Edited version of private advice

Authorisation Number: 1051624663904

Date of advice: 27 February 2020

Ruling

Subject: GST and the sale of real property

Question

Are <name of rulee> (you) making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) when you sell the property located at <address> (the Property/the Land)?

Answer

No, you are not making a taxable supply under section 9-5 of the GST Act when you sell the Property. Accordingly, GST is not payable on the supply.

This ruling applies for the following period:

<n year(s)> from the date of the ruling

The scheme commences on:

Date of application for the private ruling

Relevant facts and circumstances

<name of rulee> (you) are a partnership (the Partnership) with an Australian business number <ABN number> active from <ddmmyyyy>. You are not currently or historically registered for GST.

You own real property located at <address> (the Property/the Land). You purchased the Property in <yyyy> which settled on <ddmmyyyy>.

The Property comprised of n lots held in one amalgamation and one address. There is no separate address for each of the lots.

The total land size of the Property is <n hectare> (n square meters). Records shown on Current title search documents in relation to the Property, made on <ddmmyyy>, include the following details:

The co-owner of the Property, <name>, is the same individual as the partner of the Partnership, <name>. <last name> being the married name of <name>.

Existing structures on the Land at the time of the purchase:

·         <description of structures>

·         Residential premises with attached water tank for domestic use

-        The residential premises are currently on the Land, on lot y

-        The residential premises have been occupied by <name> as the principal place of residence for the entire period of ownership.

Since the date of purchase, the whole of the Property, excluding the portion for residential premises, is leased to your related entity <name> of <ABN number> (the Lessee).

·         On the ABN lookup website, the Lessee is registered for GST from <ddmmyyyy>.

·         You have not entered into a formal written lease agreement with the Lessee because of the related entity relationship.

·         The Lessee operates a farming business and holds a contract with <name>. The farming operation will cease before the settlement of the sale.

·         The Lessee pays for all the outgoings in relation to the Property including rates, water, electricity, land tax, capital improvements and repairs.

You have been approached by a potential purchaser who intends to acquire the Property for development and subdivision purposes. The potential purchaser has advised that they do not intend to carry on a farming business from the Property after they have acquired the Property. The potential purchaser is not your related entity or associate.

The Lessee's farming operation will cease before the settlement of the sale.

Your GST turnover is currently under $75,000.

·         This turnover is solely from leasing of the Property to your related entity/Lessee. Outgoings in relation to the Property paid by the Lessee are your only GST turnover amount.

·         For the financial year 2019, your GST turnover was <$> being the total annual outgoings paid by the Lessee.

·         Other than the lease of the Property, you did not carry on any other enterprise previously and you do not carry on any other enterprise currently.

You do not expect to generate any income (leasing or otherwise) after the Property has been sold.

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 188-25

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 195-1

Reasons for decision

Unless otherwise stated,

·         all the legislative references referred to in this detailed reasoning are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         terms marked with an asterisk are defined in section 195-1 of the GST Act.

Liability for GST on a taxable supply

Section 9-40 provides that you must pay the GST payable on any taxable supply that you make.

Taxable supply

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.

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

Your supply will be taxable where all the requirements of section 9-5 are satisfied. You will not make a taxable supply if any of the requirements are not met.

Where real property is located in Australia, the requirement specified in paragraph 9-5(c) will generally be satisfied.

In this case,

·         you propose to sell the Property

·         the Property is located in Australia

·         you are currently leasing the Property to your related entity, that is, you are carrying on a leasing enterprise.

·         you have leased the whole of the Property, excluding the portion for residential premises, to your related entity <name>.

·         The residential premises have been used by your partner, <name>, as the principal residence for the entire period of ownership.

Accordingly, based on the above facts, in relation to:

(i)    the part of the Property that relates to the residential premises

we consider the sale will be of a private asset and the sale will be outside the GST system.

(ii)   the part of the Property excluding the part that relates to the residential premises

we consider the sale will satisfy the requirements of a taxable supply as specified in paragraphs 9-5(a), (b) and (c).

You are not registered for GST. Accordingly, it is relevant to consider whether you are required to be registered for GST in relation to item (ii) above.

Requirement to be registered for GST

Section 23-5 provides that you are required to be registered for GST if:

(a)  you are carrying on an enterprise, and

(b)  your GST turnover meets the GST registration turnover threshold, which is generally $75,000 for entities other than non-profit organisation.

You are carrying on a leasing enterprise. Accordingly, you satisfy the GST registration requirement specified in paragraph 23-5(a).

GST registration turnover threshold

Subsection 188-10(1) provides that you have a GST turnover that meets the GST 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 GST 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.

Supplies that are disregarded when working out your projected GST turnover include:

·         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

·         supplies that are not connected with Australia.

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:

(a)  by way of transfer of ownership of a capital asset, and

(b)  solely as a consequence of

(i)            ceasing to carry on an enterprise or

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

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) provides the ATO view in working out the GST turnover of an entity. Paragraph 30 of GSTR 2001/7 states:

Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53 of this Ruling.)

Capital asset

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of 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.

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.

You derive leasing income from the Property (other than the part that relates to the residential premises). You have owned the Property since <yyyy> and there is no indication you have acquired the Property in order to derive income from disposal. We consider the Property is your capital asset. Accordingly, the proceeds from the sale of the Property will be excluded from the calculation of your projected GST turnover.

In this case:

·         other than the lease of the Property (excluding the part that relates to the residential premises), you do not carry on any other enterprise currently.

·         your current GST turnover from the lease of the Property is below $75,000.

·         you do not expect to generate any income (leasing or otherwise) after the Property has been sold.

Accordingly, we consider your projected GST turnover will be below $75,000 and under section 23-5 you are not required to be registered for GST in relation to the sale of the Property. This means you do not satisfy the requirement of making a taxable supply specified in paragraph 9-5(d), and when you sell the property located at <address> you will not be making a taxable supply under section 9-5 and GST will not be payable.

This is provided you do not carry on any other enterprise prior to the settlement date of the sale of the Property that will make your GST turnover meet the GST registration turnover threshold.