Edited version of your written advice

Authorisation Number: 1051487132146

Date of advice: 27 February 2019

Ruling

Subject: GST and sale of property and assets

Question 1

Will the sale by Entity 2 to Entity 4 of all of the things at Site 2, including the sites and residential dwellings, be taken to be an input taxed supply pursuant to subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

Will the sale of the ‘Businesses’ and ‘Assets’ as defined under the Sale of Business Agreement by Entity 1, Entity 2 and Entity 3 to Entity 5 be a taxable supply pursuant to section 9-5 of the GST Act?

Answer

Yes, except to the extent anything under the Sale of Business Agreement is owned and supplied by Entity 3 and was used solely in connection with input taxed supplies made by Entity 3.

Relevant facts and circumstances

Entity 1, Entity 2 and Entity 3 (collectively “You”) are currently members of the same GST group. Entity 3 is the nominated representative member of the GST Group.

Entity 1 owns the land and related assets at Site 1.

Entity 2 owns the land and related assets at Site 2.

Entity 1 and Entity 2 lease their respective sites and assets (the Park) to Entity 3, which operates the residential business on Site 1 and Site 2 under Residential Park permits.

Entity 1 and Entity 2 have each contracted to sell their respective sites to Entity 4.

98.1% of the sites at the Park are subject to a residential tenancy agreement for moveable dwelling premises in a moveable dwelling park under the Residential Tenancies and Rooming Accommodation Act 2008. Most residential tenancies begin with a six week/42 day “Short Tenancy Statement” which then is taken to be a long term tenancy if the tenancy continues (Long Term Tenancies). The average length of stay at the Park is 1.7 years.

Short Tenancy Statements entered into show the Lessor as ABC Caravan Park Pty Ltd.

Site 1

Entity 1 acquired Site 1 under a contract of sale on xx/xx/xxxx with settlement occurring in 20xx. Since settlement, Site 1 has been leased to Entity 3 and operated as a residential park.

Site 1 operates under a Residential Park Permit as issued by the relevant Council.

Site 1 consists of two separate lots (Lot 1 and Lot 2). Lot 1 is x.xxx ha and Lot 2 is x.xxx ha with the lots recorded together on title reference xxxxxxxx and containing xxx separate sites, of which:

(a) xxx sites have residential moveable dwellings owned by the Entity 1 where the site and dwelling are subject to Long Term Tenancies. Such supplies of long-term accommodation are treated as input taxed;

(b) x site has a residential moveable dwelling that is owned by the long term tenant, not Entity 1. The tenant pays rental for the site;

(c) x site is currently work in progress meaning there is currently no tenant in situ; but it is intended for Long Term Tenancies; and

(d) x sites have no residential moveable dwelling. These sites have a concrete pad, or grass with electricity water and sullage only and are only used for short term/tourist letting, which is treated as a taxable supply for GST purposes. The estimated area occupied by these sites is xxx square metres.

Site 1 also contains an office for the Park, three Amenities Blocks, a workshop and a storage area as well as roads and paths for accessing the sites.

Site 1 contains an area of xx.xxm² which is subject to two commercial leases for a mobile phone tower used by ABC Pty Ltd and XYZ Pty Ltd. The two leases are treated as a taxable supply.

Site 1 contains an area of xxxxm² that is subject to a commercial tenancy agreement to an unrelated entity. This tenancy is treated as a taxable supply.

Entity 1 has entered into a Contract for Commercial Land and Buildings (Agreement 1) for the sale of land (Site 1) to Entity 4.

Site 2

Entity 2 acquired Site 2 in 19xx and operated it in its own right until 20xx when it entered into a lease agreement with Entity 3. Entity 3 has operated the premises as a residential moveable dwelling park since 20xx.

Site 2 operates under a Residential Park Permit as issued by the relevant Council.

Site 2 contains xxx separate residential moveable dwelling sites of which:

(a) xxx sites have residential moveable dwellings owned by Entity 2 where the site and dwelling are subject to Long Term Tenancies. Such supplies of long-term accommodation are treated as input taxed;

(b) x sites are currently work in progress meaning there are currently no tenants in situ but they are intended for Long Term Tenancies; and

(c) No sites have residential moveable dwellings that are only used for short term/tourist letting.

