Edited version of your written advice

Authorisation Number: 1012888956356

Date of advice: 8 October 2015

Ruling

Subject: GST - Mixed supplies of property

Question 1

Are you making a mixed supply under section 9-80 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the property located in Australia?

Answer

Yes, you are making a mixed supply under section 9-80 of the GST Act.

Question 2

What methods can you use to determine the value of the taxable and non-taxable portions of your property under section 9-80 of the GST Act?

Answer

You can use any reasonable basis to apportion the consideration and calculate the value of the taxable and non-taxable parts of a supply under section 9-80 of the GST Act.

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a partnership registered for GST since 1 July 2000 in the forestry industry.

You own a block of land located in Australia (the property).

You acquired the Property in 19XX and it is a number of hectares (acres) in area. The land was vacant at the time you acquired it.

Under State government legislation, some of these acres are preserved as "protected regenerated vegetation". This means that you have exclusive use and responsibility to maintain this parcel of land but you cannot build upon or otherwise use the land without State approval. As a result, you have a financial and time burden in maintaining this land.

During your ownership of the property you have been conducting several different enterprises on the land. These enterprises included:

• forestry

• bed and breakfast cabins; and

• other unrelated enterprises.

Consent has been granted by your local government authority (LGA) to undertake forestry on the property. In this endeavour you have established a number of specific stands and a number of 'cabinet timber' stands on the property.

Your forestry activities include plantings, thinning and enhancements in line with Farm Forestry best practice. These activities have been carried out with the planning and financial support of the relevant government authority.

No commercial harvesting of the forestry has been realised to date however it was always planned that the crop would be harvested over a period of ten to fifteen years from the date of lodgement of the development application depending on species maturity rates, or otherwise when economically worthwhile.

Some other areas of your property were planted with another plant and the property now has extensive plantations of this plant scattered throughout.

The harvesting of the other plant has recently been explored and you have considered establishing a joint venture with a local producer to harvest and market it. To date, harvesting has occurred and timber has been utilised in product trials but no commercial sales have been made.

You have also planted fruit and nut trees in accessible areas of the property.

You hold an aquaculture permit/licence for your property however no active aquaculture enterprise has been carried out.

Prior to 1 July 2000 you constructed a building on the property which you used as your main residence upon its completion in prior to 1 July 2000. This building had a bedroom and kitchen and toilet facilities associated with a normal residential building.

Sine 1 July 2000 you obtained approved from your LGA to construct and develop a bed and breakfast accommodation on the property as an ancillary/secondary use.

Your intention at this time was that the bed and breakfast accommodation would consist of a number of X bedroom cabins. You would construct a new main residence with your original residence becoming the reception/central management area for the bed and breakfast accommodation.

To ensure that your LGA approval did not lapse, you completed all the operational works for the bed and breakfast accommodation in 20XX. These works consisted of roads, drainage, waste systems, security gates, surveillance equipment and completion of one cabin.

Also in 20XX, you completed your new residence which was separate and distinct from the cabin and the building previously occupied by you.

You also renovated your former residence in 20XX with the intention that it became the manager's office/reception for the proposed bed and breakfast enterprise. However, after renovation, your former residence still had the facilities and character of a normal residence and has been let as such since 2XX9.

During the period July 19YY to June 20XX you have also constructed the following structures to accommodate the farm forestry and bed and breakfast enterprises:

• X (for the bed and breakfast guests)

• Shade-house/Fuel shed (for the forestry enterprise)

• Machinery shed and solar farm (for the forestry enterprise)

• Fire circle (for bed and breakfast guests)

• Beach and Beach Bar (for bed and breakfast guests)

• Wharves on the dam (for bed and breakfast guests)

• Security Gate (for the bed and breakfast guests)

• Lake and pontoon jetty (for the bed and breakfast guests).

The first completed cabin has been rented out on a long term basis since 20YY using a standard residential lease.

You accepted several work assignments unrelated to the farm forestry and bed and breakfast enterprises during the period 20YY to June 20ZZ. These work assignments saw you temporarily relocate to other cities in Australia and overseas.

You incurred expenses for the installation of pads and electricity, internet and toilet infrastructure for a number of other cabins during the period January 20VV to June 20ZZ.

You estimate that the land at the property is being used in the following proportions:

• 25% is protected regeneration vegetation

• 45.5% is used for forestry

• 15.5% is used for your main residence

• 7.8% is used for bed and breakfast accommodation

• 3.1% set aside for planned aquaculture activities

• 1.1% is open paddocks used for private purposes

• 1% is infrastructure (roads and drainage) relating to the forestry enterprise

• 1% is infrastructure relating to the bed and breakfast enterprise.

