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Ruling

Subject: GST and sale of real property

Question:

Is GST payable on the sale of the Property?

Answer:

No.

Relevant facts and circumstances

The Company was placed into member's voluntary winding-up before 1 July 2000, and appointed the Liquidator.

The Company (in voluntary liquidation) is listed as the Vendor in the contract for the sale of the land (the Contract) entered into Month XX 20XX.

The Contract lists the property as the vacant block of land (the Property).

The Company acquired the Property before the Capital Gains Tax regime commenced. The Property is held on capital account as a long-term investment asset and has only been used to generate rental income.

The Property was made available to an associate (the Associate) for use in their enterprise up until Month Y1 20Y1 when they ceased the enterprise and cancelled their ABN. After that date, the Associate used the Property for private purposes Month Y2 20Y2. During the period that the Associate used the Property, either for his business or personal purposes, they paid rent annually.

The Company registered for GST effective 1 July 2000 but cancelled it effective Month X1 20Y1. The Company re-registered for GST effective Month X3 20X3 under the misapprehension that as it was selling the Property, it had to be registered for GST. On Month X4 20XX, following further advice, the Company cancelled its GST registration effective from Month X3 20XX.

The Company lodged activity statements (AS) between Month X2 20X3 and Month X3 20XX which have been amended several times. GST was paid on the rent collected on the Property during the period of GST registration.

Rent for the use of the Property has been charged as follows:

· 30 June 20XX - less than $75,000 - no GST remitted as not registered when rent paid

· 30 June 20X3 - less than $75,000 plus GST (GST remitted as per amended AS)

· 30 June 20X2 - less than $75,000 - no GST remitted as not registered when rent paid

· 30 June 20X1 - less than $75,000 - no GST remitted as not registered when rent paid

From Month X1 20XX, the Company has ceased seeking to rent the Property and have subsequently entered into a contract to sell the Property. The Company will passively hold the Property until the contract is settled.

The Contract is due to settle X months from the execution date. The consideration (ignoring GST if applicable) payable under the Contract is as follows:

The Contract indicates that the Vendor is not registered for GST but includes protective clauses should the Commissioner of Taxation determine that GST does apply to the sale.

The Contract provides that the purchaser will use its best endeavours to have the Property rezoned to a residential use. The purchaser and its consultants will be entitled to access the Property for purposes associated with pre-planning, precinct structure planning and rezoning preparations.

The Contract provides that the Vendor continues to retain possession of the Property up until the settlement date and the purchaser will not be entitled to possession of the Property except that it may have access to it.

Should certain planning permits not be obtained within certain time lines, there is capacity under the Contract to defer settlement by up to Y months or as late as Month X1 20XG. Should settlement be deferred, the $D scheduled to be paid on the proposed settlement date will be reduced to $F payable on Month X1 20XF with the balance of $G payable on the actual deferred settlement date.

The Property is rural on the residential fringe and not of sufficient size to be attractive to tenants. However, should the Property be rented, based on advice by Property Advisors, the potential weekly rental is $X00 per week.

In the GST private ruling application, the Company has provided an undertaking that it will not commence an enterprise in the future in relation to or connection with the Property. Apart from maintaining the Property so it is in appropriate condition for the purchaser when they eventually take ownership, the Company will not conduct any other activities.

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 58-5.

A New Tax System (Goods and Services Tax) Act 1999 section 58-10.

A New Tax System (Goods and Services Tax) Act 1999 section 188-5.

A New Tax System (Goods and Services Tax) Act 1999 section 188-5.

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

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

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.

Reasons for decision

Summary

GST is not payable on the sale of the Property.

Detailed reasoning

In this case, the Liquidator is in the process of selling the Property of the Company, an entity that was placed in member's voluntary winding up.

Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes.

In particular, supplies, acquisitions and importations, and associated acts and omissions, by the representative are, in most cases, treated as having been by the incapacitated entity. This ensures that a transaction by the representative has the same consequences under the GST law as if the incapacitated entity had no representative.

Under section 58-5 of the GST Act, any supply by a representative, in its capacity as representative, is taken, for GST purposes, to be a supply by the incapacitated entity and not the representative.

Under section 58-10 of the GST Act, a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would be liable to pay on a taxable supply to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

A 'representative' is defined in section 195-1 of the GST Act to include a liquidator and it further defines an 'incapacitated entity' to include an entity that is in liquidation.

'Liquidator' has the meaning given by subsection 6(1) of the Income Tax Assessment Act 1936. It means the person who, whether or not appointed as liquidator, is required by law to carry out the winding-up of a company.

In this case, the Liquidator is a representative of an incapacitated entity, the Company. Hence, Division 58 of the GST Act is applicable.

The sale of the Property falls within the scope of the Liquidator's responsibility or authority for managing the Company's affairs. Therefore, the Liquidator would be liable to pay any GST that the Company would, but for section 58-10 of the GST Act, be liable to pay on this supply if it was a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered for GST.

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

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

Based on the information provided, the sale of the Property is for consideration and is connected with Australia as the Property is located in Australia. Therefore, the sale satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

It remains to be determined whether the sale of the Property is made in the course or furtherance of an enterprise that the Company carries on under paragraph 9-5(b) of the GST Act, whether the Company is required to be registered for GST under paragraph 9-5(d) of the GST Act, and whether the sale is GST-free or input taxed.

