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Ruling

Subject: goods and services tax (GST) and sale of property

Question 1

Will GST be payable on your sale of the property?

Answer

GST will be payable on your sale of the property unless the purchaser is registered or required to be registered for GST and you and the purchaser agree in writing that your sale of the property is the supply of a going concern.

Question 2

Will the margin scheme apply to your sale of the property?

Answer

If GST is payable, you and the purchaser may choose to use the margin scheme.

If you and the purchaser do not choose to use the margin scheme, the margin scheme will not apply.

The margin scheme will not be relevant if GST is not payable on your sale of the property.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You purchased a vacant block of land from X. The property is located in Australia.

The margin scheme was used to calculate GST on the sale of the property to you.

This land was subsequently leased back to X for a number of years, ending on a date in the future.

You will sell the property in order to pay taxes.

The property is still vacant land.

You will transfer the lease to the purchaser.

A farming business was not carried on on the property while you owned it.

Our records reveal that you have not been a member of a GST group or GST joint venture.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 section 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1A)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

Reasons for decisions

Question 1

Summary

GST will not be payable on your sale of the property if the purchaser is registered or required to be registered for GST and you and the purchaser agree in writing that your sale of the property is the supply of a going concern, as the sale will be a GST-free supply of a going concern under such circumstances.

If the sale of the property is not a GST-free supply of a going concern, GST will payable on the sale, as all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) will be satisfied under such circumstances.

Detailed reasoning

GST is payable by you where you make a taxable supply.

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 will satisfy the requirements of section 9-5 of the GST Act. That is, you will supply the property by way of sale for consideration and in the course or furtherance of your property leasing enterprise. Additionally, the sale will be connected with Australia as the property is located in Australia and you are registered for GST.

There are no provisions in the GST Act under which your sale of the property will be input taxed.

Therefore, what remains to be determined is whether your sale of the property will be a GST-free supply.

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.

You will sell a leased property to the purchaser and you will transfer to the purchaser your interest in the lease. Hence, you will supply all of the things necessary for the continued operation of the property leasing enterprise to the purchaser. Therefore, you will satisfy the requirement of paragraph 38-325(2)(a) of the GST Act.

You will carry on the leasing enterprise up to the time of your sale of the property. Therefore, you will satisfy the requirement of paragraph 38-325(2)(b) of the GST Act.

As you will satisfy all of the requirements of subsection 38-325(2) of the GST Act, you will make a supply of a going concern.

You will supply the property for consideration when you sell it. Therefore, you will satisfy the requirement of paragraph 38-325(1)(a) of the GST Act.

If the purchaser is registered or required to be registered for GST, you will satisfy the requirement of paragraph 38-325(1)(b) of the GST Act.

If you and the purchaser agree in writing that your sale of the property is the supply of a going concern, you will satisfy the requirement of paragraph 38-325(1)(c) of the GST Act.

Therefore, if the purchaser is registered or required to be registered for GST and you and the purchaser agree in writing that your sale of the property is the supply of a going concern, you will satisfy all of the requirements of subsection 38-325(1) of the GST Act. Under such circumstances you will make a GST-free supply of a going concern under subsection 38-325(1) of the GST Act. Hence, under such circumstances, you will not make a taxable supply of the property, and therefore GST will not be payable on the sale.

There are no other provisions of the GST Act under which your sale of the property could be GST-free.

Therefore, where your sale of the property is not a GST-free supply of a going concern, your sale of the property will be a taxable supply and therefore under such circumstances GST will be payable on your sale of the property.

Question 2

Summary

You and the purchaser may choose to use the margin scheme if GST is payable on your sale of the property as the requirements of paragraphs 75-5(1)(a) to 75-5(1)(c) of the GST Act would be satisfied under such circumstances and you did not acquire the property through a supply that was ineligible for the margin scheme.

If you and the purchaser do not choose to use the margin scheme, the margin scheme will not apply.

The margin scheme will not be relevant if GST is not payable on your sale of the property, as the margin scheme is a method of working out the amount of GST on the sale of a property where GST is payable.

Detailed reasoning

Subsection 75-5(1) of the GST Act states:

The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a *stratum unit; or

(c) granting or selling a *long term lease;

if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act states:

The agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

Subsection 75-5(2) of the GST Act states:

However, the *margin scheme does not apply if you acquired the entire

freehold interest, *stratum unit or *long term lease through a supply that was

*ineligible for the margin scheme.

You will make a supply of real property by selling a freehold interest in land.

You did not acquire the freehold interest through a supply that was ineligible for the margin scheme.

Therefore, you and the purchaser may choose to use the margin scheme if your sale of the property is a taxable supply. The choice must be put in writing and this must be done on or before the making of the supply or within such further period as the Commissioner allows.

If you and the purchaser do not choose to use the margin scheme, the margin scheme will not apply.

The margin scheme will not be relevant if GST is not payable on your sale of the property, as the margin scheme is a method of working out the amount of GST on the sale of a property where GST is payable.

In accordance with section 75-10 of the GST Act, if the margin scheme is used to calculate GST on your sale of the property, the GST amount will be 1/11^th of the difference between the price you sell the property for and the price you paid for the property. The price of a property for GST purposes is the price after adjusting for settlement adjustments (for example, adjustments for council rates).