Edited version of your written advice

Authorisation Number: 1012724604751

Ruling

Subject: goods and services tax (GST) and purchase of properties

Question

Will you be entitled to input tax credits on your purchase of property X and property Y if individual A in their capacity as executor for the deceased estate of individual B (the vendor) registers for GST?

Answer

No. You will not be entitled to input tax credits on your purchase of the properties regardless of whether the vendor registers for GST.

Relevant facts and circumstances

You are registered for GST.

The vendor is not registered for GST.

The vendor holds a property located in Australia (property X) and another property located in Australia (property Y)

Property X consists of a number of titles and has a total area of a certain number of square metres. There are commercial premises on these lots.

Property Y is directly behind property X. Property Y property consists of a title and has an area of a certain number of square metres. There are a number of uninhabitable duplex cottages on this property. These cottages have not been used as residential cottages for decades.

The Valuer General notes all the land to be industrial.

Individual B purchased property X a number of decades ago and property Y a number of decades ago. Individual B purchased property Y much later than property X.

Individual B operated a business from property X from a certain date to a certain date.

Individual B purchased property Y with the intention of one day extending the building that is on property X, although they only used property Y as car parking for their business and they never got around to extending the factory.

After individual B ceased to operate their business there was a big gap in time during which no one used the properties. Then individual B allowed company X to use property X in its business rent free. The vendor has been allowing company C to occupy this property rent free.

Company C continues to operate a business from property X. Company C used property Y for its business in the initial years, when it was doing more of a certain sort of activity. It now outsources this activity so it hasn't been using it for a few years.

Company C is registered for GST. Individual A is a director of company C.

Individual B also owned a residence located in Australia. This residence was individual B's home. This property was sold a long time ago.

The vendor will sell property X and property Y under a single contract to you and company D.

The vendor would not earn $75,000 or more in the 12 month period beginning with the month of settlement of sale of property X and property Y if the sale of these properties was excluded.

The parties to the contract have not agreed in writing that the margin scheme will be used to calculate GST on the sale of the properties.

You and company D are in a property development joint venture. You and company D will develop residential units on the site to rent out.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(2)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 72-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-1(3)

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)

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

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

Reasons for decision

Summary

You will not be entitled to an input tax credit on your purchase of property X and property Y if the vendor registers for GST because you will not acquire the properties for a creditable purpose. You will not be entitled to an input tax credit regardless of whether the vendor registers for GST because you will not acquire the properties for a creditable purpose.

You will also not meet the requirement of receiving taxable supplies unless the vendor voluntarily registers for GST.

Detailed reasoning

An entity is entitled to input tax credits on its creditable acquisitions.

You make a creditable acquisition where you meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable

purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the

supply; and

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

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

Creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you

acquire it in *carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input

taxed; or

(b) the acquisition is of a private or domestic nature.

In accordance with section 40-35 of the GST Act, leasing out residential premises is an input taxed supply.

You will not acquire the properties for a creditable purpose because you will develop residential premises on the site and lease them out on completion. Therefore, you do not meet the requirement of paragraph 11-5(a) of the GST Act.

Acquisition of taxable supply

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which 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.

In accordance with subsection 184-1(3) of the GST Act, a person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity for GST purposes. For example, where an individual is the trustee of a trust, the individual in his or her personal capacity is one entity. As trustee of a particular trust, he or she is a different entity.

The executor for a deceased estate is a trustee of the deceased estate trust.

The sale of property X and property Y will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale of these properties will be supplies made for consideration and the properties are located in Australia.

The vendor is not registered for GST.

There are no provisions in the GST Act under which the sale of property X and property Y will be GST-free or input taxed. In accordance with paragraph 20 of Goods and Services Tax Ruling GSTR 2012/5, the sale of property Y will not be input taxed under the sale of residential premises exemption (section 40-65 of the GST Act) because the dwelling style premises on these properties are no longer inhabitable, and they are therefore not residential premises for the purposes of the GST Act.

Therefore, what remains to be determined is whether the sales of the properties will be made in the course or furtherance of an enterprise that the vendor carries on and whether the vendor is required to be registered for GST.

Sale made in course or furtherance of enterprise

In accordance with paragraph 9-20(1)(a) of the GST Act, enterprise includes an activities or series of activities done in the form of a business.

In accordance with section 195-1 of the GST Act, carrying on an enterprise includes anything done in the course of the termination of an enterprise, for example, selling assets as part of the winding up of the enterprise.

