Edited version of your written advice

Authorisation Number: 1051491380067

Date of advice: 8 March 2019

Ruling

Subject: GST and supply of real property

Question 1

(a) Is Entity X (Fund) carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

(b) Where the Commissioner considers that the Fund is carrying on an enterprise, is the sale of the four Properties a taxable supply for the purposes of section 9-5 of the GST Act?

Answer

(a) Yes, the Fund is considered to be carrying on an enterprise for the purposes of the GST Act.

(b) No, the sale of the four Properties by the Fund is not a taxable supply for the purposes of section 9-5 of the GST Act.

This ruling applies for the following periods:

1 January 2019 till quarter ending 30 June 2020

Relevant facts and circumstances

Individual A and Individual B are the two sole members of a self-managed superannuation fund (the Fund). The Fund is a complying superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The Fund purchased four adjoining investment properties (together ‘the Properties’) in 2003 which consisted of the following:

● Property 1 a residential premise that was leased to a tenant till Late 2014. After this tenant vacated the property the Fund was unable to secure another tenant and allowed a relevant group to use the property until approximately 3 years ago. No consideration was payable by the relevant group during its period of use. After the relevant group vacated the property in early 2016 the Fund has been unable to secure any other tenant.

● Property 2 - a residential premise that was leased to the same tenant continuously until approximately three years ago. After this property was vacated by the tenant the Fund has been unable to secure any other tenant.

● Property 3 - a commercial property that was built over two titles. It was leased to a commercial tenant who vacated the property around three years ago (early 2016). The Fund tried unsuccessfully to find another tenant and due to issues with squatters decided to demolish the property.

The acquisition of each of the four properties by the Fund was not subject to GST, nor was the sale to the Fund made under the margin scheme.

At the date of purchase of the properties by the Fund all properties where rented/leased by the Fund to various residential and commercial tenants (as outlined above).

The Fund registered for GST on 1 July 2014. From this date the Fund charged GST on the commercial premises. No GST was charged on the remaining two residential properties.

Due to the inability to attract tenants after the properties where vacated in early 2016, the Fund decided to demolish all buildings. This demolition occurred late early-mid 2016.

Since the building demolition the four sites have remained as vacant land.

The Fund has not claimed any input tax credits on any part of the demolition costs. In addition no input tax credit has been claimed in respect of the Properties since the Fund demolished the buildings.

The members of the Fund separated in early-mid 2016. As part of the settlement agreement the four properties held by the Fund are required to be sold so that the superannuation benefits can be split in accordance to court orders. As a result, the properties have been listed for sale by the Fund since the marriage breakdown.

Commencing 30 September 2017 the GST registration of the Fund was cancelled as it ceased receiving rental income and was not required to be registered for GST as its income was below the GST turnover threshold.

The Fund has not undertaken any activities in respect of the Properties since its demolition. In addition the Fund did not intend to undertake any development activity in respect of the Properties themselves.

The Fund did not borrow any monies to finance the demolition and removal of the buildings. Nor did the Fund borrow any monies for any building.

The Fund has currently entered into a contract of sale with a purchaser to sell the four properties. The purchaser of the Properties is an unrelated third party.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1,

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 23-5,

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 23-15,

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-15 and

A New Tax System (Goods and Services Tax) Act 1999 section 188-20.

Reasons for decision

Summary

The Fund is considered to be carrying on an enterprise for the purposes of the GST Act. However as the Fund is not registered for GST, or required to be registered for GST the supply of the Properties is not a taxable supply.

Detailed reasoning

Question 1(a)

Section 9-20 of the GST Act defines ‘enterprise’ as 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.

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) discusses the meaning of the term ‘enterprise’. Relevantly, paragraph 94 of MT 2006/1 explains that carrying on an enterprise includes activities done in the commencement or termination of the enterprise. Further paragraph 140 of MT 2006/1 states:

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade:

● A business encompasses trade engaged in on a regular or continuous basis.

● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes commercial activities that do not amount to a business but which have the characteristics of a business deal. Further paragraph 258 and 261 discuss the difference between trade assets and investment assets and states:

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

260. Assets can change their character but cannot have a dual character at the same time.

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

In this case the Fund purchased the four Properties for the purpose of deriving income through its leasing activities. As such the Fund carried on a leasing enterprise for the purposes of the GST Act. It is also accepted that during the period in which the leasing enterprise was carried on the Properties where held by the Fund as capital assets.

However the issue that needs to be considered is whether the lack of tenants and/or demolition of the premises has caused the Fund to cease carrying on the leasing enterprise and/or changed the character of holding the asset as a capital asset to being a trading asset.

Paragraph 178 of MT 2006/1 sets out the indicators of a business and paragraph 265 of MT 2006/1 sets out relevant factors when examining isolated transactions. In considering these indicators there is no single test to determine whether a business is being carried on. Rather each case turns on its own particular set of facts.

Taking into consideration the circumstances of this case the Commissioner considers that the Fund used the Properties solely for the purpose of conducting its leasing enterprise. That is, notwithstanding that the Fund was unable to secure replacement tenants once the Properties were vacated and the subsequent demolition of the premises, the Fund did not cease to hold the Property as part of its leasing activities. Further as the Fund has not commenced any development activities nor taken steps to hold the asset as a trading asset it has not changed its character.

Accordingly, consistent with paragraph 140 of MT 2006/1 the Commissioner considers that the Fund carries on its enterprise for the purposes of the GST Act and the sale of the Properties is taken to be part of terminating this enterprise.

Question 1(b)

The requirements for a taxable supply are set out in section 9-5 of the GST which 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 the indirect tax zone; 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 this case the issue that needs to be considered is whether the Fund is required to be registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it’s carrying on an enterprise and its annual turnover meets the registration turnover threshold.

In this case the Fund is carrying on an enterprise therefore what remains to be considered is whether the Funds annual turnover meets the registration turnover threshold (which is $75,000 unless you are a non-profit body).

Subsection 188-10(1) of the GST Act states that:

You have a GST turnover that meets a particular *turnover threshold if:

(a) your *current annual turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected annual turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Subsection 188-15(1) of the GST Act states:

(1) Your current GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

In this case as you do not derive any rental income your current GST turnover is below $75,000. Therefore provided your projected annual turnover remains below $75,000 you will not be required to register for GST.

Subsection 188-20(1) of the GST Act provides:

Your projected annual turnover at a time during a particular month is the sum of the *values of all supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

In this case the sale of the Properties will cause your projected GST turnover to exceed the registration turnover threshold. However, section 188-25 of the GST Act provides that the following types of supplies should be disregarded in calculating your projected turnover:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequences of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

In this case we consider that the supply of the Properties (as vacant land) is made, or likely to be made, ‘solely as a consequence’ of ceasing to carry on your leasing enterprise. We also consider the sale the Properties to be a substantial and permanent reduction in size and scale of your leasing enterprise. On this basis, the supply of the Properties is excluded when calculating your projected GST turnover.

According, your projected annual turnover does not exceed $75,000 and you are not required to be registered for GST under section 23-5 of the GST Act when you sell the Properties.

On the basis that you do not register for GST voluntarily you will therefore not meet the requirements of making a taxable supply and GST will not apply to the sale of the four properties.