Edited version of private ruling

Authorisation Number: 1011810834448

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Ruling

Subject: GST and going concerns and sales of residential premises

Question

Is GST payable on your sale of property X and property Y?

Answer

GST is not payable on your sale of property X to the extent that the supply was comprised of the residential premises.

GST is payable on your sale of property X to the extent that the supply was comprised of the shop premises.

GST is payable on your sale of property Y.

Relevant facts and circumstances

You purchased two properties in a certain year. Each property was on a separate title. One property was located at a certain address in Australia (property X) and the other was located at a certain address in Australia (property Y).

Property X contains two levels. The ground floor is a commercial shopfront (shop premises). The top level is residential premises. The residential premises are a residence and are not commercial residential premises, such as a hotel.

The only rooms in the residential premises are bedrooms, lounge room, a kitchen and a bathroom.

The residential premises existed when you purchased property X.

You did not substantially renovate the residential premises.

You did not build the residential premises, and the residential premises do not contain a building that you built, to replace premises you demolished on the same land.

Property Y is a vacant block of land which backs onto the rear of property X. Property Y is used as a car park for the shop premises only.

You moved out of the property X premises on a certain date. After this date, you advertised for tenants to rent the two properties.

Several offers to rent were presented to you but you declined them as they were too low.

The two properties were then leased for a certain period commencing on a certain date as part of a condition of sale of the properties to the tenant.

The property sale contracts for both properties were signed on a certain date and settlement took place on a certain date.

Therefore, the tenant who leased the properties from you as a condition of sale was in the process of purchasing the properties from you at the same time.

You were registered for GST when you sold the two properties.

Reasons for decision

Summary

GST is not payable on your sale of property X to the extent that the supply was comprised of the residential premises as this portion of the supply was an input taxed supply of residential premises under subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

GST is payable on your sale of property X to the extent that the supply was comprised of the shop premises as this portion of the supply satisfied the requirements of section 9-5 of the GST Act.

GST is payable on your sale of property Y, as this sale satisfied the requirements of section 9-5 of the GST Act.

Detailed reasoning

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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)

In your case, you satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is, you supplied the two properties in question for consideration when you sold them, and you supplied the properties, by way of sale, in the course or furtherance of a leasing enterprise that you carried on. Your supplies, by way of sale, of the properties were connected with Australia, as the properties are located in Australia. Additionally, you were registered for GST when you sold the properties.

What remains to be determined is whether your sales of the properties were GST-free or input taxed supplies.

Going concerns

A supply of a going concern is GST-free where the requirements of subsection 38-325(1) of the GST Act are satisfied.

Subsection 38-325(2) of the GST Act defines going concern. It states:

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 part of a larger enterprise carried on by the supplier).

Subsection 38-325(1) of the GST Act states:

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.

Paragraph 108 of Goods and Services Tax Ruling GSTR 2002/5 deals with the situation where the owner of an enterprise which consists solely of leasing out real property sells the real property that is subject to the lease to the lessee. It states:

108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

In your case, you were the owner of an enterprise which consisted solely of leasing out real property (the two properties in question). You sold that real property to the lessee. Therefore, you were not able to supply to the purchaser the benefit of the covenants which were necessary for the continued operation of the existing enterprise of leasing that real property. Hence, you did not supply to the purchaser all of the things that were necessary for the continued operation of your enterprise of leasing the real property.

Consequently, you did not satisfy the requirement of paragraph 38-325(2)(a) of the GST Act.

As you did not satisfy the requirements of subsection 38-325(2) of the GST act, you did not supply a going concern to the purchaser. Therefore, your supplies, by way of sale, of the two properties were not parts of a GST-free supply under subsection 38-325(1) of the GST Act.

Sales of residential premises

Subsection 40-65(1) of the GST Act states:

A supply 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 the occupation).

However, 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 (regardless of the term of occupation) before

2 December 1998

Paragraphs 19 and 26 of Goods and Services Tax Ruling GSTR 2000/20 provide the meaning of residential premises and to be used for residential accommodation. Paragraph 19 of GSTR 2000/20 states:

19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

Paragraph 26 of GSTR 2000/20 provides that the physical characteristics common to residential premises that provide accommodation are the premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

Section 40-75 of the GST Act provides the meaning of new residential premises.

