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Ruling

Subject: GST and supplies made by the trustee of a deceased estate

Question

Are you required to make an increasing adjustment in relation to your distribution of the following Estate assets to the beneficiaries of the Estate of a specified individual (Individual A):

§ farming business assets,

§ farming properties (farmland X and farmland Y) situated in Australia

§ a private residence and a guest accommodation premises and associated facilities situated on farmland X

§ commercial properties and associated leasing business assets.

Answer

No, you are not required to make an increasing adjustment in relation to your distribution of these Estate assets to the beneficiaries.

Relevant facts and circumstances

· You, the trustee for the Estate of Individual A, are registered for GST with effect from a specified date;

· You have legal control over the estate of Individual A who passed away on that specified date;

· Immediately prior to her death, Individual A had owned several farm titles and commercial properties;

· The farming properties as known as farmland X and farmland Y;

· The commercial properties are shop/restaurant buildings situated on adjoining lots and vacant land used as a car park (in relation to those lots);

· Individual A had operated the farming and leasing enterprises from the properties and was registered for GST in relation to these enterprises;

· You have continued to account for GST on the commercial rent and the farm activities in your capacity as trustee for the Estate;

· You intend to distribute the assets of the Estate to its beneficiaries, Individual B and C. The properties will be distributed to Mr B and Mrs C individually as tenants in common in equal shares in accordance with the will of Individual A. The assets include:

o farmland situated at two locations and the assets of those farming businesses;

o the commercial properties and the business assets associated with the leasing of those premises;

o a private residence and a guest accommodation premises and associated facilities which are situated on farmland X;

· Mr B and Mrs C, in partnership, have an Australian Business Number but are not currently registered for GST. However, the partnership will be registered for GST at the time that the assets of the Estate are distributed.

Farm property

The farm properties were acquired before GST came into effect. Over time, parts of the farm titles had been subdivided and sold as residential building lots.

Farmland X is held on one title and includes farmland, the private residence and the accommodation premises.

The private residence and the accommodation premises were built prior to 1 July 2000 and are part of the same complex.

Individual A had leased part of the premises to Mr B and Mrs C (a family member) to use as a bed & breakfast.

An annual rental amount for the lease of the guest accommodation premises was payable by Mr B and Mrs C (in partnership) to Individual A.

Individual A had resided in the private residence together with Mr B and Mrs C before Individual A moved into a nursing home in a specified year. There was no lease of the private residence by Individual A to Mr B and Mrs C.

Mrs C held an enduring power of attorney over Individual A's affairs and continued to operate the enterprises on behalf of Individual A (following the move to the nursing home). Mr B and Mrs C continued to live in the private residence and to lease the guest accommodation premises from Individual A for the purpose of operating their bed & breakfast business (in partnership).

Following Individual A's death, the private residence is still being occupied by Mr B and Mrs C and it is their intention to continue to do so. It has been their home for more than a decade and is the only private residence on the farm properties.

Mr B and Mrs C (in partnership) have also continued to lease the guest accommodation part of the property from you, for the purpose of operating their accommodation business;

Following the distribution of the Estate assets by you to the beneficiaries, the property will be owned by Mr B and Mrs C as tenants in common (in equal shares), and will be held as a partnership asset.

Individual A had lived within the guest accommodation premises. Following Individual A's move to the nursing home, the accommodation became available as guest accommodation. It was renovated in a specified year.

The guest accommodation premises is rated as a 'bed & breakfast- self catering' premises. Initial continental breakfasts are supplied for guest self catering. No meals are provided for guests (i.e. no cooked breakfast or any other meals). Gourmet breakfast is available by voucher at a local restaurant. The guest accommodation does not include cleaning of rooms on a daily basis- rooms are cleaned after guests vacate.

The guest accommodation premises has accommodation with limited self catering facilities suitable for short stays and accommodations suitable for self catering and longer stays.

Following the distribution of the Estate assets, the partnership will transfer the business assets of the guest accommodation business (excluding the property itself) to a family trust. The partnership will lease out the guest accommodation premises to the family trust. The family trust will carry on the accommodation business from the leased premises in their own right.

