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Ruling

Subject: Goods and services tax (GST) and the disposal of capital assets

Question:

1. Is there a GST liability on the disposal of capital assets such as fixtures and fittings on the ceasing of my business?

2. If so, how much GST is liable and how is it calculated?

3. Why did I pay GST on the disposal of the fixtures and fittings from my business when the proceeds from their sale did not form part of the business turnover due to the cessation of the business, and I had previously paid taxation liabilities in prior years?

Advice/Answers:

1. There is a GST liability on the disposal of capital assets from your enterprise such as fixtures and fittings as a consequence of the cessation of your business as you were still registered for GST at the time of their sale.

2. The amount of the GST liability on a taxable supply is 10% (ten percent) of the value of the supply. This is equivalent to 1/11 (one eleventh) of the total price of the supply.

3. The GST liabilities you paid during the prior financial year were for supplies that you made during that financial year in the course of your usual business activities. The GST liabilities you later paid early in the current financial year were for sale of the fixtures and fittings on the cessation of your business while still registered for GST.

Relevant facts and circumstances

You were registered for GST for a period of several years.

Your GST registration was cancelled early in the current financial year.

Our records show that you operated an enterprise.

Late in the immediately prior financial year you were approached by purchasers who wished to buy the fixtures and fittings in the premises from which you operated your enterprise.

At that time you decided to cease the operation of your enterprise for personal reasons.

You engaged a lawyer to draw up a contract for the sale of the assets of the enterprise.

This contract of sale for these fixtures and fittings was signed on in the first quarter of the current financial year.

You have stated that matters concerning GST were not considered .when this contract was drawn up.

You sold these fixtures and fittings to the buyers.

You ceased operating your enterprise early in the first quarter of the current financial year.

You did not sell your business as a going concern.

There was no 'goodwill' component in the agreed price that you charged for the fixtures and fittings.

The premises from which you operated your enterprise were leased and were not yours to sell.

The lease of the premises from which you operated your enterprise was transferred by your landlord to the purchasers on condition that the new tenants agreed to pay additional rent until the original lease expires.

You remitted GST to the ATO for the sale of the fixtures and fittings of your enterprise.

The new tenants undertook renovations of the premises and commenced operating a new enterprise.

Our records show that you:

(a) reported for GST using quarterly tax periods, you operated on a cash basis

(b) have lodged all of your activity statements up to and including the first quarter of the current financial year

(c) your activity statement the first quarter of the current financial year shows a GST liability

(d) do not have any outstanding liabilities for indirect taxes, and

(e) had a turnover in the range $0 to $74,999.

Our records show your GST registration was cancelled in the first quarter of the current financial year.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 9-70

A New Tax System (Goods and Services Tax) Act 1999 section 9-75

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

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

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 188-25

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

Reasons for decision

Question 1:

You make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if:

· you make a 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 GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Under section 9-40 of the GST Act you must remit the GST payable on any taxable supply that you make.

The meaning of the term 'supply' is defined in section 9-10 of the GST Act so as to include a supply in any form whatsoever. This definition includes the supply of goods. In selling the fixtures and fittings of your enterprise you are making a supply of goods. Further, you sold the fixtures and fittings for an agreed amount of money, and in so doing you made a supply for consideration. Thus the first requirement of the definition of a taxable supply is met.

Section 195-1 of the GST Act defines the term 'carrying on' an enterprise so as to include anything performed either in the course of the commencement or termination of the enterprise.

This is discussed in our publication GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? ('determination'), a copy of which is enclosed for your reference.

The determination states at paragraph 15:

When is an enterprise being carried on?

15. The term 'carrying on' is defined in section 195-1 and ensures that activities done in the course of commencement or termination of an enterprise are included in determining whether the activities of the entity amount to an enterprise.

Thus in selling the fixtures and fittings from your enterprise you made a supply in the course or furtherance of an enterprise that you carried on, even though you were ceasing the operation of your enterprise. In your doing so the second requirement of the definition of a taxable supply is met.

As your sale of your enterprise's fixtures and fittings occurred within Australia, their supply was connected with Australia, and so the third requirement of the definition of a taxable supply is met.

GST registration:

It is a requirement under section 23-5 of the GST Act that you must register for GST if you carry on an enterprise and your turnover meets the registration turnover threshold, which is currently $75,000. However, under section 23-10 of the GST Act if you carry on an enterprise you may choose to register for GST even if your turnover does not meet the registration turnover threshold.

At the time that you sold your enterprise's fixtures and fittings you were registered for GST, and you remained registered for GST even though your turnover was less than the registration turnover threshold. Hence you chose to be registered for GST until the time that your enterprise ceased to operate.

Thus the fourth requirement of a taxable supply was met.

Furthermore, the supply of fixtures and fittings is neither GST-free nor input taxed. As such, all of the requirements of a taxable supply are met.

As a consequence there was a GST liability on the disposal of the fixtures and fittings of your enterprise. This is so even though the supply of these fixtures and fittings was the disposal of capital assets.

This is explained further on page 2 of our publication GST and the disposal of capital assets (NAT 7682-08.2011), a copy of which is enclosed. This publication states:

When do you account for GST on the disposal of a capital asset?

Generally, if you are registered or required to be registered for GST, the disposal of a capital asset in Australia, in the course of carrying on your business, is a taxable sale and you are required to account for GST on that sale. This applies even if the asset was purchased before 1 July 2000 or the asset is sold to an individual who is not in business (a private sale). If you receive any payment (or other form of consideration) when you dispose of a capital asset, you must report an amount at G1 (total sales) on your activity statement for the relevant tax period.

If you had chosen to have your GST registration cancelled prior to the cessation of your enterprise on the basis that you were not required to be registered because your turnover was less than the registration turnover threshold, there would have been no GST liability because the supply of the fixtures and fittings would not have been a taxable supply.

In that circumstance you would not have been required to register for GST because under section 188-25 of the GST Act the turnover from the disposal of your fixtures and fittings would have been excluded from the calculation of your projected turnover on the grounds that:

(a) it was the disposal of the capital assets of the enterprise

(b) it was a supply made solely on the basis of your ceasing to carry on an enterprise.

Question 2:

Section 9-70 of the GST Act states that the amount of GST on a taxable supply is 10% of the value of the taxable supply. Under section 9-75 of the GST Act the value of a taxable supply is calculated by the formula:

Value = Price x 10

11

Alternatively, the GST liability can be calculated as 1/11 of the total price received for a supply.

Question 3:

Our records show that while you were registered for GST you operated on a cash basis. If you account for GST on a cash basis you account for the GST payable on the sales you make in the same reporting period you receive payment for them. As you received payment for the sale of your fixtures and fittings in the tax period July to September of the current financial year, you were required to account for the GST liability on their sale in that tax period. Please refer to page 19 of our publication GST for small business (NAT 3014), a copy of which is enclosed.