Subsection 40-75(1) of the GST Act states:

*Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than

*commercial residential premises) and have not previously been the

subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building, that has been built, to replace

demolished premises on the same land.

Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 clarifies paragraphs 40-75(1)(b) and 40-75(1)(c) of the GST Act. It states:

28. Paragraphs 40-75(1)(b) and (c) raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises. Although the focus is on the building, residential premises that are new residential premises under paragraph 40-75(1)(b) or (c) include both the land and the building. The land and the building components are not to be considered separately when residential premises are sold. Where the criteria in paragraphs 40-75(1)(b) or (c) are satisfied the residential premises are new residential premises, even though, at some point in the past, they may previously have been sold as residential premises, or have previously been the subject of a long-term lease.

Your sale of property X was a sale of real property.

Additionally, to the extent of the residential premises portion of your supply of property X by way of sale, it was a sale of residential premises to be used for residential accommodation for the purposes of the GST Act. This is because to that extent it was a sale of premises that had the physical characteristics of residential premises that provided residential accommodation, that is, the residential premises provided the occupants with sleeping accommodation and at least some basic facilities for day to day living.

Therefore, the requirements of subsection 40-65(1) of the GST Act were satisfied.

The residential premises were not commercial residential premises. Therefore, the exclusion at paragraph 40-65(2)(a) of the GST Act did not apply.

Before your sale of the residential premises, the residential premises had previously been sold as residential premises other than commercial residential premises. Therefore, the requirement of paragraph 40-75(1)(a) of the GST Act was not satisfied.

You did not substantially renovate the residential premises. Therefore, the requirement of paragraph 40-75(1)(b) of the GST Act was not satisfied.

You did not build the residential premises, and the residential premises do not contain a building that you built, to replace premises you demolished on the same land. Therefore, the requirement of paragraph 40-75(1)(c) of the GST Act was not satisfied.

Hence, your sale of the residential premises was not a sale of new residential premises. Therefore, the exclusion at paragraph 40-65(2)(b) of the GST Act did not apply.

Consequently, your sale of the residential premises was an input taxed supply under subsection 40-65(1) of the GST Act. Hence, your sale of the residential premises was not a taxable supply, and therefore, GST is not payable on your sale of the residential premises.

There are no provisions in the GST Act under which your sale of the shop premises was a GST free or input taxed supply. Hence, as all of the requirements of section 9-5 of the GST Act were satisfied, your sale of the shop premises was a taxable supply, and therefore, GST is payable on your sale of the shop premises.

There are no provisions in the GST Act under which your sale of property Y was a GST-free or input taxed supply. Hence, as all of the requirements of section 9-5 of the GST Act were satisfied, your sale of this property was a taxable supply, and therefore, GST is payable on your sale of this property.

In accordance with paragraph 16 of Goods and Services Tax Ruling GSTR 2001/8, your sale of property X was a mixed supply as it was a supply that has to be separated or unbundled as it contained separately identifiable taxable and non-taxable parts that need to be individually recognised, that is, the shop premises (taxable) and the residential premises (non-taxable).

Paragraph 116 of GSTR 2001/8 explains how to calculate the GST payable on a mixed supply. It states:

116. When you have apportioned the consideration for a mixed supply, you can calculate the GST payable as either:

· 10% of the value of the taxable part; or

· 1/11 of the price (or consideration) for the taxable part.

Therefore, you must apportion the consideration for your sale of property X between the shop premises, which is the taxable part of the supply, and the residential premises, which is the non-taxable part of the supply. Then you can calculate GST by multiplying the value of the taxable part by 10% or dividing the consideration for the taxable part by 11.

Paragraph 26 of GSTR 2001/8 explains how to apportion the consideration for a mixed supply. It states:

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.

The GST payable on your sale of property Y is 10% of the value of the supply or 1/11^th of the consideration you received for this sale.