Edited version of your written advice

Authorisation Number: 1012894919974

Date of advice: 16 October 2015

Ruling

Subject: GST and adjustments on cancellation

Question 1

Will Entity A's supply of the Property to Entity B be a GST-free supply of a going concern?

Answer

Yes.

Based on the information provided, Entity A's supply of the Property will be a GST-free supply of a going concern under section 38-325 of the GST Act. This is because, on settlement date, Entity A will be supplying to Entity B all of the things that are necessary for the continued operation of a leasing enterprise, being the Property and the current Lease Agreement.

In addition, the Contract provides a written agreement that Entity A (as the vendor) and Entity B (as the purchaser) have agreed in writing that the sale is a supply of a going concern and, as Entity A will continue to lease the premises until the day of settlement, Entity A will be carrying on a leasing enterprise until the day of the supply (settlement date).

Question 2

On the date that Entity A is proposing to cancelation their GST registration (application date), is Entity A required to be registered for GST?

Answer

No.

On the understanding that the assumptions set out in the facts apply, Entity A is not required to be registered for GST.

The requirement to register for GST will only apply where Entity A has a GST turnover that is at or above the turnover threshold of $75,000. In determining the GST turnover threshold the GST Act requires and entity to consider both the current GST turnover and projected GST turnover.

Based on the facts Entity A's current GST turnover does not meet, and/or does not exceed the turnover threshold. Further the Commissioner accepts that the projected GST turnover is at or below $75,000. This is on the basis that in working out the projected GST turnover section 188-25 of the GST Act applies to disregard the sale of the Property.

On this basis Entity A is not required to be registered for GST.

Question 3

If Entity A ceases to be registered for GST on the application date will the supply of the Property, be subject to GST?

Answer

No.

The requirements for a taxable supply are set out in section 9-5 of the GST Act and pursuant to paragraph 9-5(d) an entity must be registered or required to be registered for GST.

On the basis that Entity A is not registered for GST and is not required to be registered for GST (based on our response in question 2), the supply of the Property by Entity A will not be a taxable supply.

Question 4

If Entity A ceases to be registered for GST on the application date will Entity A have increasing adjustments under Division 138 of the GST Act?

Answer

Yes.

Based on the information provided, Entity A will be required to make increasing adjustments under Division 138 of the GST Act upon cancelling their GST registration.

The increasing adjustment will apply to each asset that was acquired by Entity A, that immediately before the cancellation taking effect Entity A was entitled to an input tax credit.

Question 5

If Entity A ceases to be registered for GST on the application date will Entity A have an increasing adjustment under Division 129 of the GST Act and/or Division 135 of the GST Act in respect of the Properties acquired as a GST-free going concern?

Answer

No.

Entity A will not have any increasing adjustment under Division 129 or Division 135 of the GST Act.

Generally under section 135-5 of the GST Act, the recipient of a supply of a going concern will have an increasing adjustment if they initially acquire the supply of a going concern and intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies. In cases where an initial adjustment is not required, section 135-10 of the GST Act provides for later adjustments for supplies of going concerns. For the purposes of section 135-10, Division 129 applies to that acquisition in relation to:

• The proportion of all the supplies made through the enterprise that you intend will be supplies that are neither taxable supplies nor GST-free supplies and

• The proportion of all the supplies made through the enterprise that are supplies that are neither taxable supplies nor GST-free supplies.

In this case, we accept that consistent with ATO ID 2007/180 there is no change in the proportion of all the supplies made through the enterprise Entity A carries on. Therefore there would be no adjustment calculated under the method statement in subsection 129-40(1) of the GST Act. This approach applies equally to the interpretation of the phrase 'supplies made through the enterprise' in Division 135 of the GST Act.

On this basis Division 135 and Division 129 of the GST Act will not apply such that Entity A does not have an increasing adjustment with respect to the properties acquired as a GST-free going concern upon cancellation of the GST registration on the application date. 

Question 6

a. If Entity A ceases to be registered for GST, will it's entitlement to claim income tax deductions be based on the GST-inclusive amount of any expenses incurred after this time?

b. Will Entity A's entitlement to income tax deductions change solely by reason of its GST registration being cancelled?

Answer

a. Yes

b. No

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. However no deduction is allowable if the outgoing is of a capital, private or domestic nature.

Section 27-5 of the ITAA 1997 states that you cannot deduct a loss or outgoing you incur, to the extent that the loss or outgoing includes an amount relating to an input tax credit to which you are entitled or a decreasing adjustment that you have made.

If an entity is not registered for GST, any GST they incur when making business purchases will be included as a business expense since they are not entitled to claim any associated input tax credits.

In this case, if Entity A is not registered for GST, Entity A is entitled to claim income tax deductions based on the GST-inclusive amount of any expenses incurred in gaining or producing their assessable income.

This ruling applies for the following period

Year ending 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is and has been registered for GST since 1 November 20XX.

Entity B is and has been registered for GST since 1 July 20YY.

Entity A acquired commercial property after its registration date consisting of three freehold titles. The particulars of each acquisition are as follows:

• Property 1 was acquired for $X exclusive of GST. This supply was a taxable supply by the vendor. The margin scheme was not applied and Entity A claimed an input tax credit.

• Property 2 was acquired for $Y. The supply was a GST-free supply of a going concern.

• Property 3 was acquired for $Z exclusive of GST. The supply was partly taxable and partly a GST-free sale of a going concern. Therefore the purchase price was apportioned and an input tax credit was partly claimed.

For completeness, Entity A has no other assets.

Together we refer to the above three mentioned properties held by Entity A as the 'Property'.

Entity A acquired the Property with the intention of developing them into, and selling completed residential apartments. After acquiring the Property, Entity A carried on a leasing enterprise, whilst undertaking the design and development application process.

Entity A made no structural improvements to the Property.

The Property has been leased by Entity A to Entity C. A copy of the lease agreement between Entity A and Entity C (the Lease Agreement) has been provided as part of this ruling request.

The Lease Agreement sets out the amount of rent payable. This amount is less than $75,000 per annum.

Entity A made various creditable acquisitions in the course of carrying on its leasing enterprise and the enterprise of developing and selling residential apartments and claimed input tax credits in respect of these acquisitions.

Entity A's activities of developing and selling the residential apartments ceased prior to the proposed date of cancellation of their GST registration (i.e. the 'application date)

Entity A (as vendor) entered into a contract for sale (Contract) with Entity B (as purchaser) for the sale of the three properties. A copy of the Contact has been provided for the purposes of this ruling request.

Under the terms of the Contract the:

• parties agree in writing that the supply of the Property is a supply of a going concern;

• Anticipated completion date is late 20YY

Assumptions

For the purposes of answering questions 2 - 6 of this ruling request, the following assumptions are taken to apply.

• On or around the day one month prior to settlement of the Contract, which is referred to as the 'application date', Entity A will request the Commissioner cancel its GST registration,

• Entity A will not carry on an enterprise for at least 12 months following completion of the Contract,

• Entity C will continue to occupy the premises under the terms of the Lease Agreement,

• The Contract will proceed to settle in late 20YY,

• Entity A will, in due course, lodge an income tax return for the year ended 30 June 2016.

Note: For the purposes of this ruling response the Commissioner has not determined whether Entity A ceased its activities of developing and selling the residential apartments before the application date. Accordingly, if it is found upon further review that Entity A's development activities where not ceased the decisions reached in questions 2 to 6 will not apply.

Relevant legislative provisions

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 135

A New Tax System (Goods and Services Tax) Act 1999 138

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 27-5