In accordance with paragraph 146 of MT 2006/1, where the only activities performed by an entity are those that it does in terminating the enterprise, for example, the sale of its business premises, those activities are nevertheless done in carrying on an enterprise.

Individual B used property X as their business premises. Property Y was also used in this business - it was used for a particular purpose for the business.

Taxation Ruling IT 2622 explains that upon the death of a person, the property of the deceased passes to their estate, the legal control over which is exercised by an executor or an administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs.

Therefore, it is considered that the winding up of an enterprise that the deceased carried on, performed by an executor or administrator upon the death of the deceased, will still be part of the carrying on of the deceased's enterprise.

The vendor is the trustee of a deceased estate. The sale of the properties in question will be something done in the course of winding up individual B's enterprise. Hence, the sale of these properties will be supplies made in the course or furtherance of an enterprise the vendor carries on. Therefore, individual A, in their capacity as executor for the deceased estate, meets the requirement of paragraph 9-5(b) of the GST Act.

GST registration

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold ($75,000).

Individual A, in their capacity as executor for the deceased, is carrying on an enterprise. Therefore, the requirement of paragraph 23-5(a) of the GST Act is met.

Subsection 188-10(1) of the GST Act states:

You have a GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover

threshold, and the Commissioner is not satisfied that your

*projected GST turnover is below the turnover threshold; or

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

In accordance with subsection 188-15(1) of the GST Act, an entity's current GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are input taxed; or

(b) supplies that are not made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

(c) supplies that are not made in connection with an enterprise that the entity carries on.

In accordance with subsection 188-20(1) of the GST Act, an entity's projected GST turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is likely to make, during that month and the next 11 months, other than:

(a) supplies that are input taxed; or

(b) supplies that are not made for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

(c) supplies that are not made in connection with an enterprise that the entity carries on.

In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital asset is excluded from projected GST turnover.

Paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7 discuss the meaning of capital asset. They state:

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.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Individual B held property X and property Y as capital assets as they retained them to produce income from their business. The character of these assets has not changed to that of trading assets since the time they ceased operating this business.

Therefore, the sale of property X and property Y are excluded from projected GST turnover.

The vendor would not earn $75,000 or more in the 12 month period beginning with the month of settlement of sale of property X and property Y if the sale of these properties was excluded. Therefore, the vendor will not have a GST turnover of $75,000 or more at the time of sale of these properties.

(The associate provision - section 72-5 of the GST Act does not apply to the supply that the vendor makes to company C (the licence to occupy property X) because company C is registered for GST and it acquires the right to occupy the property solely for a creditable purpose. Therefore, the GST turnover calculations relating to the vendor should not include a notional rent amount.)

As the vendor will not have a GST turnover of $75,000 or more at the time of sale of property X and property Y, the requirement of paragraph 23-5(b) of the GST Act will not be met.

As the vendor does not meet all of the requirements of section 23-5 of the GST Act, the vendor will not be required to be registered for GST at the time of sale of property X and property Y.

Section 23-10 of the GST Act provides that an entity is entitled to be registered for GST if it is carrying on an enterprise (regardless of the level of GST turnover).

The vendor is entitled to be registered for GST because the vendor is carrying on an enterprise by selling the properties from which individual B formerly operated a business.

If the vendor voluntarily registers for GST, the requirement of paragraph 9-5(d) of the GST Act will be met. If the vendor does not voluntarily register for GST, the requirement of paragraph 9-5(d) of the GST Act will not be met.

As all of the requirements of section 9-5 of the GST Act will be met if the vendor voluntarily registers for GST, the sale of property X and property Y will be taxable supplies if the vendor voluntarily registers for GST.

As not all of the requirements of section 9-5 of the GST Act would be met if the vendor does not voluntarily register for GST, the sale of property X and property Y will not be taxable supplies if the vendor does not voluntarily register for GST.

The sale of the properties to you will not be taxable supplies unless the vendor voluntarily registers for GST. Therefore, you would only meet the requirement of paragraph 11-5(b) of the GST Act if the vendor voluntarily registers for GST.

Consideration for supply

You will provide consideration for the supply of the property to you. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act.

GST registration (you)

You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act.

Conclusion

As you do not meet all of the requirements of section 11-5 of the GST Act, you will not be entitled to an input tax credit on your purchase of property X and property Y.