Edited version of your private ruling

Authorisation Number: 1012075977716

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Ruling

Subject: Sale of subdivided land

Questions

1. Is goods and services tax (GST) payable on the sale of the subdivided land described as Lot 1?

2. If so, what is the GST amount payable?

Answers

1. GST is payable on the sale of the subdivided land described as Lot 1 to the extent to which it is taxable.

2. See below.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a sole trader and are registered for the goods and services tax (GST).

You acquired land with two residential premises before the advent of GST. You renovated one of the premises and demolished the other.

The renovation effected was to build a café and a shop on the ground floor and private living quarters on the upper floor.

The access to the upper floor was from an outside stairway.

Both the upper floor and the ground floor are of equal areas.

The renovations were carried over a period of time and were completed after the introduction of GST.

You have not claimed any input tax credits on the renovations made to the building.

While these renovations were going on, you built another residential premises at the back of the existing residential premises. This was completed before GST came into effect.

The land you sold has a designated area for a commercial enterprise.

You carried on three enterprises from your property. One was to operate a café/shop from the renovated premises, the operation of the commercial enterprise and a short-term accommodation operation from the new residential premises.

You did not rent either of the two premises to outsiders. The bedrooms above the café/shop were used by your family and you lived in the new residential premises.

You made the new residential premises available to paying guests on a short-term accommodation basis.

In addition, you operated the café/shop during the day and maintained the commercial enterprise on the land.

The ground floor café/shop was used in the evening for the purpose of dining by you and your family.

In 2009 you subdivided the land into two lots. One lot consisted of the renovated building, the commercial enterprise on the land and the café/shop and land (Lot 1) and the other lot, the newly constructed premises from where you are carrying on the short-term accommodation enterprise and land (Lot 2).

You subdivided the property because you wanted to sell part of it as you no longer wanted to carry on operating the café/shop.

The purchaser bought Lot 1 and the premises to be used as a dwelling and does not use it for any commercial purpose, except that the purchaser is leasing the part of the land where a commercial enterprise is being carried out.

The contract of sale also states that the price includes GST.

You have a family trust and the trustee has an Australian business number (ABN) but not registered for the GST.

You intend to carry on your enterprises under this trust after you retire from your current activities.

On the sale of Lot 1, the purchaser executed a lease agreement, with the tenant as the trustee company, to lease that part of the land that was used for the commercial enterprise

The lease period is for a number of years from the commencement of the lease with an option for two further terms of similar periods each.

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 section 9-80.

A New Tax System (Goods and Services Tax) Act 1999 section 40-65.

Reasons for decision

You make a taxable supply where you satisfy all of the requirements in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration, the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected with Australia and you are registered, or required to be registered for the GST. Based on the facts provided, we consider that all of the above conditions are met for part of the supply you made and that you are made a taxable supply of that part.

Additionally, under section 40-65 of the GST Act, the sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. The facts also show that part of the supply you made include residential premises.

Mixed supply

In this case you have sold subdivided land consisting of a building and an area in which a commercial enterprise is being carried on. The building consists of a café/shop on the ground floor and bedrooms, a bathroom and a sitting room on the upper floor.

Sale of part of the building that consisted of the café/shop and the land on which the commercial enterprise is being carried on are taxable because you satisfy all the requirements of a taxable supply as given in section 9-5 of the GST Act. The sale of the upper part of the building is a sale of residential premises and generally considered input taxed as it consists of bedrooms, a bath room and a sitting room. Thus, the supply you made has both a taxable part and an input taxed part and constitute what the Commissioner of Taxation (Commissioner) considers as a mixed supply.

A mixed supply is valued according to the rule in section 9-80 of the GST Act. The consideration you received for the supply of the subdivided land is therefore necessary to be apportioned for the taxable and non-taxable parts.

Goods and Services Tax Ruling: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioner's view of apportioning in situations like this.

In GSTR 2001/8 a distinction is made between mixed supplies and composite supplies. Paragraph 43 of GSTR 2001/8 states that:

a mixed supply contains separately identifiable parts where one or more of the parts is taxable and one or more of the parts is non-taxable.

a composite supply is a supply of one dominant part that has other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

Whether your supply is a mixed supply or a composite supply is a matter of fact and degree.

