Edited version of private advice

Authorisation Number: 1051901177823

Date of advice: 21 September 2021

Ruling

Subject: GST and sale of property and other business assets

Question 1

Will GST be payable by you on your sale of the land (including its improvements) located at address 1 to X?

Answer

No.

Question 2

Will GST be payable by you on your sale of the stock currently located at the property located at address 1 to X?

Answer

No.

Question 3

Will GST be payable on your supply of the XXX, YYY and ZZZ and other XXXXXXX assets you use in the address 1 business operation to X?

Answer

No.

Question 4

Will GST be payable on your supply of XXXXX relating to the address 1 business to X?

Answer

No.

Relevant facts and circumstances

You are not registered for GST.

You have not been registered for GST over the past XX years because your GST turnover has been under $XXXX.

You operate an enterprise as a sole trader from business operations located at two different addresses in the indirect tax zone. You formerly operated this enterprise with your spouse as a partnership until they died. One business operation is located at (address 1) (this is your main business operation). Your other business operation (being, relatively minor in size) is at address 2.

You have operated the business operation at the address 1 property for a number of years.

The address 1 property has the following improvements on it

•         XXX dwelling

•         other improvements, including ones you use in your business.

The XXX dwelling has XX bedrooms, lounge room, kitchen and bathroom. The dwelling was on the address 1 property when you and your spouse purchased the land X years ago. You and/or your spouse did not substantially renovate the dwelling. You and your spouse have used the dwelling as your accommodation when you visited the address 1 property to manage your business operation there.

You have accepted an offer from X to purchase your address 1 property. A sale contract has been drafted, but it has not been signed yet. The sale is expected to settle on or before a certain date.

The agreed price for things you will sell to X at settlement before adding GST is over $XXXX. GST will be added to the $XXXX figure if GST is payable by you on the sale.

The XXXXX will be included in the address 1 land sale.

You will supply XXXXX for the business you conduct on the address 1 property to X. This includes XXX, YYY, ZZZ and XXXXX. The XXX, YYY and XXXXX are specified in the land sale contract as inclusions.

X intends that it or another entity will operate the business operation that you are currently operating at the address 1 property.

You have an X amount of stock at your address 1 property. You will supply this stock to X pursuant to the land sale contract.

You use XXXXXX in your business operation at address 1, such as XXXX and XXXX and you will supply some of these XXXXXX to X as part of the land sale arrangement.

You and X have not agreed in writing that you will sell a going concern to X.

You will operate your business on the address 1 property right up to the time of settlement of sale of that property.

You have stock at your address 2 property, but this is much less stock than you have at your address 1 property.

You are of a certain age. You wish to downsize your enterprise substantially and enter a phase of your life which you have referred to as 'retirement'. Once you have sold your assets associated with the address 1 business operation, you will just have one business operation, which will be the address 2 business operation.. You estimate that your income from this business operation, moving forward, will be a certain amount.

You have determined that your projected GST turnover at the time of settlement of sale of land and the other relevant assets to X would be well under $XXXX if the sale of these assets are excluded from the calculation of projected GST turnover under the GST law.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decisions

Questions 1 to 4

Summary

GST will not be payable on your sale of the land and other assets to X as you are not registered for GST and you will not be required to be registered for GST at settlement.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states

You make a taxable supply if:

(a)        you make a supply for *consideration; and

(b)        you make the supply 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 will not be a *taxable supply to the extent that the supply is

*GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

The indirect tax zone includes mainland Australia and various other areas.

You meet the requirements of paragraphs 9-5(a) to 9-5(c) of the GST Act that is:

•         you are selling the property and other assets in question for consideration (the price)(paragraph 9-5(a)); and

•         you are selling the assets in question in the course or furtherance of your enterprise (paragraph 9-5(b) of the GST Act); and

•         the sale of the land is connected with the indirect tax zone (as the property is located in the indirect tax zone)(paragraph 9-5(c) of the GST Act); and

•         the sale of the other assets in question is connected with the indirect tax zone (as these goods will be supplied wholly within the indirect tax zone)(paragraph 9-5(c) of the GST Act)

You are not currently registered for GST. Therefore, we shall determine whether you will be required to be registered for GST when you sell the assets.

