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Ruling

Subject: GST and sale of real properties

Questions

1. Will the sale of the properties by you be a taxable supply?

2. If the purchaser is registered for the goods and services tax (GST) or required to be registered for GST, and there is an agreement in writing by you and the purchaser that the supply of the properties is of a going concern, will your supply of the properties be a supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answers

1. No. The sale of the properties by you will not be a taxable supply and therefore you will not be liable for GST.

2. Based on the information received, if the purchaser is registered for GST or required to be registered for GST, and there is an agreement in writing by you and the purchaser that the supply of the properties is of a going concern the supply of the properties, your supply of the properties will not be of a going concern under section 38-325 of the GST Act as you are not registered for GST.

However, if you register for GST, the supply of the properties will be of a going concern under section 38-325 of the GST Act as all the requirements in that section will be satisfied based on the information you supplied.

Relevant facts and circumstances

You have an Australian business number (ABN) and are not currently registered for GST. You own several properties in Australia for rental purposes. You are a salary and wage earner and you are not carrying on any other business in addition to the leasing enterprise.

You advised that the properties are not new residential premises as there were existing houses on each block at the time when you purchased the properties. They are residential premises and you have not carried out any substantial renovations to the properties. The annual turnover in respect of the rental income received from the properties was over $75,000.for the last financial year.

Most of the properties are currently tenanted pursuant to residential tenancy agreements.

You intend to sell all the properties to a purchaser. There will be a separate contract for each property. However, all the contracts will be interdependent. The purchaser is currently not registered for GST.

The properties will be subject to a call option in favour of the purchaser. You advised that the option agreements are unavailable as they have not yet been prepared.

You have supplied the draft contracts (contracts) for each property.

Reasons for decisions

Question 1

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act states:

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.

(* denotes a term defined in section 195-1 of the GST Act)

For the sale of the properties to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied.

Based on the information provided, you have satisfied the requirements in paragraphs 9-5(a) to

9-5(c) of the GST Act as follows:

· the properties will be sold for consideration

· the sale will be made in the course or furtherance of a leasing enterprise that you carry on, and

· the sale will be connected with Australia as the properties are located in Australia.

You are not registered for GST. Therefore we have to consider whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act.

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold of $75,000.

Subsection 188-10(2) of the GST Act states:

You have a GST turnover that does not exceed a particular *turnover threshold if: 

(a) 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

(b) your projected GST turnover is at or below the turnover threshold.

Subsection 188-15(1) of the GST Act states:

Your current GST turnover at a time during a particular month is 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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Subsection 188-20(1) of the GST Act states:

Your projected GST turnover at a time during a particular month is 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: 

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Accordingly, supplies that are input taxed are not included when calculating your current or projected GST turnover.

Consideration from leasing enterprise

In your case, you have been leasing the residential properties for a number of years and your annual turnover in respect of the rental income received from the properties was over $75,000 for the last financial year.

Section 40-35 of the GST Act deals with input taxed supply of residential rent.

Paragraph 40-35(1)(a) of the GST Act provides that 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 the supply is of residential premises (other than commercial residential premises).

Therefore the consideration received from the supplies of leasing the properties are excluded when calculating both the current and projected GST turnover.

What remains to be considered are whether the proceeds from the sale of the properties will lead to your current and projected GST turnover exceeding the GST registration turnover threshold.

Consideration from sale of properties

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.

However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises.

You advised that the properties are not commercial residential premises and have been used for residential accommodation. Further, you advised that the properties are not new residential premises and you have not carried out any substantial renovations to the properties. Therefore, the sale of the properties will be input taxed as all the conditions in section 40-65 of the GST Act are met.

Therefore, the proceeds for the sale of the properties will be excluded when calculating your current and projected GST turnover. Hence, your GST turnover will not meet the registration

turnover threshold and you will not be required to be registered for GST. Therefore, paragraph

9-5(d) of the GST Act is not satisfied.

Accordingly, the sale of the properties by you will not be a taxable supply since all the requirements in section 9-5 of the GST Act will not be satisfied and therefore you will not be liable to pay GST on the sale of the properties.

As you are not required to be registered for GST and the supply of the properties by you is not a taxable supply, the issue on whether the supply is GST-free or input taxed will have no application in your case as the supply of the properties are not subject to the GST Act.

Question 2

From the information received, you are not registered for GST. Further, as discussed in question 1 you will not be required to be registered for GST. Accordingly, your supply of the properties will not be subject to the GST Act. Hence, you are not required to consider section 38-325 of the GST Act when selling the properties.

Additional Information

1. If you choose to register for GST

As discussed in question 1, you are not required to be registered for GST. However, you can choose to register for GST as there is no provision in the GST Act to disallow an entity to register for GST if it carries on an enterprise.

By registering for GST, you will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act and the sale of the properties will be a taxable supply to the extent that they are not input taxed or GST-free.

