Edited version of private advice

Authorisation Number: 1051880717538

Date of advice: 5 August 2021

Ruling

Subject: GST and sale of property

Question 1

Is ABC Trust making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in regard to the sale of the property situated at a specified location?

Answer

Yes

Question 2

Is XYZ Pty Ltd making a taxable supply pursuant to section 9-5 of the GST Act in regard to the sale of the property situated at a specified location?

Answer

No

Relevant facts and circumstances

XYZ Pty Ltd is not, and has never been, registered for GST.

XYZ Pty Ltd does not carry on an enterprise or receive income in its own right.

XYZ Pty Ltd is the Trustee for the ABC Trust.

The ABC Trust is registered for GST effective from 1 July 20XX and carries on an enterprise described as property development.

XYZ Pty Ltd is the registered proprietor of property situated at a specified location (Property).

The Property was acquired on dd/mm/yyyy and is a commercial property consisting of four shops.

The Property is recorded as an asset in the financial records of the ABC Trust.

All income and expenses in relation to the Property are accounted for in the financial accounts of the ABC Trust.

In relation to activities associated with the Property, the role of XYZ Pty Ltd is limited to the execution of documents such as leases/licences and sale contracts entered into.

XYZ Pty Ltd does not take any other role in activities or decisions associated with the Property.

You are of the view the Property title is held by XYZ Pty Ltd in the capacity as bare trustee.

Shop 3 was previously subject to a fixed term lease tenanted to Tenant 3. The fixed term lease commenced on dd/mm/yyyy for a term of x years with a further x-year option. Following the expiration of the fixed term lease, Tenant 3 continued to occupy and currently occupy Shop 3 under a periodic tenancy. The monthly rental amount is $x,xxx plus specified outgoings.

Shop 4 was previously subject to a fixed term lease tenanted to Tenant 4. The fixed term lease commenced on dd/mm/yyyy for a term of x years with a further x-year option. Following the expiration of the fixed term lease, Tenant 4 continued to occupy and currently occupy Shop 4 under a periodic tenancy. The monthly rental amount is $xxx plus specified outgoings.

Shop 1 and Shop 2 are currently tenanted to DEF Pty Ltd under a licence agreement executed on dd/mm/yyyy. The weekly rental amount is $xxx.

On dd/mm/yyyy XYZ Pty Ltd entered into a Contract of Sale of Real Property to sell the Property for a price of $xxx,xxx.

The purchaser is shown on the sale contract as DEF Pty Ltd and/or Nominee.

Publicly available information obtained from the Australian Business Register show DEF Pty Ltd as being registered for GST effective from dd/mm/yyyy.

You have submitted a copy of the sale contract which shows the section providing that the sale is of a going concern is not checked.

The sale contract provides that the sale of the Property is subject to existing tenancies.

There is no written agreement between you and the purchaser that the sale is of a going concern.

Settlement date was dd/mm/yyyy.

You have provided copies of the Land Tax Clearance Certificate for Shops 1 - 4 for yyyy. The certificates show that XYZ Pty Ltd are listed as the vendor however the land tax has been assessed to the ABC Trust.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Paragraph 9-20(1)(c)

Section 9-40

Division 38

Section 38-325

Subsection 38-325(1)

Paragraph 38-325(2)(a)

Division 40

Reasons for decision

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

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

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

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

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 for GST.

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

In this case it is common ground that XYZ Pty Ltd holds title to the Property in the capacity of bare trustee. The Property is held on bare trust for the ABC Trust.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts discusses how the GST legislation applies to supplies of real property involving bare trusts and similar trusts where the trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries. A reference to 'bare trusts' in GSTR 2008/3 is taken to refer to trusts which may not strictly fall within accepted definitions of bare trusts but share similar features. The key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property.

Paragraphs 37 to 41 of GSTR 2008/3 state:

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

38. On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. For instance, in the example at paragraph 11 of this Ruling, despite legal title to the property being held by T [XYZ Pty Ltd], the property is used by B [the ABC Trust] in carrying on its enterprise.

39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

40. The definition of 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T [XYZ Pty Ltd] transfers legal title to the property to a third party at the direction of B [the ABC Trust], it is B [the ABC Trust ] that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

41. This is consistent with the scheme of the GST Act. There is nothing in the GST Act requiring legal title to the assets of an enterprise to be held or dealt with by the entity carrying on the enterprise, in order for taxable supplies or creditable acquisitions of the assets to be made.

In keeping with the ATO view expressed in GSTR 2008/3, we consider the supply of the Property to DEF Pty Ltd is made by the ABC Trust. Therefore, when considering the application of section 9-5, the criteria is considered in the context of the ABC Trust.

Given the facts of this case, all of the positive limbs of section 9-5 are satisfied. That is, the supply of the Property is made for consideration, in the course of an enterprise the ABC Trust carries on (the leasing of the Property), is connected with Australia and the ABC Trust is registered for GST. Furthermore, the input taxed supplies provisions contained in Division 40 do not apply in this case.

The final issue to consider is whether the supply of the Property falls within the scope of Division 38 and is GST-free.

Section 38-325 contains provisions where if satisfied, a supply of a going concern is GST-free. Section 38-325 states:

38-325 Supply of a going concern

(1)  The supply of a going concern is GST-free if:

(a)  the supply is for consideration; and

(b)  the recipient is registered or required to be registered; and

(c)   the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2)  A supply of a going concern is a supply under an arrangement under which:

(a)  the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b)  the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

The definition of a going concern for GST purposes and how the GST legislation applies to such supplies is discussed in Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?

Section 38-325 requires consideration of the criteria to be in the context of an 'identified enterprise'.

The term 'enterprise' is defined in section 9-20 and includes 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 (paragraph 9-20(1)(c)).

Paragraph 107A of GSTR 2002/5 recognises that an 'identified enterprise' may consist solely of the leasing of a property to a tenant or tenants. Furthermore, where the 'identified enterprise' is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a).

However, paragraph 108 of GSTR 2002/5 states:

108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

In this case the Property is being supplied to DEF Pty Ltd where a portion of the Property (Shop 1 and Shop 2) are currently tenanted to DEF Pty Ltd under a licence agreement. As such, the extent to which the Property supplied to DEF Pty Ltd being subject to the existing licence agreement with DEF Pty Ltd would not form a part of a going concern enterprise supplied by the ABC Trust to DEF Pty Ltd.

Following subsection 38-325(2) being satisfied, the supply of the 'going concern' will be GST-free where all the criteria of subsection 38-325(1) are met.

Paragraph 38-325(1)(c) provides that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 182 of GSTR 2002/5 provides that the supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply. We consider the 'day of the supply' to be the day of settlement of the contract.

In this case settlement of the Property occurred on 18 May 2021. The facts in this case are that there is no written agreement between either XYZ Pty Ltd (as trustee for the ABC Trust) and DEF Pty Ltd, or the ABC Trust and DEF Pty Ltd, that the supply is a supply of a going concern.

Conclusion

All of the criteria of subsection 38-325(1) have not been satisfied. As such, the supply of the Property is not GST-free.

The supply of the Property is a taxable supply by the ABC Trust with GST payable in regard to the sale.

Question 2

As discussed above, with reference to paragraph 40 of GSTR 2008/3 the supply of the Property to DEF Pty Ltd is made by the ABC Trust. XYZ Pty Ltd does not make a taxable supply of the Property.