Edited version of private advice

Authorisation Number: 1052010788424

Date of advice: 12 September 2022

Ruling

Subject:Deceased estate - CGT ordinary income

Questions

1. Will the profit from the sale of the property located at the specified address (the Property) be considered ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, it is not considered as assessable income according to ordinary concepts.

2. Will the proceeds received from the sale of the Property be subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes, the proceeds are considered to be statutory income under the CGT provisions as a mere realisation of a capital asset.

3. Was the supply of the Property by the ABC Partnership (the Partnership) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, a taxable supply was not made by the Partnership in their supply of the Property as the requirement under paragraph 9-5(b) of the GST Act was not satisfied.

4. Is the Partnership entitled to cancel its GST registration pursuant to section 25-55 of the GST Act?

Answer

Yes, the Commissioner must cancel the GST registration of the Partnership under section 25-55 of the GST Act if the Partnership has applied for cancellation. This is because the Partnership has been registered for GST for at least 12 months and the Commissioner is satisfied that the Partnership is not required to be registered for GST.

5. If the answer to Question 4 is 'yes', will the Commissioner retrospectively cancel the Partnership's GST registration with effect from DDMMYYYY pursuant to section 25-60 of the GST Act?

Answer

Yes, under section 25-60 of the GST Act, the Commissioner will cancel the Partnership's GST registration with effect from DDMMYYYY. This date being the start of the tax period which commences after the date the Partnership stopped operating on a GST-registered basis.

This ruling applies for the following

1 July YYYY to 30 June YYYY

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

Notes:

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect, and you cannot rely on it.

In the facts, the expressions 'You/you', 'the Partnership' and 'the ABC Partnership' refer to the same entity and are used interchangeably throughout.

Partnership details

You, the ABC Partnership (the Partnership), applied for this private ruling on DDMMYYYY.

For the purposes of Question 1 and Question 2 on Income Tax/CGT issues, the # siblings individually are taken to be the applicants of this ruling.

The partners of the Partnership consist of # siblings, namely:

<list of names of the siblings>

The Partnership was set up purely to hold and manage assets bequeathed to the # siblings from their deceased parent (either directly from their parent or indirectly from their parent). The assets were managed through an estate, which was finalised in the YYYY financial year. Once the estate ceased to exist, the Partnership was formed on DDMMYYYY.

"Manage assets" in this respect relates to:

1. having one bank account in which rental income is paid into and rental expenses paid out of.

2.      having 1 point of contact for all the rental queries.

3.      preparing 1 tax return for all the rental properties.

4.      in essence, making the administration of owning the properties easier.

The Partnership was formed based on recommendation from your prior accountant. The benefit of the partnership structure was to utilise a jointly owned bank account to manage the income and expenses related to the bequeathed assets with all the siblings having access to the account. This was considered important to the # siblings.

The bequeathed assets included commercial property, residential property and vacant land as detailed in the table below:

GST registration and reporting

From DDMMYYYY, the Partnership registered for an ABN and GST.

You are not clear on the reason why the Partnership was registered for GST as historically over the last # years, either nil Business Activity Statements (BAS) or BASs with minor costs were lodged. The registration for GST was done by your previous tax agent. Your current tax agent is XYZ.

You have operated on a GST-registered basis previously when you were leasing commercial properties. Leasing of commercial properties ceased when your last commercial property was sold in MMYYYY.

From YYYY onwards (after the sale of your last commercial property) and until currently, your enterprise has consisted only of the leasing of # residential units located at the specified addresses (the ZZZ Residential Units).

In your BAS for MMYYYY quarter tax period, you reported sales $X with GST payable $X and you claimed input tax credits of $X. These BAS amounts relate to the following:

• The GST payable reported was due to a refund on advertising costs incurred in the sale of the specified property and the remainder of the sales reported relates to residential rental income.

•         Input tax credits claimed relate to accounting fees incurred.

Your BAS for the MMYYYY quarter tax period has not been lodged at the time of this ruling.

The Partnership's only revenue and expected revenue in the YYYY calendar year is the proceeds from the sale of Property # listed in the table above being <the specified address> (the Property) as well as the residential rental income of approximately $X from the ZZZ Residential Units. These # units have always been held for long-term rental income but are now also intended to be for sale shortly, as part of the divestment and wind-up process of the Partnership. These units will not constitute 'new residential premises' as defined for GST purposes when sold.

