Edited version of private advice

Authorisation Number: 1051569115385

Date of advice: 20 August 2019

Ruling

Subject: Goods and services tax and property

Question

Will your supply of the shop and residence at specified address be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following period: 1 August 20XX to 31 July 20XX

The scheme commences on: 1 August 20XX

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.

You (specified name) are not registered for goods and services tax (GST) individually nor as a partnership.

You purchased a property some specified time years ago. The property is located at specified address. There is a building on the property. The bottom floor of the building is a shop. There is a residence above the shop. The residence is a proper residence and not some space used as a residence. At the time of acquiring the property the intention was to rent the property long term.

The income producing property was jointly acquired by you under a single contract. The property is held by you as joint tenants. You funded the acquisition of the income producing property out of joint borrowings or funds. A property manager was appointed to act on your behalf. The rental from the property was paid into your joint bank account. The expenses relating to the income producing property were paid from your joint bank account. You jointly paid all liabilities in relation to the income producing property.

Both properties have been rented out but became vacant about 1 month ago. You are endeavouring to find tenants for the property. The annual rent from the shop and residence is expected to be below $75,000.

You are marketing the property for sale. Whoever buys the property has the right to continue to use the bottom floor as a shop. The property may be sold tenanted or untenanted.

You want to sell the property to help your children financially.

You own your principal place of residence.

You do not have any other real estate transactions apart from what is mentioned in the facts above.

You do not carry on any other enterprises.

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 subsection 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999 subsection 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 72-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

·         All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

·         All terms marked by an *asterisk are defined terms in the GST Act.

Tax law partnership

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) deals with whether tax law partnerships exist. Paragraphs 81 to 84 of GSTR 2004/6 state:

Tax law partnerships involving family members

81. The acquisition of property for income producing purposes by family members is ordinarily made by them under an arrangement or agreement. The acquisition is often made by them as joint tenants out of joint funds or borrowings, and under a single contract. The property is usually acquired for the mutual benefit of all the family members, including any children.

82. The appointment of an agent or manager to manage the leasing of the property is a joint decision of all members, or by one member acting on behalf of and with the express or implied authority of the other members. Frequently, the person managing the property is a family member. Rental income is deposited into a joint bank account. Outgoings in relation to the property are also paid out of the same account.

83. A case where these features were present is McDonald. In that case, a husband and wife entered into an agreement to invest in income producing properties; they borrowed funds to finance the purchase, the properties were purchased as joint tenants, and the income was paid into a joint bank account from which outgoings were also paid.

84. In our view, the weight of factors present in these types of cases means that the leasing enterprise is carried on by a tax law partnership.

Accordingly you are a tax law partnership.

Taxable supply

Section 9-5 provides that:

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.

For your supply to be taxable it must satisfy all the requirements of section 9-5. You will not make a taxable supply if you fail to meet one of the requirements of section 9-5. As you are not registered for GST we will consider whether you are required to be registered for GST.

Requirement to be registered

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, which is currently $75,000 for entities other than non-profit entities.

Section 195-1 provides that 'carrying on' an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

We will consider whether you are carrying on an enterprise.

Leasing enterprise

Leasing meets the definition of enterprise under section 9-20. Consequently, you are carrying on a leasing enterprise.

Furthermore, section 195-1 provides that 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise. It follows that the sale of the property (tenanted or untenanted) is in the termination of your leasing enterprise. Therefore, you are still carrying on your leasing enterprise when selling the property.

However, if your GST turnover does not meet the registration threshold then you are not required to be registered.

Next we will consider whether your GST turnover meets the registration turnover threshold.

Registration turnover threshold

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

·         your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or

·         your projected GST turnover is at or above the registration turnover threshold.

The registration turnover threshold applicable to you is $75,000.

It is necessary to determine whether your projected GST turnover meets the threshold. You are required to be registered for GST if your projected GST turnover is at or above $75,000.

Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

The following are disregarded when working out your projected GST turnover:

·         supplies that are input taxed

·         supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act)

·         supplies that are not made in connection with an enterprise that you carry on, or

·         supplies that are not connected with Australia etc.

Your supply of residential premises by way of lease is considered to be input taxed. Such supplies are disregarded when working out your projected GST turnover. We note for your information that the rental income from the shop will contribute towards your projected GST turnover.

In addition, section 188-25 provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you:

·         by way of transfer of ownership of a capital asset, or

·         solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Capital asset

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of 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 (GSTR 2001/7).

The GST Act does not define the term "capital asset". However, GSTR 2001/7 explains that generally, the term capital assets refers to those assets that make up the profit yielding subject of an enterprise. They are often referred to as structural assets. They 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. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Therefore, the character of an asset must be determined at the time of expected supply.

In this case, you held the property in order to derive lease income from letting the property to various parties. You did not acquire the property in order to derive income from its disposal. The property is therefore a capital asset. It follows then, that the disposal of the property will be excluded from the calculation of your projected GST turnover.

Your projected GST turnover is below $75,000. Your GST turnover does not meet the $75,000 registration turnover threshold.

Therefore, you are not required to be registered under section 23-5.

This being the case, you fail to meet section 9-5(d) because you are not registered nor required to be registered for GST. Accordingly, your supply of the property is not a taxable supply.