You are now over the age of 65 and have decided to retire and sell the property.

The property will be marketed as a rural property with potential for aquaculture, farm forestry, education and bed and breakfast operations.

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 9-80

A New Tax System (Goods and Services Tax) Act 1999 Division 38

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2)

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 40-75

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

A New Tax System (Goods and Services Tax) Act 1999 Division 75

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

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

Reasons for decision

In this reasoning, please note:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all terms marked by an asterisk are defined terms in the GST Act

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-5 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 your case, the supply of your property will be made for consideration, it will made in the course or furtherance of an enterprise that you carry on, it is connected with Australia and you are registered for GST, thereby meeting all the requirements of a taxable supply under section 9-5.

Mixed and composite supplies

The words "to the extent" in section 9-5 indicate that a supply of a property could be partly taxable and partly non-taxable.

Section 9-80 provides that if a supply is partly taxable and partly non-taxable, the value of the taxable supply is worked out on a proportional basis.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains how to identify the taxable and non-taxable parts of a supply and the difference between a mixed supply and a composite supply.

Paragraph 16 of GSTR 2001/8 provided that the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. On this basis, reasonable apportionment is required under section 9-80 to distinguish between the value of the taxable and non-taxable parts of a supply.

However, at paragraphs 17 to 18A of GSTR 2001/8 the Commissioner differentiates mixed supplies from composite supplies. Composite supplies are supplies which have taxable and non-taxable parts which are not separately identifiable. For instance a supply which is essentially taxable but which also contains non-taxable parts which are simply integral, ancillary or incidental to that supply. GST is only payable on the taxable part of a mixed supply. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply. No apportionment is required for composite supplies.

Input taxed supply of residential premises

Section 40-65 provides that a 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 (regardless of the term of occupation).

However, the sale is not input taxed to the extent that the residential premises are:

• commercial residential premises, or

• new residential premises.

The term 'residential premises' is defined in section 195-1 include land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation.

The cabin and your former residence exhibit all of the necessary physical characteristics to be regarded as residential premises as they have bedrooms for sleeping accommodation and kitchens, bathrooms, etc to enable the tasks of day to day living to be carried out.

In accordance with section 40-75 the cabin and former residence are not new residential premises as they have been leased for a period of more than five years. Refer also to subsection 40-75(2).

Therefore, we need to consider if your supply of these buildings is that of commercial residential premises.

Commercial residential premises

The term 'commercial residential premises' is defined in section 195-1 to include a hotel, motel, inn, hostel or boarding house, or anything similar to these establishments.

Additionally, Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) provides guidance on the characteristics of hotels, motels, inns, hostels and boarding houses or similar premises.

Whether premises are commercial residential premises is a matter of overall impression involving the weighing up of all relevant factors.

Paragraph 12 of GSTR 2012/6 sets out the following common characteristics of operating hotels, motels, inns, hostels and boarding houses or similar premises:

• Commercial intention

The premises are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

• Multiple occupancy

The premises have the capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

• Holding out to the public

The premises offer accommodation to the public or a segment of the public.

• Accommodation is the main purpose

Providing accommodation is the main purpose of the premises.

• Central management

The premises have central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

• Management offers accommodation in its own right.

The entity operating the premises supplies accommodation in its own right rather than as an agent.

• Provision of, or arrangement for, services

Management provides guests and residents with some services and facilities, or arranges for third parties to provide them.

• Occupants have status as guests

Predominantly, the occupants are travellers who have their principal place of residence elsewhere. The occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant

Applying the above principles to this case, we consider that the layout, design and operation of the cabin and your former residence (including the surrounding grounds and facilities) are intended to be used predominantly for residential accommodation. They have the physical characteristics of a house which is intended to provide the occupants with sleeping accommodation and the basic facilities for day to day living.

Moreover, the occupants of those two premises have been given the right to occupy them under the terms of a normal residential lease.

As your former residence and the cabin have none of the characteristics of commercial residential accommodation, they remain input taxed supplies of residential accommodation. Refer to section 40-35.

Your new residence constructed by you in 2009 would also be properly characterised as an input taxed supply of residential accommodation.

Paragraph 46 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises ('GSTR 2012/5') states:

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

Therefore those portions of your property designed to be used in conjunction with your current residence, your former residence and the cabin would also be an input taxed supply of residential accommodation.