You are required to be registered for GST if you meet the requirements of section 23-5 of the GST Act, which states:

You are required to be registered if:

(a)         you are *carrying on an enterprise; and

(b)         your *GST turnover meets the *registration turnover threshold.

The registration turnover threshold in your case is $XXXX per annum.

You are carrying on an enterprise. Therefore, you meet the requirement of paragraph 23-5(a) of the GST Act.

An entity's GST turnover meets a particular turnover threshold if the requirements of subsection 188-10(1) of the GST Act is met, which states:

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

(a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that

your *projected GST turnover is below the turnover threshold; or

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

Current GST turnover is defined in subsection 188-15(1) of the GST Act, which states:

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.

('Values' are GST-exclusive values (meaning you do not include the GST component, if any, of the price))

Projected GST turnover is defined in subsection 188-20(1) of the GST Act, which states:

Your projected 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 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.

Section 188-25 of the GST Act provides that certain supplies are disregarded from projected GST turnover. It states:

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, 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 consequence of:

(i) ceasing to carry on an *enterprise; or

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

Determining your current GST turnover

Your current GST turnover at settlement of sale of the land and other assets to X will be over $XXXX. You will receive from X at settlement a certain amount (GST exclusive) for sales of assets that you have used in your enterprise. The supply of the residential premises is input taxed, so the portion of the GST-exclusive sale price that is reasonably apportionable to the residential premises does not count towards your current GST turnover. However, the stock alone, counts towards current GST turnover, and it will be sold for over $XXXX (before including GST, if any). Therefore, your current GST turnover meets the registration turnover threshold.

Determining your projected GST turnover

Capital assets exclusion

Paragraphs 31 and 32 of Goods and Services Tax Ruling GSTR 2001/7 discusses the meaning of capital assets. They state:

31. The GST Act does not define the term 'capital assets'. 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' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

Your sale of the land in question will be a sale of a capital asset, as it makes up part of the profit yielding subject of your enterprise; it is a structural asset. Therefore, the part of the GST exclusive sale value of the assets in question that is reasonably apportionable to the sale of the land (the land includes XXXXX on the land) is excluded from your projected GST turnover. The stock to be supplied by you to X are chattels. The stock are not capital assets but are instead trading stock.

You will sell other structural assets to the X as well, such as the XXX. As these are capital assets, they are also excluded from the calculation of your projected GST turnover.

Supplies made solely as a consequence of substantially and permanently reducing the size or scale of an enterprise exclusion

Supplies made solely as a consequence of substantially and permanently reducing the size or scale of an enterprise are excluded from projected GST turnover.

Paragraphs 41 to 45 of GSTR 2001/7 explain when this exclusion from projected GST turnover applies. They state:

41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1 of this Ruling), or the substantial and permanent reduction in size or scale of an enterprise (see example 2 of this Ruling).

42. The GST Act does not define the term 'substantially and permanently' as used in subparagraph 188-25(b)(ii). The word 'substantial' will vary according to context. In Terry's Motors Ltd v. Rinder [1948] SASR 167 at page 180, Mayo J noted that the word 'substantial' is not a word with a fixed meaning. The word 'substantial' is commonly used to refer to something real or of substance, as distinct from ephemeral or nominal, when, for example, describing 'substantial loss or damage'. However the word 'substantial' can also be used to describe something that is 'large, weighty or big'.

43. In the context of section 188-25, we consider that the term 'substantially' refers to a reduction in size which is greater than merely nominal and does not necessarily require a reduction which is proportionately large. We will accept that, in the context of section 188-25, a 10% reduction in the size or scale is substantial in the case of most enterprises. Size or scale in this context means something measurable in terms other than turnover, for example, number of divisions within a company or number of stores operated (see example 2 of this Ruling). In some enterprises a reduction of less than 10% may be substantial. This will depend on the facts and circumstances of each enterprise.