Site 2 also contains 2 Amenities Blocks and a Storage Area.

Entity 2 has entered into a Contract for Commercial Land and Buildings (Agreement 2) for the sale of land (Site 2) to Entity 4.

Entity 3 operates Site 1 and Site 2 under the name of ABC Caravan Park (the Park). Approximately 98% of the sites and dwellings at the Park are the principal home of the resident under a long term tenancy arrangement. Entity 3 treats such supplies of long term accommodation as input taxed supplies pursuant to paragraph 40-35(1)(b).

Sale of Business Agreement

Entity 1, Entity 2 and Entity 3 have agreed to sell the manufactured homes, cabins and caravans and other assets required for operating the residential park businesses at Site 1 and Site 2 to Entity 5 under a Sale of Business Agreement.

Clause x.x of the Sale of Business Agreement states that the Sellers agree to sell and the Buyer agrees to purchase the Businesses and the Assets:

(a) on the Completion Date;

(b) free from all Encumbrances; and

(c) for the Purchase Price.

Clause x.x of the Sale of Business Agreement clarifies that the Purchase Price is the combined total consideration for:

(1) the Assets and the Business;

(2) Site 1; and

(3) Site 2.

The Sale of Business Agreement identifies the following parties to the agreement:

● Entity 1, Entity 2 and Entity 3 (Sellers).

● Entity 5 (Buyer).

The Sale of Business Agreement defines the following terms:

Assets means:

(a) all authorisations and other rights necessary for the operation of the Businesses

(b) the Business Name

(c) the Business Records

(d) the rights and benefits of the Sellers under the Contracts;

(e) the Goodwill;

(f) the Intellectual Property Rights used in the Businesses including those in the Website;

(g) the Plant and Equipment; and the Stock.

Businesses means:

(a) the Site 1 Business; and

(b) the Site 2 Business.

Site 1 Business means the accommodation centre business undertaken from Site 1 using the Assets.

Site 2 Business means the accommodation centre business undertaken from Site 2 using the Assets.

Purchase Price means $xx,xxx,xxx.xx (exclusive of GST).

Relevant legislative provisions

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

Section 9-5

Subsection 9-30(4)

Section 9-40

Section 11-20

Division 38

Section 40-35

Paragraph 40-35(1)(b)

Division 48

Section 48-40

Subsection 48-40(1)

Subsection 48-40(2)

Subsection 48-45(1)

Section 195-1

Residential Tenancies and Rooming Accommodation Act 2008

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 www.ato.gov.au

Question 1

Subsection 9-30(4) states:

A supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies [emphasis added].

Section 195-1 provides that if a provision of the GST Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

Division 48 (which contains provisions relating to GST groups), whilst altering the basic rules relating to the entity liable for GST on taxable supplies (and entitlement to input tax credits in respect to creditable acquisitions) contained in section 9-40 and section 11-20, does not alter which entity makes the supplies or acquisitions – see subsection 48-40(1) and subsection 48-45(1).

Paragraph 48-40(2)(a) states that ‘a supply that an entity makes to another member of the same GST group is treated as if it were not a taxable supply…’. This has effect despite sections 9-40 and 13-15 (which are about liability for GST).

For subsection 9-30(4) to apply to the sale of Site 2 by Entity 2 to Entity 4, Site 2 must have been ‘used solely in connection with Entity 2’s supplies that are input taxed’.

You contend that the GST Group solely used Site 2 to make input taxed supplies to entities outside the GST Group (park residents). Your contention requires a single entity concept to apply so that subsection 9-30(4) would be applied as follows:

● Entity 2, or the GST Group, can be treated as having used Site 2 to make input taxed supplies, despite the input taxed supplies of the residential park business being made by another GST group member (Entity 3).

● The intra-group supply of Entity 2 leasing Site 2 to Entity 3, is taken not to have occurred, so that Entity 2 has not used Site 2 to make a lease supply to Entity 3.

