Edited version of your private ruling

Authorisation Number: 1012521820039

Ruling

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

Question

Is the sale of your property subject to GST?

Answer

Yes, the sale of your property will be subject to GST but only to that part of the property that has been leased to a tenant who has used it for primary production purposes. This is because the sale of the property is a mixed supply comprising both a taxable and non-taxable part.

Relevant facts and circumstances

You, the current partnership, are a tax law partnership consisting of a number of remaining partners of the original partnership, also a specific partnership, which was created following the death of one of the partners.

The current partnership is registered for GST.

The partners are family members and are the current co-owners of a certain property. The co-owners acquired this property many years ago and legal title was held by them as tenants in common. One of the partners and another related individual's share is X% and the other two partners' (also related) share is X%, held equally as joint tenants. The other partner and the other related individual also held their X% share equally as joint tenants. However, following the death of the other related individual, this other partner now holds the whole X% share.

On acquisition, the land had fencing and a small residential house and was primarily rural land. The partners do not reside on the land. The co-owners' intention when acquiring the property was to use it for investment purposes and to provide possible future agricultural land for future expansion of their existing primary production businesses.

The part of the property that has the small residential house has been leased and continues to be leased.

The rest of the land on the property, since it has been acquired, has been leased to a tenant who has carried on a primary production business on the land, and continues to be used in this way.

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

Apart from repairs to the small residential house which were carried out more than 10 years ago, 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.

The land has not been developed or subdivided by you.

The land has now been rezoned low density residential. A purchaser has approached you to sell your property and has made an offer. This offer has been accepted by you and contracts exchanged to sell the property. You are selling to maximise the realisation of your property.

You will not be selling the land as farmland.

You will not be selling the land as a sale of a going concern. There is no agreement that the property is being sold as a going concern. The purchasers at the signing of the contract were not jointly registered for GST.

The property is being sold as is.

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 leased up until the day of settlement.

The partnership has previously acquired Y commercial strata units which are rented. No properties have previously been sold.

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 in section 9-5 of the GST Act are met. In this case, the sale of your property is for consideration and is connected with Australia as the property is located in Australia and the partnership is 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 (also accessible from our website) 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 leasing enterprise, it is considered that the disposal of this capital asset has a connection with the partnership's enterprise. Accordingly, the supply of the property is considered to be made in the course or furtherance of the partnership's enterprise. As such, the supply 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 the property will be a taxable supply and will be subject to GST unless it is GST-free or input taxed.

Whether the sale 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 have not supplied 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 have not sold 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 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 has not been substantially renovated to make it 'new residential premises' at the time of supply of the property.

As such, the sale of that part of the property containing the small 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

As the supply of the property is a mixed supply, it is necessary to apportion the consideration for the supply between the taxable and non-taxable components.

Goods and Services Tax Ruling GSTR 2001/8 provides guidelines on how to apportion the 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 is 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 containing the farmland that has been leased to a tenant and used by the tenant in their primary production business.

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.

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.