44. The concept of 'permanently' requires that the reduction in size and scale of an enterprise is enduring or is reasonably expected to be enduring. A reduction resulting from circumstances that have a foreseeable end is not permanent, for example a change that foreseeably affects only one or two years. Provided the basis of the expectation of endurance is reasonable it is not relevant that the expectation is proved inaccurate by subsequent events.

45. The substantial and permanent reduction applies to each enterprise operated by the entity, rather than the entity which may be required to be registered for GST.

Paragraphs 51 and 52 of GSTR 2001/7 give an example of where the exclusion would apply. They state:

Example 2: Substantially and permanently reducing the size and scale of an enterprise

51. Property Developer Pty Ltd develops tourist resorts in each of the six states in Australia. Its business in each state is approximately the same size, and overall it has a GST turnover of approximately $18.0M. The company is in the process of updating its accounting and payment system to facilitate electronic lodgment and payment of GST. This process is not expected to be completed for another 6 months, at which time the company intends to elect to lodge and pay electronically.

52. The board of directors decides to permanently close its operations in one State, reducing the size of its total operations by approximately 17%. As a consequence of this decision, it sells its offices, offers staff redundancies and cancels its state licences. Property Developer Pty Ltd then sells its stock of land holdings in that State to another developer for $2.75M. The supply made in disposing of the trading stock is made solely as a consequence of a substantial and permanent reduction in the size and scale of the company's enterprise. Therefore, the $2.75M is excluded from the calculation of its projected GST turnover. As a result, the GST turnover of Property Developer Pty Ltd does not meet or exceed the electronic lodgment turnover threshold, and it is not required to lodge and pay electronically. (However, Property Developer could voluntarily choose to do so.)

You carry on your enterprise at two locations. Your address 1 business operation is your main business operation and the address 2 business operation is relatively minor in comparison to the address 1 business operation. Therefore, the supplies you make to X on settlement (being the address 1 land, the stock located there and other assets of that business operation, which include much of the XXXXXX in the form of chattels) will be supplies made solely as a result of substantially reducing the size or scale or your overall enterprise. The sale of the stock to X can be contrasted to sales of stock you make in the ordinary course of trading.

We consider that the substantial reduction in the size or scale of your overall enterprise is not of a temporary nature, but is instead permanent, given that the reduction in size or scale involves your disposing of your main business operation and also the following factors:

•         your age and your desire to move into a phase of your life in which you will view yourself as being retired, which suggests that you wish to operate your enterprise on a much easier scale with much less work to do; and

•         your plan is to continue operating your enterprise only from the remaining much smaller business operation.

Therefore, your sale of the following assets to the X at settlement will be supplies you make solely as a consequence of substantially and permanently reducing the size or scale of your enterprise:

•         the land (including its XXXXXX)

•         the stock

•         the XXXXXX

•         XXXXX assets in the form of chattels (such as the XXX and the XXXX)

Hence, the sale of these assets will be excluded from your projected GST turnover. The sum total GST exclusive value for these assets is (amount).

You have determined that your projected GST turnover at the time of settlement of sale of land and the other relevant assets to X would be well under $XXXX if the sale of these assets were required to be excluded from the calculation of projected GST turnover under the GST law. Therefore, you will not meet the registration turnover threshold at the time of settlement. Hence, you do not meet the requirement of paragraph 23-5(b) of the GST Act. As you do not meet all of the requirements of section 23-5 of the GST Act, you will not be required to be registered for GST at the time of settlement.

As you are not registered for GST and you will not be required to be registered for GST at settlement, you do not meet the requirement of paragraph 9-5(d) of the GST Act. As one of the positive limbs of section 9-5 of the GST Act is not met, GST will not be payable by you on your sale of any of the assets to X.