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Ruling

Subject: GST and sale of property

Questions

1. Are you carrying on an enterprise?

2. Does your GST turnover meet the registration turnover threshold?

3. Are you required to be registered for the GST?

Answers

1. Yes, you are carrying on an enterprise.

2. Yes, your GST turnover meets the registration turnover threshold.

3. Yes, you are required to be registered for the GST.

Relevant facts and circumstances

You, an entity, are a wholly owned subsidiary of a company which is currently in liquidation.

You were incorporated for the purpose of acquiring a property to subdivide for sale. Your Directors' report indicated that all parcels of land were sold more than 20 years ago. .

Years later, you were deregistered by Australian Securities and Investment Commission (ASIC) on your directors' application as part of the cleanup of your company group.

A few years later, ASIC wrote to your former directors to inform them of a remnant lot that remained on your original title.

Your directors applied for your reinstatement with ASIC in order to deal with the land. Your directors also notified the liquidator of your holding company. Consequently, you were reinstated on the company register by ASIC.

All the necessary work to obtain a new title for the land was carried out shortly thereafter by your directors.

The remnant lot was sold and will settle soon.

Once the contract is settled, no further activities will be carried on by you

You will then be deregistered or wound up.

Relevant legislative provisions

A New Tax System (Goods and Services) Act 1999 Section 9-20.

A New Tax System (Goods and Services) Act 1999 Section 23-5.

A New Tax System (Goods and Services) Act 1999 Section 23-15.

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

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

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

A New Tax System (Goods and Services) Act 1999 Section 188-25.

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

A New Tax System (Goods and Services) Act 1999 Division 195.

Reasons for decision

1. Are you carrying on an enterprise?

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides, among other things, that an enterprise is 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 term carrying on an enterprise is defined in section 195-1 of the GST Act. It ensures that activities done in the course of commencement or termination of an enterprise are included in determining whether activities of the entity amount to an enterprise.

In this case, you were incorporated for the purposes of acquiring a property to subdivide for sale. Your Directors' reports indicated that all parcels were sold many years ago.

Some years later, you were deregistered by the Australian Securities and Investment Commission (ASIC) on your directors' application as part of the cleanup of your company group.

You contend that the business of buying, subdividing and selling of land had ceased during this period. You considered that you had disposed of all the subdivided lots and this transaction had been completed. However, it is not unreasonable to state that had you been aware of the existence of the remnant lot you would have dealt with it in a similar manner. This is evidenced in the fact that upon re-discovery of the remnant lot you proceeded to deal with it in the same manner as you would have done previously. Accordingly, but for the passage of time, the sale of this remnant lot would clearly have been considered as part of your profit making business activity.

Furthermore, you did not acquire the lot with the intention of long term holding for capital appreciation, investment or private purposes. The reason for your re-instatement was for the sole purpose of dealing with the land. The nature of that dealing can only be attributed to the original profit making intention.

Given the activities undertaken since reinstatement, we are of the view that the activities undertaken are no different to those you carried out prior to you being deregistered by ASIC. As such, we consider that the sale of the remnant lot has been supplied in the course of carrying on a business.

Consequently, we are of the view that you are carrying on an enterprise.

2. Does your GST turnover meet the registration turnover threshold?

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 *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

(*denotes a term defined in section 195-1 of the GST Act).

Subsection 23-15 of the GST Act states:

(1) Your registration turnover threshold (unless you are a non-profit body) is:

(a) $50,000; or

(b)  Such higher amount as the regulations specify.

Under GST regulation 23-15.01, the current registration turnover threshold is $75,000 for entities other than non-profit bodies.

Subsection 188-10(2) of the GST Act states:

You have a GST turnover that does not exceed a particular *turnover threshold if:

(a) your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

(b) your projected GST turnover is at or below the turnover threshold.

Subsection 188-15(1) of the GST Act states:

Your current GST 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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

As discussed above, you are carrying on an enterprise, which has a current GST turnover of more than $75,000. You intend to cease your enterprise upon settlement of the sale of the remnant lot. It is necessary to determine whether the sale of the remnant lot will lead to your projected GST turnover exceeding the GST registration turnover threshold.

Subsection 188-20(1) of the GST Act states:

Your projected GST 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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Section 188-25 of the GST Act states:

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) refers to the meaning of GST turnover including the effect of section 188-25 on projected GST turnover. Paragraphs 30 to 36 of the ruling state:

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53.)

31. The GST Act does not define the term capital assets. Generally, the term capital assets refers to those assets that make up the profit yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

32. Capital assets can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. Capital assets can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

In your case, the remnant lot is part of the property that you acquired to subdivide for sale; hence it is your revenue asset. Consequently, such a supply will not be disregarded in working out your projected GST turnover under paragraph 188-25(a) of the GST Act.

Paragraphs 38 to 41, 46 and 47 of GSTR 2001/7 provides guidance on the meaning of 'solely as a consequence' state

Meaning of 'solely as a consequence'

38. The GST Act does not define the term 'solely as a consequence of'. In the case of Reseck v. FC of T (1975) 133 CLR 45; 75 ATC 4213; (1975) 5 ATR 538 the meaning of 'in consequence of' in the context of the phrase 'in consequence of termination of employment' was examined. His Honour Gibbs J at CLR 51; ATC 4216; ATR 541 interpreted the words to mean that an event follows as an effect or result of some primary event. However, Jacobs J at CLR 56; ATC 4219, ATR 545 expressed a different view that a 'consequence' in this context is not the same as a 'result'. It does not import causation but rather a 'following on'. Both judges dismissed the argument the termination of service had to be the dominant cause of the payment.

39. Although the words 'in consequence' may mean a result (i.e., cause) or a following on, the addition of the word 'solely' in our view requires that in this context there be a causal connection which is exclusive.

40. In Perpetual Trustee Company Ltd v. Commissioner of State Revenue (2000) 44 ATR 273, Hansen J considered the phrase 'solely in consequence' within Exemption 23 of the Stamps Act 1958 (Vic) . After discussing the purpose of the exemption, (that being to provide an exemption from stamp duty in specific cases), Hansen J said at pages 286-287:

'In its common understanding in its present context the word "solely" in conjunction with the words "in consequence of" means that the exemption will apply only if the instruments of transfer were executed in consequence of the change in trustee and in order to vest the real property of the trust in the name of the new trustee and not in consequence of any other factor.'

41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1), or the substantial and permanent reduction in size or scale of an enterprise (see example 2).

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

In your case, you will cease to carry on your enterprise after the settlement of the sale of the remnant lot.

The disposal of the remnant lot is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances your enterprise ceases as a consequence of the disposal of the remnant lot, rather than the remnant lot being disposed of in consequence of the ceasing to carry on the enterprise.

Consequently, the supply of the remnant lot will not be disregarded in working out your projected GST turnover under subparagraph 188-25(b)(i) of the GST Act.

Therefore, your GST turnover does meet the registration turnover threshold.

3. Are you required to be registered for the GST?

As discussed in question 2 above, as your GST turnover meets the registration turnover threshold as specified in paragraph 23-5(b) of the GST Act, you are required to be registered for GST.