Edited version of your private ruling

Authorisation Number: 1012610006485

Ruling

Subject: GST and sale of commercial properties by unregistered vendors

Question 1

Are the entities that each own individual titles for the specified properties required to be registered for goods and services tax(GST), either individually or as a tax law partnership when they sell the properties under a single contract of sale?

Answer

No, the entities that each own individual titles for the specified properties are not required to be registered for GST, either individually or as a tax law partnership when they sell the properties under a single contract of sale.

Question 2

Does GST apply to the sales of the properties referred to in question 1?

Answer

No, GST is not applicable to the sales of the properties referred to in question 1.

Question 3

If GST is applicable to the sale of the properties referred to in question 1, will the terms and conditions of the sale satisfy the requirements of a supply of a going concern?

Answer

The sale of the properties will not satisfy all of the requirements of a supply of a going concern. Please refer to the reasons for decision

Question 4

Will the answers to questions 1, 2 and 3 be different, if the contract for sale is amended and a Special Condition is added to the contract for sale stating that the seller is not registered or required to be registered for GST and GST is not applicable to the sale of the above properties?

Answer

The answers will not be different.

Relevant facts and circumstances

All the entities are separately carrying on an enterprise of leasing commercial properties and they are not registered for goods and services tax (GST) either individually or as a partnership.

All the entities own their respective commercial properties and lease them in their own right.

They do not carry on any other enterprises other than the leasing enterprise of their respective commercial properties.

All the entities have signed a single contract of sale to sell their respective properties.

The annual turnover from the leasing enterprise carried on by each entity is less than $75,000.

Agreements for rent for each property are not contingent upon agreements for other properties and rent is either paid directly to the owners or to the loan accounts.

Each owner of the properties intends to cease their leasing enterprise prior to the settlement of the properties.

All the properties will be in a vacant position at the time of settlement.

According to the contract of sale, the parties have agreed that the buyer will be registered for GST at settlement and the sale of the properties will be the supply of a going concern and GST-free.

The seller and the purchaser have agreed that the contract can be amended to remove the above conditions to include a special condition to state that the seller is not registered or required to be registered for GST and the seller states that no GST applies on the contract for sale.

Depending upon the outcome of this private ruling, the contract will be amended with the above conditions.

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 9-40,

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-325,

A New Tax System (Goods and Services Tax) Act 1999 subsections 38-325(1) and (2),

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1),

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1) and

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

Reasons for decision

Question 1

Tax law partnership

A tax law partnership exists only if there is an association of persons in receipt of income jointly. For GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly

In this case, the commercial properties were leased by the owners individually and not jointly. The income from the leasing of commercial properties in the past was received by each individual owners of the property and not jointly. Each owner was carrying on their leasing enterprise separately and not jointly.

It is considered that the sale of the above commercial properties jointly by the owners in the process of terminating their leasing enterprises may not be considered as receiving income jointly and therefore not considered as a tax law partnership. Furthermore, the owners are not considered as co-owners of each property. Each property has a separate title and is sold by their respective owners. Therefore, the entities are not required to be registered for GST as a tax law partnership.

The issue that needs to be considered is whether each entity is required to be registered for GST, individually.

Turnover Threshold for GST

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

Currently the registration turnover threshold (unless you are a non-profit body) is $75,000. Therefore, if your annual turnover meets the relevant threshold, you are required to be registered for GST.

Division 188 of the GST Act deals with the meaning of GST turnover and whether it meets a particular turnover threshold. Under subsection 188-10(1) of the GST Act you have an annual turnover that meets a particular turnover threshold if:

• Your current turnover is at or above that turnover threshold, and the Commissioner is not satisfied that your projected annual turnover is below that turnover threshold; or

• Your projected annual turnover is at or above that turnover threshold.

Under subsection 188-15(1) of the GST Act your current annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

• Supplies that are input taxed; or

• Supplies that are not for consideration (and are not taxable supplies under section 72-5); or

• Supplies that are not made in connection with an enterprise that you carry on.

