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Ruling

Subject: GST and the sale of properties

Issue 1

Question 1

Is the sale of residential premises at property A by you a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the sale of residential premises at property A is not a taxable supply under section 9-5 of the GST Act and therefore not subject to GST.

Question 2

Is the sale of a surrounding farm land at property A by you a taxable supply under the GST Act?

Answer

No, the sale of the surrounding farm land at property A is not a taxable supply as you do not satisfy the requirement of paragraph 9-5(d) of the GST Act and your sale of the surrounding farmland at property A is not subject to GST.

Issue 2

Question 1

Is the sale of residential premises at property B by you a taxable supply?

Answer

No, the sale of residential premises at property B is not a taxable supply under section 9-5 of the GST Act and therefore not subject to GST.

Question 2

Is the sale of a surrounding farm land at property B by you a taxable supply under the GST Act?

Answer

No, the sale of the surrounding farm land at property B is not a taxable supply as you do not satisfy the requirement of paragraph 9-5(d) of the GST Act and therefore, your sale of the surrounding farmland at property B is not subject to GST.

Relevant facts and circumstances

You (Person A and Person B) are two individuals who own farming properties ('properties') as joint tenants. You are not registered for goods and services tax (GST) nor have an Australian business number (ABN).

The properties were transferred to you under the intergenerational land transfer provisions. The properties have always been used by Person A to operate a farming business as a sole trader. Person B as a part owner of the properties has not operated the farm in their own right or in a partnership with Person A. Person A effectively leases half of the land from Person B for no consideration.

You are in the process of selling the properties to a company who neither intends to carry on a farming business on the properties nor leasing the properties to the vendor for the farming business.

Property A has a house and farm yard. The house on property A is rented out to a third party as residential premises.

Property B has a house, double garage, workshop, carport, various sheds and a farm yard. You and your children occupied the house on property B as your main residence and used the farm for your personal enjoyment as well as Person A operating a farming business for income purposes. The farming business is not being operated together as a partnership. The only business operated by either party is the farm, which is operated by Person A as a sole trader. Person B and your children occasionally help out on the farm.

The land has been used in a farming operation by Person A since they acquired it. Person A carries out all farming activities.

Person A has a separate bank account for the farming business in their own name and the money is banked into Person A's bank account. All the farming expenses are paid from this account. The farming business bank account pays for its own liabilities.

Person A pays for all the expenses relating to the property, including council rates, however, they do not specifically pay Person B any set amount of rent for using part of the property for business. Tax deductions have been claimed in Person A's tax return for expenses incurred in relation to the property.

There was no business organisation set up for the farming business. There is no business plan for the farming business.

There is no lease agreement between you and Person A.

You have done some renovation on both properties. However, there were no substantial renovations done in last five years.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d)

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 40-35

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 72-5

A New Tax System (Goods and Services Tax) Act 1999 Section 72-10

A New Tax System (Goods and Services Tax) Act 1999 Section 72-70

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decisions

GST is payable on a taxable supply. Under section 9-5 of the GST Act, 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.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly.

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

We first need to examine whether the properties will be provided by each individual separately or by a partnership for GST purposes. Based on the facts provided, the properties are owned as joint tenants by two individuals (Person A and Person B).Therefore, the entity will be the partnership of Mr and Person B which will be making the supply of the properties.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the property.

Issue 1

The sale of property A

Based on the facts provided, your supply of property A satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the properties are located in Australia respectively.

Therefore, we need to consider:

· whether the sale of property A is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

· whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

· in the form of a business

· 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.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1 and Goods and Services Tax Determination GSTD 2006/6 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in these rulings have been applied in your circumstances.

You advised us that you are selling property A which is used partly for residential leasing purposes and partly for the farming business. Therefore we need to consider whether your leasing part of property as residential premises and part of the property for farming activities constitute an 'enterprise' for the purposes of section 9-20 of the GST Act.

Question 1

The sale of the residential premises at property A

Whether the sale of the residential premises at property A made in the course or furtherance of an enterprise that you carry on

Based on the facts provided, you have been leasing the residential premises at property A for several years to a third party on a continuous basis. Therefore, we consider that your leasing activities constitute an enterprise for the purposes of section 9-20 of the GST Act and you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act. Accordingly, the sale of the residential premises at property A satisfies the requirement of paragraph 9-5(b) of the GST Act.

Now we need to consider whether you are registered or required to be registered for GST and satisfy the requirement of paragraph 9-5(d) of the GST Act.

As you (the partnership) are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the property.