Whether the sale of the Property is in the course of an enterprise that the Company carries on

For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with the enterprise. Whether a connection between the sale of the thing and the enterprise exists will depend on the facts and circumstances.

Goods and Services Tax Ruling GSTR 2004/8 contains the ATO view on decreasing adjustments on supplies. It also considers the meaning of 'in the course or furtherance' in relation to an enterprise. Paragraphs 29 and 30 of GSTR 2004/8 state:

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

· at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

· at the time of sale it was applied in carrying on your enterprise to at least some extent; and

· it is sold as a transaction of your enterprise.

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

The term 'enterprise' is defined in section 9-20 of the GST Act to include an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in a property.

On the information provided, since the acquisition of the Property up until Month Y2 20Y2, the Company has been leasing the property to an Associate for use in its business or for private purposes. However, in anticipation of selling the property, the Company is no longer seeking to lease the Property.

As the Company carried on a leasing enterprise on the Property, the disposal has a connection with its enterprise. The sale is made in the course of terminating its leasing enterprise and is a supply which is made in the course or furtherance of the enterprise which the Company carries on.

Hence, the requirement of paragraph 9-5(b) of the GST Act would have been satisfied if the Company had sold the property.

Whether the Company is required to be registered for GST

On the information provided, the Company is not registered for GST. Therefore, we need to consider whether the Company is required to be registered for GST.

Section 23-5 of the GST Act sets out who is required to be registered and it 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.

The registration turnover threshold is $75,000 (or $150,000 if the entity is a non-profit body).

On the information provided, the Company's only enterprise is the leasing of the Property. At the time of entering into the Contract, the Company was no longer leasing the Property. Furthermore, the Company has provided an undertaking that it will not commence any new enterprise until the date of settlement.

We therefore need to determine whether the proceeds from the sale of the Property are included in calculating the Company's GST turnover.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

· your current GST turnover is at or above $75,000, and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

· your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In working out both your current and projected GST turnover, you disregard certain supplies including:

· supplies that are input taxed and

· supplies that are not made in connection with an enterprise that you carry on.

However, section 188-25 of the GST Act excludes certain supplies made when working out your projected annual turnover.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

· by way of transfer of ownership of a capital assets of yours, or

· solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Paragraphs 31 to 41 of GSTR 2001/7 explain the view of the ATO on the terms 'capital asset', 'transfer of ownership' and 'solely as a consequence':

Meaning of 'capital assets'

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.

Meaning of 'transfer of ownership'

37. The GST Act does not define the concept, 'transfer of ownership'. The words retain their ordinary meaning in context, and mean a transfer of the whole of your beneficial interest in the asset with or without legal title. A transfer of an interest in property that is less than your full interest will not be captured by these words. For example, if you merely grant a lease or licence over an asset that you own, the supply of that lease or licence will not be a 'transfer of ownership'. However, if you assign your full interest in that lease or licence it will be a 'transfer of ownership'.

Meaning of 'solely as a consequence'

38…

39…

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).

On the information provided, the Company had been carrying on a leasing enterprise on the Property since acquisition. The intention at the time of acquisition was to lease the Property to earn rental income not resale. It is considered that the Property may be described as 'the business entity, structure or organisation set up or established for the earning of profits' and is considered a capital asset of the leasing enterprise.

The Liquidator is selling the property in its current state in a single transaction.

An enterprise terminates when activities relating to that enterprise cease. In anticipation of a sale, the Property is no longer available for lease. Once, this Property is sold the Company will be liquidated. It is considered that the sale of the Property is the consequence of the cessation of the leasing enterprise.

Following the discussion above, the Company will dispose of a capital asset in addition to ceasing to carry on its leasing enterprise. The proceeds of the sale will be excluded when calculating its projected annual turnover. Hence, its projected annual turnover will be below the registration threshold of $75,000.

As such, when the Property is sold, the Company's current GST turnover will be at or above $75,000. However, its projected GST turnover will be below $75,000. Hence, its GST turnover will not meet the registration turnover threshold and it will not be required to be registered for GST. Hence, the requirement of paragraph 9-5(b) of the GST Act would not be satisfied if the Company had sold the property.

As all the requirements of section 9-5 of the GST Act are not met, had the Company made the supply, the sale would not have been a taxable supply. There is no need to consider further whether the supply is GST-free or input taxed.

Consequently, the Liquidator is not liable to pay any GST on the sale of the Property because had the Company made the supply, GST would not have been payable.

Division 165 of the GST Act

The application of Division 165, which contains the general anti-avoidance provisions, requires a careful weighing of the individual circumstances of each case. For the Division to apply, the following four elements need to be satisfied:

(1) One or more of the steps in the arrangement is a 'scheme' as defined in subsection 165-10(2);

(2) A 'GST benefit', as defined in subsection 165-10(1), arises under the scheme;

(3) An entity gets a GST benefit from the scheme; and

(4) It is reasonable to conclude, taking account of the matters in section 165-15, that the dominant purpose or principal effect of entering into or carrying out the scheme was to get a GST benefit.

The Commissioner considers that the arrangement described in your ruling request with its unique set of facts and circumstances does not attract the application of Division 165 of the GST Act. Having regard to all the relevant facts and circumstances we have accepted in this particular case that the arrangement should not be considered to be artificial and contrived with a specific aim to obtain a GST benefit that would not otherwise be available by the operation of the GST Act.

All GST rulings referred to above are available at the ATO website www.ato.gov.au