Whilst both entities are members of a GST group, we do not consider that Division 48 has the effect that supplies by members of a GST group are made by the GST group, or that the GST group is treated as single entity for all purposes under the GST Act.

This is supported by the AAT decision in The Taxpayer and Commissioner of Taxation [2010] AATA 497. The specific issue was a GST group member determining ‘the consideration for your acquisition’ for property acquired from another group member under s 75-10(2) of the GST Act at 32:

‘ …:The GST system does not have a single entity style rule of the kind provided for in part 3-90 of the Income Tax Assessment Act 1997 (Cth). Particular, and it might be observed, piecemeal, provision is made in the GST Act for dealing with, or ignoring, some, but not all, transactions that occur within a GST group. These provisions, and the effect they produce, can be described in the terms referred to in the Explanatory Memorandum. These references in the Explanatory Memorandum are not a warrant for advancing a single entity concept that would allow the term "your acquisition" to be construed as an acquisition by another entity…’

The application of Division 48 and specifically section 48-40 was later considered in Applicant and Commissioner of Taxation 2012 ATC 1-046 (Applicant case) at [16]-[33], [21]. While Senior Member Fice agreed that ‘…the single entity argument…is correct at [33], the reasons at [21]-[28] are specifically about the scope of subsection 48-40(2) being narrow and limited to liability for GST at [28], and how it interacted with paragraph 66-5(2)(e) at [22]. The reasons do not indicate that subsection 48-40(2) has a broad scope, and is to be interpreted as establishing an overarching single entity concept. The Commissioner’s position on these two AAT decisions is set out in the Decision Impact Statement for the Applicant case:

Regarding the GST grouping rules, despite its preference for the second taxpayer's single entity argument, the Tribunal did not find the decision on the interaction between Divisions 48 and 75 of the GST Act in The Taxpayer and Commissioner of Taxation [2010] AATA 497 to be incorrect. We consider that decision, which has not been disturbed on appeal, properly reflects the fact that Division 48 of the GST Act does not confer an unqualified single entity treatment for GST groups under which actions of one group member can generally be ascribed to another.

The lack of an overarching single entity concept is illustrated by the fact that where a single entity concept does apply, it is specifically referenced in the provision, for example subsection 48-45(2) and section 48-55. Division 48 does not contain a provision that modifies the application of 9-30(4). Consistent with the Commissioner’s comment in the Decision Impact Statement for the Applicant case, the interaction between subsection 9-30(4) and Division 48 will be determined by the effect of subsection 48-40(2).

The input taxed supplies in relation to the residential park

In this case approximately 98% of the sites and dwellings at the Park are the principal home of the resident under a long term tenancy arrangement. Such supplies of long term accommodation have been treated as input taxed supplies pursuant to paragraph 40-35(1)(b).

Subsection 9-30(4) uses the phrase ‘you have used solely in connection with your supplies that are input taxed’. Entity 3 is the entity making the input taxed supplies of the accommodation to the occupants/residents of the ‘residential park’. Subsection 48-40(2), or any other provision in Division 48 does not attribute input taxed supplies made by Entity 3 to the GST group, or to Entity 2 when applying subsection 9-30(4). As Entity 2 has not made any input taxed supplies using Site 2, this requirement in subsection 9-30(4) is not satisfied.

The intra-group lease

Entity 2 is making a supply of the property (Site 2) to Entity 3 by way of lease (a supply to another GST group member). We consider Site 2 to be commercial residential premises, and the supply of Site 2 to Entity 3 would not be input taxed under section 40-35. As this is an intra-group supply, subsection 48-40(2) applies so the supply by way of lease by Entity 2 is treated as not being a taxable supply. The effect of subsection 48-40(2) is not to treat this supply as not having taken place as the GST group is a single entity.

When applying subsection 9-30(4) the phrase ‘you have used solely in connection with your supplies that are input taxed’ is used. Entity 2’s ‘use’ of Site 2 was in connection with the supply under the lease to Entity 3, which is not an input taxed supply.