Whether you are required to be registered for GST

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *annual turnover meets the *registration turnover threshold.

The registration turnover threshold for an entity (other than a non-profit entity) is $75,000.

As already determined above, your leasing activities constitute an enterprise for the purposes of section 9-20 of the GST Act. Therefore, you meet the requirement in paragraph 23-5(a) of the GST Act.

The meaning of annual turnover is explained in Division 188 of the GST Act. Subsection 188-10(1) of the GST Act states:

You have an annual turnover that meets a particular turnover threshold if:

· your *current annual turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected annual turnover is below the turnover threshold; or

· your projected annual turnover is at or above the turnover threshold.

Section 188-15 of the GST Act defines 'current annual turnover'. This section provides that your current annual 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.

Section 188-20 of the GST Act defines 'projected annual turnover'. This section provides that your projected annual 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.

In working out both your current and projected annual turnover, you should disregard:

· supplies that are input taxed

· supplies that are not for consideration (and are not taxable supplies under section 72-5)

· supplies that are not made in connection with an enterprise that you carry on

· any supply that is not connected with Australia

· any supply that is connected with Australia because of paragraph 9-25(5)(c) of the GST Act, and

· any supply (other than a supply covered above):

o of a right or option to use commercial accommodation in Australia

o that is not made in Australia, and

o that is made through an enterprise that the supplier does not carry on in Australia.

Based on the facts provided, your only enterprise is the leasing of the residential premises at property A. We therefore need to determine whether the income from leasing and sale of this property is included in working out your annual turnover.

Input taxed

Division 40 of the GST Act covers supplies, including the transfer of land, that are input taxed and are therefore not taxable supplies. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to GST credits for acquisitions that relate to making the supply.

Leasing of the property

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).

From the facts provided, you are leasing the residential property. As the supply of the residential property by way of lease is input taxed, the values of all the supplies from leasing the residential property would be excluded from calculating both the current and projected annual turnover. Therefore, the income from leasing of the residence on the property is excluded in working out your annual turnover.

Sale of the property

Section 40-65 of the GST Act deals with the sale of residential premises.

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

'Residential premises' is defined in section 195-1 of the GST Act as land or a building that:

(a) is occupied as a residence or for residential accommodation, or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

However, subsection 40-65(2) of the GST Act states that a sale of residential premises is not input taxed to the extent that the premises are:

(a) commercial residential premises, or

(b) new residential premises other than those used for residential accommodation before 2 December 1998.

Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises at paragraph 160 states:

Commercial residential premises

160. commercial residential premises means:

(a) a hotel, motel, inn, hostel or boarding house; or

(b) premises used to provide accommodation in connection with a school; or

(c) a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire; or

(d) a ship that is mainly used for *entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport; or

(da) a marina at which one of more of the berths are occupied, or are to be occupied, by ships used as residences; or

(e) a caravan park or a camping ground; or

(f) anything similar to residential premises described in paragraphs (a) to (e).

However it does not include premises to the extent that they are used to provide accommodation to students in connection with an education institution that is not a school.

Based on the facts provided, property A does not fall into any of the categories mentioned above and therefore, is not commercial residential premises under the GST Act.

Subsection 40-75(1) of the GST Act explains when residential premises are new residential premises. New residential premises are residential premises that:

· have not previously been sold as residential premises and have not previously been the subject of a long-term lease

· 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.

The residential premises on property A has not been renovated repaired or modified in any substantial way. Furthermore, the residential property does not satisfy the other requirements in subsection 40-75(1) of the GST Act. Hence, the residential property is not new residential premises under subsection 40-75(1) of the GST Act.

Therefore, the sale of the residential premises at property A is input taxed under section 40-65 of the GST Act. As such, the sale of the residential premises at property A is excluded from the calculation of your current and projected annual turnover.

As the values of the supplies from the leasing and sale of the residential premises are disregarded when calculating your current annual turnover and projected annual turnover, your annual turnover does not meet the registration turnover threshold of $75,000. As such, the requirement in paragraph 23-5(b) of the GST Act is not satisfied. You are therefore not required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act is not satisfied.

Conclusion

Based on the facts of your case, the sale of the part of property A which is used as residential premises does not meet all the requirements listed in section 9-5 of the GST Act. Therefore, the sale of the residential premises at property A is not a taxable supply and the sale is not subject to GST.

Question 2

The sale of the surrounding farm land at property A

For the sale of the surrounding farm land at property A to be taxable all the requirements under section 9-5 of the GST Act need to be satisfied.

Your supply of the surrounding farm land at property A satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as, the supplies that you make are for consideration and the property is located in Australia respectively.

