Edited version of your written advice

Authorisation Number: 1051398136445

Date of advice: 17 July 2018

Ruling

Subject: Sale of properties

Questions

1. Is GST payable on the sale of the properties by the Individual?

2. What are the GST consequences for the related entity on the sale of the properties?

Answers

1. No. GST is not payable on the sale of the properties by the Individual.

Please read below for various adjustments that you are required to make due to certain GST mistakes.

2. Please read below.

Relevant facts and circumstances

An individual (the Individual) purchased some properties (Properties) that were used to carry on a ‘serviced apartment’ business as a GST-free sale of a going concern. The sale included the furniture that was inside these properties.

The Properties are under separate titles.

The Properties have not been substantially renovated since the Individual purchased them.

The Individual let the Properties to a related entity (related entity) to carry on the enterprise of leasing out the Properties to third party tenants (enterprise).

The related entity uses the internet to advertise and rent the Properties.

The Properties are predominantly used by the related entity to provide accommodation for more than 30 days (approximately 70% of accommodation was for more than 30 days).

Any major capital purchases required for the Properties were purchased by the Individual and not by the related entity. The Individual has claimed input tax credits on the purchase of these items.

In the Individuals’ income tax return the Individual has also claimed depreciation and interest cost in relation to the loan that he obtained to purchase the Properties.

The related entity incurred day to day running costs of the Properties and claimed input tax credits in regards to these acquisitions.

The Individual receives a monthly payment of a certain amount (inclusive of GST) from the related entity for letting the property to the related entity. The Individual has claimed input tax credits of the GST included in this amount.

The Individual does not pay a management fee to the related entity.

The related entity treats the accommodation provided by it to its’ tenants as accommodation in commercial residential premises and therefore includes GST on all of the rental fees charged to its’ clients.

The related entity treated all types of accommodation provided by it to its’ tenants as being taxable supplies. Whilst the related entity noted a legislative provision that stated that long term accommodation may not be subject to GST, the related entity applied a conservative approach and applied GST to all types of accommodation.

The Individual has been approached by a potential buyer that wishes to purchase the Properties to provide accommodation to third parties. The sale will include furniture and all the fitting and appliances that are currently being used by the related entity to carry on the enterprise.

The Individual is contemplating selling the properties either under one contract or under separate contracts.

The related entity may or may not carry the enterprise of providing accommodation to third party tenants until the day of settlement of the Properties.

What the Individual will be selling to the third party purchaser will be merely the Properties without any business plans, goodwill etc. that are attributed to the business. Accordingly the sale price for Properties will only take into account the value of the Properties and will not attribute any amount to the enterprise that was being carried on by the related entity.

The related entity will not be supplying anything to the Individual as part of the finalisation of the sale of the enterprise that has been carried on by the related entity.

The related entity will not be receiving any payment in regards to the sale of the Properties from the Individual.

The full amount of the sale proceeds will be retained by the Individual.

Relevant legislative provisions

Section 9-5 of the A New Tax (Goods and Services Tax) Act 1999

Section 142 of the A New Tax (Goods and Services Tax) Act 1999

Section 135 of the A New Tax (Goods and Services Tax) Act 1999

Reasons for decision

GST is payable on taxable supplies. A supply is not a taxable supply if it is input taxed. In this case what needs to be determined is whether the supply of the properties by the Individual is an input taxed supply of residential premises or supply of commercial residential premises (which may be a taxable supply).

Residential premises

Residential premises is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a * floating home.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

The Commissioner’s views on what he considers as residential premises is outlined in goods and services tax ruling, Goods and services tax: residential premises (GSTR 2012/5).

Commercial residential premises

Commercial residential premises is defined in section 195-1 of the GST Act as follows:

(a) a hotel, motel, inn, hostel or boarding house; or

(b) premises used to provide accommodation in connection with a * school; or

(c) a * ship that is mainly let out on hire in the ordinary course of a * business of letting ships out on hire; or

(d) a ship that is mainly used for * entertainment or transport in the ordinary course of a * business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by * ships used as residences; or

(e) a caravan park or a camping ground; or

(f) anything similar to * residential premises described in paragraphs (a) to (e).

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an * education institution that is not a * school.

The Commissioners’ views on what he considers as commercial residential premises is outlined in goods and services tax ruling, Goods and services tax: commercial residential premises (GSTR 2012/6). GSTR 2012/6 provides the following at paragraph 12.

12. Common characteristics of operating hotels, motels, inns, hostels and boarding houses that are relevant, though not necessarily determinative, to characterising premises as commercial residential premises are:

● 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.