Distribution of farming land and business

The farming properties (farmland X and farmland Y) will be transferred by you to Mr B and Mrs C. Following the distribution of these Estate assets, the partnership will own the farm land and farm business assets.

The partnership will transfer the farm business assets (excluding the property) to a family trust. The partnership will lease the farm property to the family trust. The family trust will carry on the farm enterprise from the leased premises in their own right.

The farming enterprise will be carried on by the partnership until the day it is to be supplied to the family trust.

The family trust will be registered for GST from the date of the commencement of the leases of the properties from the partnership (to the family trust).

Distribution of the commercial properties and commercial leasing assets

Individual A owned the commercial properties which were held as part of her leasing enterprise.

Following the distribution of the Estate assets to the beneficiaries, the properties will be owned by Mr B and Mrs C as tenants in common. The partnership intends to continue operating the leasing enterprises carried on in relation to these properties.

The transfer of the Estate assets by you to Mr B and Mrs C will not be contemporaneous with the transfer of the business assets (excluding land) by the partnership to the family trust. As the terms of the family trust deed are still being determined, the partnership will continue to carry on the leasing and farming enterprises until the trust deed is finalised.

You refer to a decision made by the Australian Taxation Office (ATO) in which it was held that the lease of the accommodation by Individual A to Mr B and Mrs C (in partnership) was an input taxed supply of residential premises.

With respect to the supplies to be made by you of the Estate Assets, your tax representative makes the following contentions in support of this private ruling request:

· You will not be subject to an increasing adjustment on the distribution of the assets of the Estate to the beneficiaries, Mr B and Mrs C for the following reasons:

o In the current circumstances, to the extent that the assets relate to the commercial leasing enterprise, the beneficiaries, Mr B and Mrs C, intend to utilise the assets to continue to carry on that leasing enterprise;

o To the extent that the assets relate to the farm enterprise, the beneficiaries intend to transfer those assets to a family trust that will continue to carry on the enterprise. That transfer is unlikely to be immediate and they are likely to carry on the farm enterprise for a short period before the assets are transferred to the family trust.

Your tax representative subsequently clarified that the beneficiaries will carry on the farming enterprise as your transfer of the assets to the beneficiaries and the subsequent supply of the farm business assets by the beneficiaries (the partnership) to the family trust will not be contemporaneous.

Although section 139-5(3)(a) provides for the beneficiary to continue to carry on the relevant enterprise, it does not impose a minimum period of time that the beneficiary must continue to carry on the enterprise. While the ultimate intention is to transfer the enterprise assets to the family trust, the proposed temporary conduct of the farm enterprise by the beneficiaries prior to the transfer to the family trust is sufficient to attract the operation of section 139-5(3)(a) and therefore no adjustment arises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 139.

A New Tax System (Goods and Services Tax) Act 1999 Section 139-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 139-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 139-5(3)

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 Division 72

A New Tax System (Goods and Services Tax) Act 1999 Subsection 72-20

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-30(4)

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

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 40-5.09(1)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Section 139-5 of the GST Act

Subsection 139-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you have an increasing adjustment if:

(a) you are the executor or the trustee of a deceased estate; and

(b) you are *registered or *required to be registered for GST, and

(c) you supply an asset of the deceased to a beneficiary of the deceased estate; and

(d) the supply is not a *taxable supply, and is not a supply that is *GST-free or *input taxed; and

(e) you were, or are, or the deceased was, entitled to an input tax credit for the for the deceased person's acquisition or importation of the asset.

[note: the terms marked with an * are defined in section 195-1 of the GST Act.]

However, subsection 139-5(3) provides that an adjustment does not arise under section 139-5 in respect of the asset if:

(a) the asset related to an enterprise that the deceased person *carried on and the beneficiary intends to continue to carry on that enterprise; or

(b) there were one or more adjustment periods of the deceased person's acquisition or importation of the asset, and the last of those adjustment periods has ended before the cancellation of your *registration takes effect.

You are acting in your capacity as trustee for the deceased estate of Individual A. You are registered for GST and will supply the assets of the Estate to the beneficiaries, Mr B and Mrs C. Therefore the supply of the assets by you to the beneficiaries of the Estate will meet paragraphs 139-5(1)(a) to (c).