Therefore, we need to consider whether your sale of the surrounding farm land at property A is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Whether the sale of the surrounding farm land at property A made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b)

You advised us that you have provided the surrounding farm land at property A to Person A to operate their farming business since the property was transferred to you. You have not charged any rent to Person A for using the property for the farming business. However Person A pays all expenses relating to the property, including council rates. We consider that the payment of all the expenses including council rates by Person A on a regular basis for use of the farmland is consideration for a grant of interest in property.

Hence, it is considered that you have been carrying on an enterprise of leasing property as defined in section 9-20 of the GST Act. Therefore, the sale of the surrounding farm land at property A is in the course of the enterprise, and paragraph 9-5(b) of the GST Act is satisfied.

We now need to consider if you are registered or required to be registered for GST and satisfy the requirement of paragraph 9-5(d) of the GST Act.

As you (the partnership) are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the property.

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The registration turnover threshold for entities other than non-profit entities is $75,000.

As already determined above, your leasing of the farm land constitute an enterprise for the purposes of section 9-20 of the GST Act. Therefore, you meet the requirement in paragraph 23-5(a) of the GST Act. We need to consider if your annual turnover meets the registration turnover threshold.

Where there is no consideration or inadequate consideration for the supply of property, the entity is unable to satisfy the requirements of paragraph 23-5(b) of the GST Act.

You advised us that you have not charged any rent to Person A for using the property for the farming business. However Person A pays all the expenses relating to the property, including council rates. The payment of such expenses by Person A is consideration for your supply of the use of the land. The total amount of the payment made by Person A for the rent and other expenses of property are inadequate and below $75,000. As such, under the basic rules of the GST you do not satisfy the requirement of paragraph 23-5(b) of the GST Act.

Division 72 of the GST Act

In calculating current and projected turnover, section 188-15 and section 188-20 of the GST Act excludes supplies that are made for no consideration except those supplies without consideration that are taxable under section 72-5 of the GST Act.

From the facts provided, you have held the property for a number of years and during this period you have supplied the farm land to Person A to be used for their farming business. You advised that you did not collect rent from Person A. However, Person A has contributed financially to the general maintenance of the property. Therefore, we need to consider if Division 72 of the GST Act applies to your situation.

Where supplies are made to an associate for no consideration or inadequate consideration, the special rules in Division 72 of the GST Act may bring such supplies within the GST system. Division 72 ensures that supplies to, and acquisitions from your associates without consideration are brought within the GST system and that the supplies to your associates for inadequate consideration are properly valued for GST purposes. As such, we need to consider if Division 72 of the GST Act has any application in your case.

The term 'associate' is defined in section 195-1 of the GST Act and it has the meaning given by section 318 of the Income Tax Assessment Act 1936. Accordingly, an associate of a partnership includes a partner in the partnership. Therefore, Person A would meet the definition of an associate for the purposes of Division 72 of the GST Act.

Under section 72-5 of the GST Act, the fact that there is no consideration for a supply does not prevent it from being a taxable supply. Such supplies can be taxable if the supply is made to an associate of the supplier and:

· your associate is not registered or required to be registered for GST; and

· your associate acquires the thing supplied otherwise than solely for a creditable purpose.

Section 72-10 of the GST Act deals with the value of taxable supplies made without consideration. It states that where a supply to your associate without consideration is a taxable supply, its value is the GST exclusive value of the supply.

However, Division 72 of the GST Act only applies if the recipient of the supply is not entitled to a full input tax credit, because they are not registered or required to be registered or if the acquisition was not solely for a creditable purpose.

Based on the facts provided, Person A is registered for GST as a sole trader. Further, the interest in the farm land was acquired by Person A for a creditable purpose as they carries on specific farming activities on the property. Therefore, Division 72 of the GST Act does not apply in your case to deem an appropriate market value of consideration for your supply to the partner (Person A).

Therefore, considering the expenses such as council rate and other expenses of the property, your current and projected annual turnover are below the registration turnover threshold of $75,000 and you do not satisfy the requirements of paragraph 23-5(b) of the GST Act.

As you do not satisfy the requirements of section 23-5 of the GST Act, you are not required to be registered for GST.

Accordingly, the supply of the surrounding farm land does not satisfy the requirements of paragraph 9-5(d) of the GST Act. As all the requirements of section 9-5 of the GST Act are not satisfied, the sale of the surrounding farm land at property A is not a taxable supply and the sale is not subject to GST.

