Edited version of your private ruling

Authorisation Number: 1012521489461

Ruling

Subject: Goods and services tax (GST) and sale of property

Question

If sold, would the sale of your property be subject to GST?

Answer

Yes, if sold, the sale of your property will be subject to GST but only to that part of the property used for the primary production business. This is because the sale of the property is a mixed supply comprising a taxable part and non-taxable parts.

Relevant facts and circumstances

You are a general law partnership and are registered for GST.

You are the co-owners of your property. You acquired the property many years ago and legal title is held by you as joint tenants. Part of the property is used by them for residential purposes. You are related by marriage.

On acquisition, the land had fencing and a small old residential house and was primarily rural land. The co-owners' intention when acquiring the property was to use it for agricultural purposes and for their residence.

The land has been used to carry on a primary production business in a general law partnership and continues to be used in this way.

The small old residential house has been leased and continues to be leased.

All decisions are made jointly by the co-owners for their mutual benefit. The leasing income and the primary production income is received jointly in partnership and deposited into a joint bank account.

You built a new residential house on the land more than 10 years ago in order to live in. In addition, machinery and growing sheds have been built on the land more than 10 years ago and used for agricultural purposes. Apart from this, no other improvements have been made on the property.

The property is held as a partnership asset. The partnership has claimed income tax deductions in respect to this property.

There is both a leasing enterprise and primary production business carried on by the partnership. The partnership is also using the land on a nearby property owned by one of the partner's parents to generate primary production income.

If the property is sold, it will most likely be to a developer.

The property will be sold as is, the property will not be subdivided or developed.

The property will not be sold as a going concern or as farmland.

If the property is sold, you advised that the small residential house will continue to be leased up until the day of settlement and in addition, the land will continue to be farmed by the partnership up until the day of settlement.

The partnership does not have a history of buying and selling land or buildings.

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 40-65,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 38-480 and

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325.

Reasons for decision

GST is payable on taxable supplies. The sale of property is a supply and will be subject to GST if it is a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and 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.

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

The sale of the property by the partnership will be a taxable supply where all the requirements of section 9-5 of the GST Act are met. In this case, the supply of the property will be for consideration and will be connected with Australia as the property is located in Australia and the partnership will be registered for GST. Therefore, the supply will satisfy paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act.

We now need to consider whether the sale of your property will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and whether the sale is GST-free or input taxed.

Is the sale of your property part of an enterprise?

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 your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances.

Goods and Services Tax Ruling GSTR 2004/8 discusses 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.

As the property is held as a partnership asset and has been used by the partnership in order to carry on a primary production business and leasing enterprise, it is considered that the disposal of this capital asset has a connection with the partnership's enterprise to the extent to which the property has been used in the partnership's enterprise.

Accordingly, the supply of that part of the property used to carry on a primary production business and leasing enterprise is considered to be made in the course or furtherance of the partnership's enterprise. As such, the supply of this part of the property satisfies paragraph 9-5(b) of the GST Act. As all the requirements of section 9-5 of the GST Act have been met then the sale of this part of the property will be a taxable supply and will be subject to GST unless it is GST free or input taxed.

To the extent that the property is used for a residential home by the partners then this is not connected with the partnership's enterprise. Therefore, paragraph 9-5(b) of the GST Act has not been met as the supply of this part of the property is not made in the course or furtherance an enterprise. As all the requirements of section 9-5 of the GST Act have not been met then this part of the property is not a taxable supply and will not be subject to GST.

Whether the sale of your taxable part of your property is GST free or input taxed.

GST- free

The sale of farmland may be GST free under section 38-480 of the GST Act where the recipient intends that the land be used to carry on a farming business. In this case, you advised that you will not supply the property as farmland; as such, your sale of the property would not be GST free under section 38-480 of the GST Act.

The sale of property may be GST free if it is sold as a GST- free supply of a going concern and all the requirements under section 38-325 of the GST Act are met. In this case, you advised that you will not sell the property as a going concern; as such, your sale of the property would not be GST free under section 38-325 of the GST Act.

Input taxed

Under section 40-65 of the GST Act the 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 and is not 'commercial residential premises' or 'new residential premises'. If a supply is input taxed then no GST is payable on the supply.

Section 195-1 of the GST Act defines 'residential premises' as land or a building that is occupied as a residence or is intended to be occupied, and is capable of being occupied as a residence.

In your case, the part of the property that contains the small old residential house that has been and continues to be leased by the partnership would fall within the definition of 'residential premises'. The leased small old residential house is not 'commercial residential premises' or 'new residential premises' and so long as these premises are not substantially renovated to make them 'new residential premises' at the time of supply of the property then this would fall within the definition of residential premises.

As such, the sale of that part of the property containing the small old residential house is an input taxed supply under section 40-65 of the GST Act. Therefore, this part of the property is excluded from being a taxable supply as it is an input taxed supply and will not be subject to GST.

Mixed supply

If sold, the sale of your property will be a mixed supply comprising a taxable part and non-taxable parts. To work out the GST payable on the taxable part of the sale, the sale price will need to be apportioned between the taxable part and the non-taxable parts.

Goods and Services Tax Ruling GSTR 2001/8 provides guidelines on how to apportion consideration that includes taxable and non-taxable parts, and provides methods and examples that may be used to apportion the consideration for a mixed supply.

Paragraphs 26 and 27 of GSTR 2001/8 provide that any reasonable method can be used to apportion the consideration for a mixed supply. Furthermore, the method used must be supportable in the particular circumstances and you should keep records that explain the method used. Paragraphs 92 to 111 of GSTR 2001/8 discuss reasonable methods of apportionment in greater detail. In particular, example 17 illustrates the apportionment method that can be used by you.

In conclusion

The sale of the property will be a mixed supply for GST purposes; therefore the consideration for the supply of the property will need to be apportioned on a fair and reasonable basis between the taxable and the non-taxable parts to determine the GST payable.

The taxable portion of the sale of the property will be that part of the property used for the primary production business, to this extent the sale will be a taxable supply and subject to GST.

The non taxable portion of the sale of the property will be that part of the property containing the leased small residential house, as the supply is input taxed and therefore not subject to GST. The part of the property used as a private residence by the partners is also non-taxable. The supply of the part of the property used as a private residence by the partners will not be a taxable supply to this extent and will not be subject to GST as paragraph 9-5(b) of the GST Act will not be met as the supply will not be made in the course or furtherance of an enterprise.

Additional information

Margin scheme

Where you meet the eligibility requirements of the margin scheme, you may apply the margin scheme to calculate your GST liability. For information about the margin scheme you can refer to the fact sheet GST and the margin scheme (NAT 15145) which is available from our website www.ato.gov.au.