Edited version of your written advice

Authorisation Number: 1051400464041

Date of advice: 27 July 2018

Ruling

Subject: GST and the sale of property

Question

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 999 (GST Act) when you sell the Property?

Answer

No

Relevant facts and circumstances

Individual A is not registered for GST.

Individual B is not registered for GST.

Individual B is a partner in a partnership that is registered for GST in respect of a farming enterprise.

Individual A and Individual B (You) are not registered for GST as a partnership.

In XXYYYY, you inherited the Property, from your Parent A as tenants in common.

The Property is approximately X acres in size.

In YYYY, your Parent B purchased the Property and the land was used for small crop farming at that time.

In YYYY a house was moved onto the Property and a fence was erected around the house. The house was rented out and the surrounding area was used for small crop farming. The Property is on one title.

In YYYY your parents moved to another address and small crop farming ceased on the Property. The Property continued to be rented out but the land around the house was offered as a separate leasing option for the agistment of horses. Sometimes the same tenant leased the house and land. At other times, there were two separate leases in place with two different tenants.

In XXYYYY, your Parent B passed away and the Property was transferred to your Parent A.

You are currently leasing the Property to one tenant under separate lease agreements for the house and the land. This is a continuation of the arrangement/agreements in place prior to you inheriting the Property. You have provided a copy of the current renewed leases, both entered into with Individual C.

A developer has approached you to purchase the Property in its entirety for around $X.

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 40-35

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

Reasons for decision

Note: In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Summary

You are not making a taxable supply of the Property. This is because you are not required to be registered for GST pursuant to section 23-5 when you sell the Property as your GST turnover in relation to your leasing enterprise is below the GST registration turnover threshold (currently $75,000). As the sale of the Property will constitute the transfer of ownership of a capital asset, the sales proceeds are disregarded when calculating your projected GST turnover.

Detailed Reasoning

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with the indirect tax zone (Australia), and

d) you are registered, or required to be registered for GST.

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

Of relevance is whether you are making a supply of the Property in the course or furtherance of an enterprise that you carry on and if you are required to be registered for GST.

You inherited the Property from your Parent A as tenants in common in XXYYYY and are continuing to lease the Property.

Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

We consider that you are a tax law partnership for GST purposes as you are an association of persons in receipt of ordinary income (rent) jointly in relation to a leasing enterprise you are carrying on.

As the partnership is not currently registered for GST, it is necessary to consider whether you are required to be registered for GST.

Section 23-5 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 $75,000).

The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if:

a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or

b) your projected GST turnover is at or above $75,000.

Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months other than supplies that are input taxed.

In your case, the rental income received from the lease of the residential property is an input taxed supply under section 40-35 and therefore excluded from your GST turnover. The rental income received from the lease of the vacant land is below the turnover threshold of $75,000. Therefore, your current GST turnover is below the GST registration turnover.

Your ‘projected GST turnover’ is the sum of your turnover for the current month and the next 11 months other than supplies that are input taxed.

Of relevance is the rental income received in respect of the lease of the vacant land and the expected sales proceeds of the Property (of approximately $X).

Paragraph 188-25(a) provides that when calculating your projected turnover you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether the sale of your Property is excluded from the calculation of your projected GST turnover.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses what is regarded as a ‘capital asset’ at paragraphs 31 to 36.

Whilst not specifically defined for GST purposes, the term ‘capital assets’ generally refers to those assets that make up the profit yielding subject of an enterprise and may be described as ‘the business entity, structure or organisation set up or established for the earning of profits’.

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.

In this case, you inherited the Property from your Parent A and you have continued to lease the latter to the present date.

Given the facts in this case, we consider the sale of the Property constitutes the transfer of a capital asset for the purposes of section 188-25 and will therefore be disregarded when calculating your projected GST turnover.

As the proceeds from the intended sale of your Property, as outlined in the facts, are disregarded when calculating your projected GST turnover, your projected GST turnover will be below the GST registration turnover threshold. Therefore, you are not required to be registered for GST pursuant to section 23-5 when you sell the Property.

Conclusion

GST is payable on any taxable supplies that you make. One of the requirements of a taxable supply is that you are registered or required to be registered for GST.

In this case, you are neither registered nor required to be registered for GST and as such will not be making a taxable supply when you sell the Property.