenant with the right to use the residential premises. To what extent any immediately surrounding land is available for the tenant to use has not been disclosed.

Thus an apportionment is required to determine the value of the land that is not part of the rental agreement as compared to the house/land the tenant could use at the time that the property was sold. GSTR 2001/8 provides the ATO's view on apportioning the consideration for a supply that includes taxable and non-taxable parts. Paragraphs 26, 27, and 29 of GSTR 2001/8 state:

26. You can use any reasonable method to apportion the consideration for a mixed supply. The method you use must be supportable in the particular circumstances.

27. You should keep records that explain the method you use to apportion a mixed supply.

29. To work out the value of the taxable part of a mixed supply, you identify the parts of the supply and apportion the consideration to each of the parts. The value of the taxable part is 10/11 of the consideration for the taxable part, and the GST payable is equivalent to 1/11 of that consideration.

Paragraphs 114 to 119 of GSTR 2001/8 explain how to calculate the GST payable on the taxable part of a mixed supply. This ruling can be accessed at the ATO website www.ato.gov.au.

In summary

We find that the sale of the property was a mixed supply with the land being subject to GST while the residential premise was not. We recommend that the relevant activity statement is revised by you under the principle of self assessment.