The requirements under subsection 9-30(4) are not satisfied, the sale of Site 2 by Entity 2 is not input taxed under subsection 9-30(4).

Question 2

Section 9-5 provides 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 the indirect tax zone; 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.

Goods and Services Tax Ruling GSTR 2006/9; Goods and services tax: supplies contains a number of propositions to assist in analysing a transaction to identify the supply or supplies made in that transaction. Proposition 8 proposes that a supply cannot be made by more than one entity.

In discussion regarding Proposition 8, paragraph 99 makes reference to C & E Commrs v. Wellington Private Hospital Ltd [1997] BVC 251 with Millet LJ at [252] stating:

‘Where supplies are made by different suppliers, they cannot be fused together to make a single supply...’

Division 48 does not treat multiple supplies made by different group members as a supply made by the GST group or the GST group representative.

The Sale of Business Agreement is not a single supply made by the GST group as the supplies under agreement are made by 3 separate entities (the 3 GST group members). Therefore the supply or supplies made by each GST group member under the Sale of Business Agreement need to be characterised.

Supplies made by Entity 2 and Entity 1 under the Sale of Business Agreement

As discussed above at Question 1, the supply by Entity 2 of Site 2, including the sites and residential dwellings, was not input taxed pursuant to subsection 9-30(4). Likewise, for the same reasons as discussed above, anything owned and supplied by Entity 2 under the Sale of Business Agreement will not be input taxed.

Similarly, also for the same reasons, anything owned and supplied by Entity 1 under the Sale of Business Agreement will not be input taxed.

Supplies made by Entity 2 and Entity 1 do not fall within the scope of the GST-free provisions of Division 38. Consequently, such supplies made under the Sale of Business Agreement will be taxable supply/supplies where the positive limbs of section 9-5 are satisfied.

Supplies made by Entity 3 under the Sale of Business Agreement

Under the Sale of Business Agreement, Entity 3 agreed to sell the Businesses and Assets to Entity 5. ‘Businesses’ is defined under the Sale of Business Agreement as being:

(a) the Site 1 Business; and

(b) the Site 2 Business.

‘Site 1 Business’ is defined as the accommodation centre business undertaken from Site 1 using the Assets with ‘Site 2 Business’ meaning the accommodation centre business undertaken from Site 2 using the Assets.

We consider Entity 3 to be the entity supplying the Site 1 Business and the Site 2 Business.

Sale of the ‘Site 1 Business’

Given the facts in this case, xxx sites situated on Site 1 are occupied (or intended to be occupied) by long term occupants. Supplies of such long-term accommodation have been treated as input taxed supplies. Xx sites situated on Site 1 were used to provide short term tourist letting with these supplies being treated as taxable supplies for GST purposes.

The supply of the Site 1 Business has not been solely used to make input taxed supplies. As such, the supply of the Site 1 Business is not input taxed pursuant to paragraph 9-30(4). Furthermore the sale of the Site 1 Business is not GST-free and will be a taxable supply where the positive limbs of section 9-5 are satisfied.

Sale of the ‘Site 2 Business’

In this case, Site 2 contains xxx separate sites with all sites being occupied (or intended to be occupied) by long term residents. All supplies of long term accommodation have been treated as input taxed supplies pursuant to paragraph 40-35(1)(b). We consider that the supply of the Site 2 Business by Entity 3 has been used solely in connection with Entity 3’s input taxed supplies of long-term accommodation. As such, the supply of the Site 2 Business by Entity 3 is an input taxed supply pursuant to subsection 9-30(4) and is not a taxable supply.

Assets

In line with the principles discussed above:

● any assets supplied by Entity 3 under the Sale of Business Agreement used solely in the operation of the Site 2 Business will be input taxed supplies in accordance with subsection 9-30(4);

● any assets supplied by Entity 3 under the Sale of Business Agreement used in the operation of both the Site 1 Business and Site 2 Business will be taxable supplies where the positive limbs of section 9-5 are satisfied;

● any assets supplied by Entity 3 under the Sale of Business Agreement used solely in the operation of the Site 1 Business will be taxable supplies where the positive limbs of section 9-5 are satisfied.