Considering the facts provided to us, it is our view that even though the related entity may have treated the premises as commercial residential accommodation, what the Individual is supplying is merely the Properties and not any aspect of the running of the commercial residential premises. Therefore, it is our view that the supply that the Individual make is five residential premises (and not commercial residential premises). A supply of residential premises is input taxed (and therefore is not a taxable supply). GST is not payable on taxable supply.

Additional information

Incorrect treatment of the supply of the properties by you to the Trust

The Individual has let the Properties out to the related entity in order for the related entity to run a commercial residential enterprise. It is the Commissioners’ view that where an owner of residential premises leases residential premises to another entity to carry on an enterprise leasing commercial resident premises the supply by the owner to the other entity is a supply of residential premises. This is view is expressed in paragraph 237 of the GSTR 2012/6.

Accordingly, it is our view that the supply of the Properties by way of lease by the Individual to the related entity is an input taxed supply of residential premises. This means that the Individual was not required to pay GST on the leasing of the Properties to the related entity. But the Individual treated this supply as a taxable supply and thus has incorrectly overpaid GST to the ATO each month.

Refunding the excess GST

Division 142 of the GST Act outlines where excess GST amounts may be refunded by the ATO.

Pursuant to section 142-10 of the GST Act, where a supplier (such as the Individual) has passed on the excess GST to another entity (such as the related entity) then generally the excess amount may not be refunded by the ATO to the Individual until the Individual refunds the related entity.

However, in this case, the related entity too has claimed input tax credits each month incorrectly. For instance, given that the Individual did not make a taxable supply of the Properties to the related entity, the acquisition that the related entity made from the Individual was not a creditable acquisition. Therefore, the related entity shouldn’t have claimed the amount of input tax credit that it claimed each month.

Accordingly, if the Individual chooses to refund the excess GST back to the related entity, the related entity will be required to pay this amount back to the ATO. This means that both entities will have to make corresponding adjustments. That is, the Individual will claim a refund back from the ATO and the related entity will be required to remit the GST back to the ATO.

Alternatively, if the Individual chooses not to refund the related entity of the excess GST that has been included in the monthly payment, then pursuant to section 142-10 of the GST Act the excess GST is taken to have been always payable by the Individual which means that neither entity will be required to make any adjustment until such time the Individual chooses to refund the related entity (in the paragraph preceding this paragraph we have addressed the consequences of refunding the related entity).

Increasing adjustment for the Individual under Division 135 of the GST Act

It is also noted that the acquisition of the Properties by the Individual in was through a supply that was a supply of a GST-free going concern. Given that it is our view that the supply made by the Individual of the Properties to the related entity was an input taxed supply of residential premises, pursuant to Division 135 of the GST Act the Individual is required to make an increasing adjustment as follows.

The amount of the increasing adjustment that is required to be made by the Individual pursuant to subsection 13-5(2) of the GST Act, is:

1/10 X supply price X proportion of non-creditable purpose

proportion of non-creditable use is 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, expressed as a percentage worked out on the basis of the * prices of those supplies.

supply price means the * price of the supply in relation to which the increasing adjustment arises.

In this case, the proportion of non-creditable use is 100% and the supply price is the price paid by the Individual to purchase the Properties.

Other corrections

An entity is only entitled to claim input tax credits on creditable acquisitions that they make. Any acquisitions made in relation to making an input taxed supply are not creditable acquisitions.

Accordingly, given that the supply of the Properties made by the Individual to the related entity is an input taxed supply, acquisitions made by the Individual in relation to the Properties are not creditable acquisitions. Therefore, the Individual is not entitled to claim any input tax credit in relation to these acquisitions. However, because the Individual has claimed input tax credits in relation to the Properties, the Individual is now required to correct the relevant mistakes. I have attached an ATO publication that provides information on how to correct GST errors.

Question – 2 GST consequences to the Trust

Provided that the related entity is not a party to the sale contract of the Properties, the related entity will not be liable for any GST on the sale of the Properties by the Individual. However, where any aspect of the enterprise that is being carried out by the related entity is supplied by the related entity to a third party or to the Individual for which the related entity will be paid any consideration then there may be GST consequences for the related entity.

Given that there are no clear instructions regarding how the existing tenants and their leases will be transferred to the purchaser of the Properties by the related entity we are unable to comment on the GST consequences that may arise from these transfers.

The related entity will be required to remit GST on any taxable supplies that it will make at any time during the course of the carrying on their enterprise.

The related entity will also be entitled to claim any input tax credits on creditable acquisitions that it will be making in regards to the carrying on of its’ enterprise.