The Partnership's expected revenue in the YYYY calendar year will be:

• the sale proceeds of Property #,#,# and # listed in the table above (the Other Properties) which are located adjacent/contiguous to the Property. The sale contract for the Other Properties were entered into at the same time as the sale contract for the sale of the Property with settlements scheduled to occur in mid-YYYY;
• the rental income from the lease of the ZZZ Residential Units; and
• the sale proceeds from the likely sale of the ZZZ Residential Units.

The Partnership has not received any other revenue and does not expect to receive any other revenue during this period.

The diagram below illustrates the boundaries and configuration of the Property and the Other Properties:

<Diagram sketched on photo>

Sale of the property located at the specified address

The Property and the Other Properties as sketched on the above photo were advertised for sale earlier this year. The # properties advertised together for sale were:

<list of the address of properties>

The land area of the above # properties together is approximately # hectares.

The partners in the Partnership (the # siblings) had decided to realise the capital value of the Property via an on-market sale through a real estate agent as the ongoing holding costs such as land tax were starting to be difficult to afford and the # siblings were keen to wind up and dissolve the Partnership. The sale would also provide available cash for each of the relevant family members to fund their impending retirement and other lifestyle choices. The disposal of properties was also due to the recent partners' fallout that the partnership assets have to be disposed of or otherwise dealt with before the official dissolution of the partnership.

The amount of holding costs that the Partnership had paid with respect to the Property were:

Council rates: approximately $X p.a.

Land tax: approximately $X p.a.

Water rates: approximately $X p.a.

On DDMMYYYY, the Contract of Sale of Land and Vendor Statement (Sale Contract) was entered into between < siblings' names> (in their capacities as the ABC Partnership) (Vendors) and BBB Pty Ltd (Purchaser) for the sale and purchase of the property known as <the specified address of the property> (the Property).

The Partnership had also entered into a Contract of Sale of Land for the Other Properties (to be sold to a related party of the Purchaser). This contract is not expected to settle until mid-YYYY to allow the purchaser time to obtain a planning permit in respect of these properties.

For the purposes of this tax ruling, as the Property has already settled (the Other Properties to settle in mid-YYYY), this tax ruling only seeks to cover the CGT and GST consequences of the Property. The Other Properties are not the subject of this ruling application, being referenced only for completeness of information.

The sale price for the Property was $X (plus GST if any). Settlement was # days from DDMMYYYY and took place on DDMMYYYY.

The land area of the Property is # hectares. The Property is zoned General Residential Zone.

The copy of Sale Contract provided includes the following details:

Land description: Certificate of Title reference: Volume # Folio #

Lot #, plan of subdivision #

Property address: <specified address>

Price: $X

GST The price includes GST (if any) unless the next box is checked

Special conditions include:

17. COLLATERAL CONTRACTS

17.1. This Contract of Sale is subject and conditional upon the Vendor and BBB# Pty Ltd (being a purchaser nominated by the Purchaser) entering into a Contract for the sale and purchase of the properties situated and known as <the specified addresses> and being the whole of the land in Certificate of Title Volumes # Folios # ("the other Contract") at the same time as the execution of this Contract, with the other Contract providing for settlement to take place within # days of the local council granting a re-zoning of the property sold in the other Contract to General Residential Zoning, or # months after the deposit under that Contract has been paid, whichever is the earlier.

17.2. The Vendor and the Purchaser agree that any default under this Contract by the Purchaser up to and including the settlement date shall be deemed to be a default under the other Contract and any default under the other Contract by the BBB# Pty Ltd up to and including the settlement date under this Contract shall similarly be deemed to be a default under this Contract.

17.3. For the avoidance of doubt, if this Contract comes to an end for any reason prior to the settlement date, or any time thereafter if extended either by mutual agreement or by way of a default by the purchaser, the other Contract will also be deemed to have simultaneously come to an end without any further action or notice by either party.

When the # siblings were bequeathed the Property, it was unimproved vacant land and continued in the same state when it became the asset of the Partnership and until the sale. The Partners did not engage in any development activities or carry out any other improvements on the Property.

Whilst the # siblings were aware that the Property has property development potential as residential lots, the # siblings have no expertise in property development and wanted to achieve the simplest/cleanest possible sales outcome. In this regard, the # siblings had never spoken to any property developers to consider optimising their capital value such as through a property development agreement with a property developer. They have held the land as it was in its unimproved state. The Property was sold as is, in its original unimproved vacant state.