Issue 2

The sale of property B

Similar to the reasons for decisions to issue 1, your supply satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as, the supplies that you make are for consideration and the properties are located in Australia respectively.

Therefore, we need to consider:

· whether your sale of property B is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

· whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Question 1

The sale of residential premises at property B

Are you carrying on an enterprise?

Goods and Services Tax Determination GSTD 2000/8 considers what is an 'enterprise' for the purposes of the GST Act.

In relation to the words 'in the form of an adventure or concern in the nature of trade', paragraphs 8 and 9 of GSTD 2000/8 state:

8. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. Isolated transactions with commercial characteristics fall into this category. However, it does not extend to the mere realisation of investment or private assets such as the family home and private cars.

9. The words in the form of also extend the meaning of an adventure or concern in the nature of trade so that it covers activities undertaken in the form of trade that, had they been done for profit, would satisfy the ordinary concept test of a business or an adventure in the nature of trade.

You advised us that, you are selling property B which is used partly for residential purposes and partly for a farming business. Therefore we need to consider whether a part of the property used for residential premises and a part for farming activities constitute an 'enterprise' for the purposes of section 9-20 of the GST Act.

The question is whether the activity of selling the residential premises at property B is in the form of an adventure or concern in the nature of trade.

You have occupied the residential premises at property B as your principal place of residence since it was transferred to you. The property was never rented or made available for rent.

On the basis of these facts, it is considered that the sale of the residential premises at property B is not an adventure or concern in the nature of trade and you are not carrying on an enterprise. Therefore, the sale of the residential premises at property B does not satisfy the requirement in paragraph 9-5(b) of the GST Act. Since the sale of the residential premises at property B does not satisfy paragraph 9-5(b) of the GST Act, there is no need to consider if you are required to be registered under paragraph 9-5(d) of the GST Act in relation to this sale.

Accordingly, as all the requirements of section 9-5 of the GST Act are not satisfied, the sale of the residential premises at property B is not a taxable supply and the sale is not subject to GST.

Question 2

The sale of the surrounding farm land at property B

For the sale of the surrounding farm land to be taxable all the requirements under section 9-5 of the GST Act need to be satisfied.

Your supply satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as, the supplies that you make are for consideration and the property is located in Australia respectively.

Therefore, we need to consider whether your sale of the surrounding farm land at property B is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and whether you are registered or required to be registered for GST (paragraph 9-5(d) of the GST Act).

Whether the sale of the surrounding farm land at property B made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b)

Similar to the reasons for decisions to question 2 of issue 1, on the basis of the facts, it is considered that you have been carrying on an enterprise of leasing property as defined in section 9-20 of the GST Act. Therefore, the sale of the surrounding farm land at property B is in the course of the enterprise, and paragraph 9-5(b) of the GST Act is satisfied.

We now need to consider if you are required to be registered for GST.

As you (the partnership) are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the property.

Are you required to be registered for GST?

As already determined above, your leasing of the farm land constitute an enterprise for the purposes of section 9-20 of the GST Act. Therefore, you meet the requirement in paragraph

23-5(a) of the GST Act. We need to consider if your annual turnover meets the registration turnover threshold.

You advised us that you have not charged any rent to Person A for using the property for the farming business. However Person A pays all the expenses relating to the property, including council rates. The payment of such expenses by Person A is consideration for your supply of the use of the land.

Based on the facts, the total amount of the payment made by Person A for rent and other expenses of the property is inadequate and below $75,000. Therefore, under the basic rules of the GST you do not satisfy the requirement of paragraph 23-5(b) of the GST Act. As such, the supply is not included in turnover calculation and the requirement of paragraph 23-5(b) of the GST Act is not met.

As discussed in reasons for decisions to issue 1 question 2, where supplies are made to an associate for no consideration or inadequate consideration, the special rules for the GST in Division 72 of the GST Act may bring such supplies within the GST system.

As previously discussed, Division 72 of the GST Act does not apply in your case to deem an appropriate market value of consideration for your supply to the partner. Therefore, the requirement of paragraph 23-5(b) of the GST Act is not met and your current and projected annual turnover is below the registration turnover threshold. Accordingly, your sale of the surrounding farm land at property B does not satisfy the requirements of section 23-5 of the GST Act.

As you do not satisfy the requirements of section 23-5 of the GST Act, you are not required to be registered for GST. Therefore, the sale of the surrounding farm land does not satisfy the requirements of paragraph 9-5(d) of the GST Act. Accordingly, as all the requirements of section

9-5 of the GST Act are not satisfied, the sale of the surrounding farm land at property B is not a taxable supply and the sale is not subject to GST.