In determining whether an increasing adjustment arises under subsection 139-5(1) it is necessary to consider whether the remaining requirements in paragraphs 139-5(1) (d) and (e) are met. If all the requirements are not met, then an increasing adjustment will not arise under this subsection.

Where all the requirements are met, then it is also relevant to consider whether an adjustment does not arise because of the operation of subsection 139-5(3).

Farmland-X (excluding private residence and accommodation premises) and farmland Y

The supply of the farmland and farming business assets of the Estate by you to Mr B and Mrs C will not be a taxable supply as the supply will be made for 'no consideration'. [Division 72 does not apply, as Mr B and Mrs C, will be registered for GST and will acquire the assets solely for a creditable purpose.] Further the supply is not GST-free or input taxed. Therefore, paragraph 139-5(1)(d) is met.

With respect to paragraph 139-5(1)(e), the GST treatment of the farmland and farming business assets to Individual A is not clear from the facts provided. (We understand that the assets were previously owned by Individual A and Individual D jointly prior to ownership transferring to Individual A). Irrespective, in the event that the requirement in paragraph 139-5(1)(e) is met, as the beneficiaries intend to continue to operate the farming enterprise, paragraph 139-5(3) will apply. As a consequence, an adjustment does not arise in respect of the supply of the farming assets (land and business assets) by you to the beneficiaries of the Estate.

This conclusion is made on the basis that the beneficiaries will carry on the farming enterprise as your transfer of the assets to the beneficiaries and the subsequent supply of the farm business assets by the partnership to the family trust will not be contemporaneous.

Commercial properties and associated leasing business assets

You will transfer the commercial properties and associated leasing assets to the beneficiaries, who will continue to carry on the leasing enterprises.

For the reasons outlined above (in relation to the farm land and farming assets), where the requirements of subsection 139-5(1) are met, an adjustment will not arise because paragraph 139-5(3)(a) will apply. Therefore, you will not be liable to make an increasing adjustment in respect of the assets comprising the commercial properties.

Private residence

Individual A resided on the premises until Individual A moved into a nursing home. The private residence has been occupied by Mrs C and her spouse for over a decade and they intend to continue to do so.

With respect to paragraph 139-5(1)(d) your supply of the private residence to the beneficiaries would be input taxed as it is a supply of residential premises to be used predominantly for residential accommodation (and is neither commercial residential premises nor new residential premises. [Subsection 72-20(1) provides that if apart from the lack of consideration, a supply to your associate would be a sale, the supply is taken for the purposes of the GST law to be a supply of that kind. Therefore the supply would be input taxed under section 40-65.]

As the requirement in paragraph 139-5(1)(d) is not met, an adjustment does not arise under this section.

Further, as any acquisitions made by Individual A (or you) in relation to the private residence would not be for a creditable purpose on the basis that it is for a private or domestic purpose (i.e. in relation to Individual A's private arrangement with her family member to reside and continue to reside in the private residence), paragraph 139-5(1)(e) would not be met.

As the supply does not meet all the requirements of subsection 139-5(1), an increasing adjustment does not arise under this section.

[For further information regarding the meaning of 'residential premises' for the purpose of section 40-65, please refer to the explanation under the heading 'GST and supplies of residential premises'.]

Guest accommodation premises

In relation to paragraphs 139-5(1)(d) and (e), the guest accommodation premises has the physical characteristics of residential premises to be used predominantly for residential accommodation.

As a consequence, the supply of the guest accommodation premises by way of lease by Individual A (and subsequently by you) to Mr B and Mrs C would be input taxed under section 40-35. It follows, that as the premises were used solely in connection with making these input taxed supplies, the subsequent supply of the premises would be input taxed under subsection 9-30(4). (Subsection 9-30(4) provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.) Also, as the premises have the characteristics of residential premises, the supply would be input taxed under section 40-65 (by operation of subsection 72-20). As paragraph 139-5(1)(d) is not met, it follows that an increasing adjustment would not arise under section 139-5.

Further, with respect to paragraph 139-5(1)(e), Individual A (or you) would not have been entitled to any ITCs for acquisitions made in relation to the guest accommodation premises. As the lease of the premises by Individual A (and you) is an input taxed supply of residential premises to be used predominantly for residential accommodation, it falls within the scope of subsection 40-35). It follows that acquisitions made in relation to making this supply would not be for a creditable purpose and to this extent, there would be no entitlement to ITCs.

