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Ruling

Subject: GST and the sale of assets of a deceased estate.

Question 1

Will the executor of an estate (you) be required to register for GST to report the proposed sale of the rural property as a taxable supply which was used partly for a glass blowing enterprise?

Answer

No, the supply of the property will be a consequence of ceasing to carry on an enterprise which will permanently reduce the size and scale of the enterprise. You will not be required to register for GST furthermore; you will not be making a taxable supply when you sell the rural property, provided you do not choose to register for GST.

Relevant facts and circumstances

On a specific date, the late xx (Deceased), late of xx a state in Australia (Property) died.

On a specific date, xx (you) were appointed as the executor of the estate of the x (Estate) in the Supreme Court of a state in Australia.

The deceased operated an enterprise trading under the business name 'xx ' with Australian Business number (ABN) xxx the entity was registered for GST on 1 July 2000 with a turnover below $75,000 for the financial year ending 20YY. The ABN was cancelled on a specific date following the deceased death.

On a specific date, in your capacity as executor you lodged the final April to June 20YY activity statement (JuneAS) under ABN xx as Executor for the xx. Explaining there were no debtors and stock was sent to galleries on a consignment sale or return basis. All outstanding monthly creditors were paid and included in the June AS.

On another specific date you registered a Trust entity called xx ' to manage the affairs of the Estate under xx, the Trust is  not registered with an Australian Business Number or Goods and Services Tax.

On another specific date, you advised the ATO of the date of death of the Deceased. You were advised that this date of effect would be 1 July 20YY. You received a letter from the ATO confirming the effective date.

On a specific date you requested a private binding ruling to determine if it is necessary to register for GST to report GST on the sale of your Property. Your application included the following:

· The deceased purchased the Property in xx 19ZZ as his principle place of residence.

· The deceased did not use the Property for farming purposes.

· The deceased converted the farm sheds to a studio and a gallery.

· The Property is now being sold and you have been approached by several purchasers expressing interest in the Property to be used as a residential lifestyle property.

· You are unable to locate interested buyers for the fixtures and fittings or the gallery.

On two dates you provided additional information to clarify the size and type of assets belonging to the deceased estate, stating:

· The total rural lifestyle area is Z hectares; it was planted out with trees to create a retreat atmosphere.

· Prior to 2000, the deceased converted a shed into a studio for commercial use with a written down value of $xx

· The Storage Shed is very basic, with a written down value of $nil.

· Prior to 2000, another shed was converted and extended into a commercial gallery, with a written down value as of 30 June 20YY of $xx

· As of X 20YY, the cost value of trading stock is considered to be $xx

· As of X 20YY, the plant and equipment in the business premises has a written down value of $xx the glass making plant and equipment has limited value when dismantled.

· The sale of all the business assets will not exceed $ 75,000,

· You will be using the services of a real estate agent to sell the land as one block.

· All finished stock will be sold individually, with a couple of pieces going to beneficiaries. Remaining pieces will be given to charity.

· All assets will be sold or they will be distributed to the beneficiaries 'in specie'

· All the proceeds from the sale of the deceased's assets to be distributed to the beneficiaries of their estate, pursuant to the Will.

· There are a number of beneficiaries.

· Two years before the deceased death the business declined, although the deceased had a friend sell off existing trading stock there were no employees or other activities on site after the deceased death.

· During their illness, the deceased continued the business as their energy permitted in the first few months of their illness.

· No changes or renovations have occurred to the residential premises.

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 9-20

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-5

Reasons for decision

In order to determine whether the sale of the Estate is a taxable supply for goods and services tax (GST) purposes it is necessary to determine whether you are required to be registered for GST, and establish the existence of an activity, which constitutes an enterprise and the annual turnover derived from that activity.

Under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) you are required to be registered for GST if:

(a) you are carrying on an enterprise; and

(b) your annual turnover meets the registration turnover threshold.

However, you may choose to be registered in accordance with section 23-10 of the GST Act, which states:

(1) You may be registered under this Act if you are carrying on an enterprise (whether or not your turnover is at, above or below the registration turnover threshold).

(2) You may be registered under this Act if you intend to carry on an enterprise from a particular date.

Section 195-1 of the GST Act provides that 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Subsection 9-20(1) of the GST Act includes the following activity, or series of activities as being an enterprise where it is done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

(d)…

Some activities are excluded from being an enterprise under subsection 9-20(2) of the GST Act, which states the following:

However, enterprise does not include an activity, or series of activities, done:

(a) …

(b) as a private recreational pursuit or hobby; or

(c) by an individual (other than a trustee of a charitable fund), or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain;

(d) …

The Tax Office view of what is an enterprise is contained in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1)

It considers the meaning of enterprise for the purposes of the A New Tax System (Australian Business Number) Act 1999. The definition of enterprise in this Act is the same as that used in the GST Act. A copy of MT 2006/1 may be found on the ATO website at www.ato.gov.au .

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes. The principles outlined in these rulings have been applied in this case as both the entity and the enterprise have ceased.

Paragraph 270 of MT 2006/1 states:

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade

From the facts, the sale of the rural Property is an isolated activity that has the character of a business deal, it will be sold with the intention of making a profit for the beneficiaries and will therefore fall within the meaning of 'enterprise' for GST purposes. The sale of the Property is included in the definition of 'carrying on' an enterprise as it relates to doing anything in the course of termination of the deceased enterprise. Therefore, it is included in subsection 9-20(1) of the GST Act and is not excluded by subsection 9-20(2) of the GST Act as the sale of the Property will be for a profit.

The registration threshold for an enterprise other than a non-profit body is currently $75,000. This may result in the sale of the Property (partly used for the commercial enterprise) exceeding the registration threshold and if that is the case then you will be required to register for GST.

From the fact provided, the Property was partly used for commercial purposes to conduct the enterprise. Paragraph 70 in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains this will result in a mixed supply of both commercial and residential premises. It states:

Examples of mixed supplies

Example 2 - commercial and residential premises

70. Roberto owns a building comprising both residential and commercial premises. He leases the building to Lawrence who operates a small recruitment agency from the commercial premises and lives in the residential part. The supply of the residential part is input taxed. The supply of the commercial part is taxable. Roberto is making a mixed supply that is partly taxable and partly input taxed .

The portion of the property used for residential purposes is input taxed and this portion is expressly disregarded in your projected turnover under section 188-20 of the GST Act.

Therefore, the issue to consider will be, if the portion of taxable supplies being the part of the Property used for your commercial glass blowing enterprise will exceed the GST registration threshold which is currently $75,000.

Under subsection 188-10(1) of the GST Act states that your annual turnover meets this threshold when:

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

(b) your projected annual turnover is at or above the turnover threshold.

However, section 188-25 of the GST Act states:

In working out your projected annual 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.

Therefore, if the executor or trustee of the estate does not continue the trading activities of the enterprise of the deceased person and merely supplies the assets of the enterprise either by way of sale or distribution then, these supplies will not form part of the annual turnover of the executor or trustee of the deceased estate and would not be required to be registered in this capacity. As such, the supply of any capital assets would be excluded by virtue of subsection 188-25(a) of the GST Act. The supply of any trading stock would be excluded by subsection 188-25(b) of the GST Act.

Based on the information provided, the supply of the Property as a consequence of ceasing to carry on an enterprise and the permanent reduction in the size and scale of the enterprise will not be a taxable supply. Therefore, you will not be required to be registered for GST because the sale of the Property will not be included in your calculation of your GST turnover, in the year in which you sell the Estate.