In providing this advice we have considered the facts you provided us and also the advertising material you had published in the internet.

You also provided details and the availability of the supplies you make out of the area of land used for the commercial enterprise, which is in the subdivided lot you sold.

We further examined the maps that were in your website as well as the aerial photos shown in Google maps of the property, which are available in the public domain.

Based on these it is clear that what you sold was predominantly a commercial property with a residential premises on the upper floor of the café/shop.

In apportioning the consideration between taxable part and non-taxable part, the Commissioner expects you to apply a fair and reasonable basis for such apportionment. However, you have asked us to advise you on what GST is payable on the supply you made. We consider that a fair and reasonable apportionment would be to divide the value of the consideration on the basis of the land area that can be attributed to the commercial activity you were carrying on and to the residential accommodation you used.

Based on these calculations, the Tax Office considers that the residential accommodation part of the sale is merely incidental to the overwhelming commercial nature of the sale of the property. The claim that the intention of the buyer was to use the property for residential purposes is immaterial. What is considered for the purpose of the GST legislation is the character of the property you supplied at the time of the sale.

The contract of sale you entered into with the buyer stipulates that the sale price includes GST, implying that it is a taxable supply. Further the purchaser also appears to have considered the acquisition as a commercial property in that (a) the purchaser listed all the equipment in the café/store as part of what the purchaser was buying and (b) subsequently leased the area of land used for the commercial enterprise under a commercial lease.

You have already attributed this sale in your activity statement and the GST amount attributed is more than the correct attributed GST amount. Therefore, you need to calculated the correct GST amount on the sale based on the advice provided above

Please Note: If you do not consider that this method of apportioning is reasonable, you may use any other method you believe is reasonable as long as you can demonstrate to the Tax Office that such a method is fair and reasonable.

Refund of GST

Irrespective of whatever method you use for apportioning, please note that restrictions under the provisions in subsection 105-65(1) of the Tax Administration Act 1953 apply in this case. This section states:

The Commissioner need not give you a refund to which this section applies, or apply an amount under Division 3 or 3A of Part of Part IIB to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply to any extent; and

(b) the supply is not a taxable supply to that extent (for example, because it is GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply;

(ii) the recipient is registered or required to be registered.

You accounted for GST on the sale of this property without considering the input taxed part of the supply. Consequently the amount of GST accounted for is greater than the amount of GST you would have had to account for had you applied the input taxed provisions to part of your supply.

Therefore, any refund or change to your activity statement of the overpaid GST on this sale will be considered only when the Commissioner is satisfied that you have reimbursed a corresponding amount to the recipient of your supply.

Composite supply

Paragraph 55 of GSTR 2001/8 states that parts of a supply that do not need to be separately recognised for GST purposes are referred to as being integral, ancillary or incidental.

Therefore, if a supply is a composite supply it will be treated as being a supply of a single thing and apportionment of the consideration will not be necessary.

GSTR 2001/8 states at paragraph 59 that it is a question of fact and degree whether a supply is mixed or composite.

However, it is not a necessity for you to consider the supply you made as a mixed supply. GSTR 2001/8 states:

'60. As a means of minimising compliance costs, you may treat something (or things taken together) as being integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of:

$3.00; or

20% of the consideration of the total supply.

61. You may use this approach to treat a supply as a composite supply, although it might otherwise be considered as a mixed supply'. However, if the consideration for a part exceeds the lesser of $3.00 or 20% of the consideration for the total supply, it does not necessarily mean that the part is not integral, ancillary or incidental.

It will be seen from the above that the consideration for the non-taxable part of the sale you made exceeded the lesser of $3.00 or 20% of the consideration of the total supply. However, as given in paragraph 61 of the GSTR 2001/8 above, it does not necessarily mean that you cannot treat the non-taxable part in your supply as an integral, ancillary or incidental to the taxable part of your supply. You may, therefore, treat the whole supply as a composite supply in accordance with the guidelines in paragraphs 60 and 61 of GSTR 2001/8.

If you take this approach, then the GST payable is 1/11^th of the consideration you received from the sale of the property.