Input taxed supply

As discussed in question 1, the sale of the properties will be an input taxed supply under section 40-65 of the GST Act.

GST-free supply

A supply of a going concern is GST-free under section 38-325 of the GST Act provided the conditions in section 38-325 of the GST Act are satisfied, including the written agreement of both parties.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2) A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Supply of a going concern

The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act. For the purposes of the definition of a 'supply of a going concern' it is not the supply itself that must satisfy the conditions in subsection 38-325(2) of the GST Act, but the arrangement under which the supply is made. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise. That is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act (the 'identified enterprise').

In this case, the identified enterprise is one of residential leasing and although there are a number of separate sale contracts relating to the supply of the properties, we consider that the supply is made under a single arrangement since the contracts will be interdependent.

All things necessary for the continued operation of the enterprise

In order to satisfy the conditions in paragraph 38-325(2)(a) of the GST Act, under the terms of this arrangement, the supplier (you) must supply to the recipient (purchaser) all of the things that are necessary for the continued operation of your leasing enterprise. The elements of paragraph

38-325(2)(a) of the GST Act must be satisfied from the perspective of you, the supplier.

Generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

Therefore, to meet the requirement in paragraph 38-325(2)(a) of the GST Act, you will be required to supply to the purchaser the property and the benefit of the covenants under the existing lease agreement.

In your case, you will sell the properties with the lease intact except the ones which involve verbal tenancy.

Goods and Services Tax Ruling 2002/5 (GSTR 2002/5) explains what is a supply of a going concern for the purposes of Subdivision 38-J of the GST Act. This ruling can be viewed or downloaded at our website www.ato.gov.au

Paragraphs 69 and 70 of GSTR 2002/5 provide an example of leasing enterprise without written lease agreement. It states that the supplier can supply the enterprise of leasing of the premises to the purchaser as a going concern, provided the current tenancy has not terminated and will continue. You advised that the verbal tenancy agreement have not been terminated and the sale of the property will be subject to these verbal tenancies.

Accordingly, you will supply all things that are necessary for the continued operation of the leasing enterprise and as such the purchaser will be able to continue the enterprise of leasing. Hence, you will supply to the purchaser all of the things necessary for the continued operation of the leasing enterprise under paragraph 38-325(2)(a) of the GST Act.

Further, you will continue the leasing enterprise until the date of settlement of the sale contracts. That is, the sale of the properties is subject to the existing tenancy on the day of settlement. Hence, we consider that you will be carrying on the leasing enterprise until the day of the supply under paragraph 38-325(2)(b) of the GST Act.

Accordingly, the sale of the properties will be a supply of a going concern under subsection

38-325(2) of the GST Act.

GST-free supply of a going concern

For the supply of the leasing enterprise to be a GST-free supply of a going concern it must also satisfy the requirements of subsection 38-325(1) of the GST Act.

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or is required to be registered for GST. A recipient that is required to be registered in respect of the enterprise on and from the date of the supply will satisfy the requirement in paragraph 38-325(1)(b) of the GST Act. If the recipient is not required to be registered, but chooses to register to obtain the benefit of the provision, the mere lodging of an application to be registered will not satisfy the requirements of paragraph 38-325(1)(b) of the GST Act. The effective date of registration of the recipient must be on or before the day of the supply.

Accordingly, where you are registered for GST and based on the information received, the supply of the properties will be a GST-free supply of a going concern provided the purchaser is registered for GST on the date of settlement and both you and the purchaser will agree in writing that the supply of the properties with the lease intact is a supply of a going concern.

2. Supplies that are both GST-free and input taxed

Section 9-30 of the GST Act provides a priority rule for supplies that are both GST-free supplies under Division 38 of the GST Act and input taxed supplies under Division 40 of the GST Act.

Under subsection 9-30(3) of the GST Act, where a supply is both GST-free and input taxed, the supply will be GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed.

Subdivisions 40-B (residential rent) and 40-C (residential premises) of the GST Act do not require you to choose for the supply to be input taxed. As such, the supply of the properties will be GST-free provided all the requirements in section 38-325 of the GST Act are satisfied and you are registered for GST.

Please note that Input tax credits relating to a supply, which would have otherwise been input taxed but is GST-free because of the operation of the Subdivision 38-J of the GST Act, are available to the extent that they relate to the supply under the arrangement. This means that input tax credits relating to the acquisition and use of the thing supplied will not be available such as acquisitions made in the course of the leasing activities. However, those relating to the supply of the thing under the arrangement such as legal services are available.

Paragraphs 202 to 204 of GSTR 2002/5 provide an example of the availability of input tax credits for a supply of a going concern which would otherwise be input taxed.

3. Supply of a call option over properties

The supply of the call option is a supply of a right to receive a supply of a property and will be input taxed if the supply is an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

Alternatively, the supply of the call option can be a supply of a right to receive a supply of a property which will be GST-free if the supply is a GST-free supply under paragraph 9-30(1)(b) of the GST Act.