Non-residential property

The non-residential areas of the property include those portions set aside for use in:

• Forestry; and

• Protected regeneration

It is clear that if these parts of the property were considered in isolation, they would have no characteristics that support their use predominantly for residential accommodation. This is because those parts of the property would not have the physical characteristics that provide the basic facilities for day to day living.

As these portions of the property and their associated buildings do not provide basic living facilities, they are not residential premises and are not input taxed. Thus, you make a taxable supply of this land and buildings when you sell them.

However, we also considered whether when viewed in its entirety, it would be right to characterise the houses, cabin and associated buildings as the dominant part of the supply and all other parts of the property as being integral, incidental or ancillary to that dominant, input taxed part - thereby making it a composite supply.

In paragraph 56 of GSTR 2001/8 the Commissioner points out that in Customs and Excise Commissioners v. Madgett and Anor (t/a Howden Court Hotel), the European Court of Justice described the term 'ancillary' in terms of scale and connection:

'... a service is ancillary if, first, it contributes to the proper performance of the principal service and second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.

The forestry and protected regeneration portions of your property are discrete from the residential, input taxed parts. While stands of forest and regeneration areas may enhance the enjoyment of the residential areas, they are physically identifiable and potentially marketable in their own right. Moreover, these parts of the property comprise almost 75% of the area of the property.

Given that the taxable, non-residential areas of your property are not considered to be ancillary, integral or incidental to the input taxed residential parts, your supply of the property must be characterised as a mixed supply Therefore, you will need to apportion the consideration you receive for the property between the taxable and non-taxable parts to determine the consideration for the taxable part in accordance with section 9-80. Refer to subsection 9-80(2) and paragraph 36 of GSTR 2001/8.

Methods of Apportionment

Under paragraphs 25 to 27 of GSTR 2001/8, you can use any reasonable basis to apportion the consideration and calculate the value of the taxable and non-taxable parts of a supply. Whichever method you choose should be supported by your business records.

Margin scheme

Normally, the GST on a supply is calculated as 1/11^th of the GST inclusive price and the purchaser can claim an input tax credit for the GST component.

However, under the margin scheme the GST payable on the supply of real property is instead calculated as 1/11^th of the margin and, no input tax credit can be claimed by the purchaser.

Division 75 sets out the rules for using the margin scheme. To be eligible to use the margin scheme, section 75-5 requires that both the supplier and the purchaser agree in writing that the margin scheme is to apply.

As you acquired the property prior to 1 July 2000 and intend to sell it after 1 December 2005, the margin is the difference between the sale price and one of the following:

1. the amount paid for the property, or

2. the value of the property provided in an approved valuation of the property as at 1 July 2000.

Goods and Services Tax Ruling GSTR 2006/7, Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 ('GSTR 2006/7') explains the operation of the margin scheme in situations similar to yours.

At paragraph 70 of GSTR 2006/7 with reference to MSV 2005/3 and MSV 2009/1, the Commissioner stipulates the following approved valuation methods:

1. a valuation by a professional valuer (Method 1)

2. a valuation based on the selling price (Method 2)

3. a State or Territory Government Department valuation (Method 3).

A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 ('MSV 2005/3') specifies the requirements for making valuations in respect of the margin scheme.

Paragraph 6 of MSV 2005/3 provides that if a property has been improved since the valuation date the valuation needs to take account of the unimproved value and the value at supply (settlement).

Paragraph 7 of MSV 2005/3 goes on to state that the valuation must be apportioned on a fair and reasonable basis to determine the value of the (taxable) part of the property subject to the margin scheme.

A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 ('MSV 2009/1') specifies the requirements for making valuations for the purposes of applying the margin scheme in Division 75. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010.

Going concern

Section 9-20 defines 'enterprise' to include, amongst other things, an activity, or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

The Tax Office view of what is an enterprise is contained in Miscellaneous Taxation Ruling MT 2006/1; The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1).

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

We accept that your activities of residential leasing and forestry are enterprises for the purpose of GST.

Division 38 contains the provisions relating to GST-free supplies. Subsection 38-325(2) defines the supply of a going concern for GST purposes as a supply under an arrangement in which:

(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.

Section 195-1 defines 'thing' as anything that can be supplied or imported.

Subsection 38-325(1) goes on to state that the supply of a going concern is GST-free if:

a) the supply is for consideration; and

b) the recipient is registered or required to be registered; and

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

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? provides guidance on the operation of section 38-325.

Consequently, if the sale of the taxable parts of your property, meet all of the conditions in section 38-325, those taxable parts could be characterised as the supply of a GST-free going concern.

You can obtain a copy of all our public rulings and determinations from our website at www.ato.gov.au