[For further information regarding the meaning of 'residential premises' for the purpose of sections 40-35 and 40-65, please refer to the explanation under the heading 'GST and supplies of residential premises'.]

GST and supplies of residential premises

Residential rent

Subsection 40-35(1) 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:

(a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

(b) the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

Subsection 40-35(2) states:

However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease.

[note: the terms marked with an * are defined in section 195-1]

Sale of residential premises

Section 40-65(1) states:

(3) 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 (regardless of the term of occupation).

(4) However, the sale is not input taxed to the extent that the *residential premises are:

(c) *commercial residential premises; or

(d) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The definition of residential premises in section 195-1 refers to land or a building that is occupied for a residence or for residential accommodation or is intended and capable of being occupied as a residence or for residential accommodation. The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation.

Premises are suitable for occupation as a residence or for residential premises if they possess features necessary for residential accommodation, and are able to be occupied as residential premises. It is the physical characteristics that mark premises out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

The private residence clearly meets the definition of residential premises as it was designed and built as a home and has the facilities to provide shelter and basic living facilities.

The guest accommodation premises is part of the same complex as the private residence and also has the basic facilities for day to day living. However, as the function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial, it is necessary to consider whether the guest accommodation premises is part of the complex has characteristics that align with that of commercial residential premises.

'Commercial residential premises' is defined in section 195-1 to include (amongst other things):

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

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

The terms 'hotel', 'motel', 'inn', 'hostel' and boarding house' are not defined in the GST Act and therefore take their ordinary or common meanings, subject to the context with which those terms are included in the GST Act..

GSTR 2000/20 refers to eight characteristics that are common to premises that are commercial residential premises or similar to such establishments, namely:

(i) commercial intention;

(ii) multiple occupancy

(iii) holding out to the public

(iv) accommodation is the main purpose

(v) central management

(vi) management offers accommodation in its own right

(vii) services offered

(viii) status of guests.

Whether premises are commercial residential premises requires an examination of the extent and manner to which the characteristics are exhibited and the overall character of the premises.

Commercial residential premises may be identified by physical characteristics that establish the purpose of those premises to provide accommodation to guests. For some premises, it is clear from their overall physical character that they are commercial residential premises, even when they are not being operated as such. For example premises designed and built as a hotel.

However, as the primary function of some commercial residential premises is to provide accommodation, there may be some overlap as the living accommodation areas of some commercial residential premises may exhibit the fundamental characteristics of residential premises in providing shelter and basic living facilities.

In addition to living accommodation areas, premises that are commercial residential premises often include infrastructure or other features to support the commercial operation of the premises. This infrastructure or other features are necessary to provide some level of service to the occupants, such as a reception, office areas, conference and meeting rooms, a commercial kitchen and laundry.

In relation to bed & breakfast and farm stay premises, paragraph 26 of GSTR 2000/20 states:

Domestic bed and breakfast and farm-stay premises may fall into the category of commercial residential premises, if the activities are on a large enough scale and run in a manner that satisfies the defining characteristics to a sufficient degree.

The guest accommodation premises is described as a ' bed & breakfast' and comprises two suites with limited self catering facilities (which includes a bedroom, bathroom and kitchenette) and an apartment that is fully self contained. The premises also include a pool/spa area. There is no commercial kitchen or other facilities for the preparation of meals to guests. Further, the premises do not have the level of infrastructure or other features to support it being operated in a manner or on a scale that is similar to establishments that are commercial residential premises.

On the basis of the facts provided, we conclude that the guest accommodation premises do not have the physical characteristics that align with that of commercial residential premises. Rather, the premises have the physical characteristics of residential premises to be used predominantly for residential accommodation.

As a consequence, the supply of the guest accommodation premises by Individual A (and your subsequent lease of the premises) to Mr B and Mrs C would be input taxed under section 40-35 of the GST Act.

For the reasons outlined earlier in this ruling, your distribution of the guest accommodation premises to the beneficiaries, Mr B and Mrs C will be input taxed.