In the month each entity settle their properties their current annual turnover will exceed $75,000. It is therefore necessary to consider their projected annual turnover.

Under subsection 188-20(1) of the GST Act your projected annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months other than:

• Supplies that are input taxed; or

• Supplies that are not for consideration (and are not taxable supplies under section 72-5); or

• Supplies that are not made in connection with an enterprise that you carry on.

Furthermore, section 188-25 of the GST Act provides that in working out your projected annual turnover, disregard:

• Any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

• Any supply made, or likely to be made, by you solely as a consequence of:

(1) ceasing to carry on an enterprise; or

(2) substantially and permanently reducing the size or scale of an enterprise.

The leasing enterprise that is carried on by each entity will be ceased prior to the settlement. Each entity will transfer their ownership of the properties to the purchaser of these properties at settlement. Therefore, it is considered that the proceeds from the sale of these commercial properties are disregarded when calculating the projected annual turnover as per section 188-25 of the GST Act.

As the sale of the commercial properties could be considered to be the transfer of ownership of a capital asset as sole consequence of ceasing to carry on the enterprise of each entity and/or substantially and permanently reducing the size of the enterprise of each entity, section 188-25 of the GST Act would be applied to preclude the sale of these commercial properties from being included in the projected annual turnover of each entity.

Consequently, each entity is not required to be registered for GST individually in relation to the sale of these commercial properties as the annual turnover threshold of each entity would be below the registration turnover threshold of $75,000.

Question 2

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

GST is payable on taxable supplies. Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration; 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.

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

Each entity will supply the commercial properties for consideration, in the course or furtherance of their leasing enterprise and the supply is connected with Australia. The supply of commercial properties is not input taxed or GST-free supplies under the GST Act.

The issue that needs to be determined is whether each entity is required to be registered for GST when they make the supply of commercial properties.

Since each entity is not required to be registered for GST as explained in question 1, the supply of the commercial properties will not satisfy all of the requirements of taxable supplies under section 9-5 of the GST Act.

Therefore, each entity will not be making taxable supplies when they sell their commercial properties and GST cannot be included in the sale price. Each entity is not required to pay GST on the sale of their commercial properties.

Question 3

A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the GST Act are satisfied.

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient is registered or required to be registered for GST, and

• the supplier and the recipient have agreed in writing that the supply is of a going concern.

The supply of commercial properties will be made for consideration and according to the contract of sale both the supplier and the recipient have agreed in writing that the supply is of a going concern. If the recipient of the supply is registered or required to be registered, the supply of commercial properties will satisfy the requirements of subsection 38-325(1) of the GST Act.

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement where:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier)

To satisfy the requirements under subsection 38-325(2) of the GST Act, you are required to supply all of the things that are necessary for the continued operation of your enterprise of leasing commercial properties. All the things that are necessary for the continued operation of the leasing enterprise include the supply of the property and the covenants.

The leasing enterprise carried on by each entity will be ceased prior to the settlement and all the properties supplied will be in a vacant position at the settlement. Therefore, the supply of commercial properties will not satisfy both of the requirements under subsection 38-325(2) of the GST Act.

The contract of sale states that both parties have agreed that the sale of the commercial properties will be a GST-free supply of a going concern. The contract of sale also confirms that the seller and the buyer agree that all of the requirements for a supply of a going concern will be satisfied. However, based on the facts provided, the supply will not satisfy all of the requirements under subsection 38-325(2) of the GST Act as explained above.

Question 4

This is a hypothetical question and the Office may not be able to provide an advice on this issue without all the relevant facts. However, if the contract for sale is amended as proposed, the sale of commercial properties will not satisfy all of the requirements of section 9-5 of the GST Act based on the facts provided by you. This means the answer will not be different if the contract is amended as proposed.