The Purchaser is registered for GST and is part of the AAA entity which is a property developer specialising in housing estate land subdivision projects and intended to undertake property development on the Property. Neither the Purchaser nor the AAA entity are related parties of the ABC Partnership.

The sales contract was for a fixed price. There were no further entitlements such as through sale proceeds or profit share from any land development.

Prior to settlement, the Sale Contract was varied by way of a Deed of Variation (the Deed) dated DDMMYYYY. Under clause # of the Deed, the Parties acknowledge and agree that pursuant to subsection 14-250(1) of Schedule 1 to the Taxation Administration Act 1953, a liability to pay an amount to the Commissioner does not arise and GST is not required to be withheld at settlement.

The Deed varied the GST election of the Sale Contract such that the 'GST must be paid in addition to the price' box is unchecked.

Upon settlement, the proceeds from the sale were allocated to a trust account held by the legal representatives and subsequently transferred into the individual bank accounts of the Partners as directed.

Property background

Since the Partnership held the Property, it had not earned income from the Property. The Partnership had been paying land tax each year for holding the Property.

The Property was recorded in the financial statements (balance sheet) of the Partnership.

The Partnership had never incurred any property development-related costs and has been a non-trading asset holding entity.

The Property was originally acquired in approximately YYYY/YYYY as part of a bundle of adjacent properties in the same area to be the family home of individual CCC (the Deceased), individual DDD, and <names of the # siblings > (the # siblings). The # siblings were brought up on the properties from childhood to their adult years.

The Property was vacant land with no building structure or habitable dwellings on the land (that had been the case since the Property was acquired). The Deceased built a family home on a parcel of land next to the Property. The # siblings' mother still currently resides in the main family home. The land on which the family home is located is not on any of the properties listed in the table above.

The Property was only ever vacant or used at certain times by the Deceased for their family farming of raising certain animals as a hobby farm with an average of # heads of animals. The farming continued after individual CCC passed away. The farming ceased in YYYY when the land was transferred to the # siblings.

The Deceased passed away prior to YYYY and the Property was part of the deceased estate. The Deceased's Will provided that the siblings would be the ultimate beneficiaries of the Property. However, the Property was first willed to individual DDD, subject to the condition that if/once individual DDD commences a specified event, the Property would then be transferred to the # siblings in equal proportions pursuant to the Deceased's will.

The Property was transferred to individual DDD in MMYYYY pursuant to the Deceased's will.

DDD commenced the specified event in MMYYYY. On DDMMYYYY, the Property was transferred from individual DDD to the # siblings initially as Trustees of the deceased estate and then subsequently to the ABC Partnership when this was formed in YYYY.

The background in respect of the Property and the Other Properties was largely the same as set out above (i.e. assets acquired ultimately from their deceased CCC). The Property and the Other Properties remained vacant and unused land from YYYY. One relevant difference is that one lot (Certificate of Title Volume # Folio #) was acquired directly from the deceased estate in YYYY, rather than via individual DDD. The activities and nature of the Other Properties were relevantly identical to the Property as described above.

The professional occupations of the siblings are as follows:

< each of the sibling's name - description of each of the sibling's occupations>

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1)

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

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 25-B

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

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

Reasons for decision

Detailed reasoning

Income Tax

Under questions 1 and 2 below, unless otherwise stated:

•         all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997)

•         all reference materials referred to are available on the ATO website www.ato.gov.au

Question 1

Will the profit from the sale of the property located at the specified address (the Property) be considered ordinary income under section 6-5 of the ITAA 1997?

Summary

The proceeds would represent a mere realisation of a capital asset therefore are not ordinary income and not assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Broadly, there are three main ways profits from a land development, subdivision and sale can be treated for taxation purposes:

1.    As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2.    As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;

3.    As statutory income under the capital gains tax legislation.

Carrying on a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business is being carried on.

Based on the information provided, we do not consider that any profit made from the sale of the Property would be derived in the course of carrying on a business.

Your activities do not have the repetition, size, nature or scale similar to a business of residential land subdivision.

Isolated transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693.

This ruling advises that profit from an isolated transaction will be ordinary income where:

•         the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain and

•         the transaction was entered into, and the profit was made, in the course of carrying on a business operation or commercial transaction.

Paragraph 9 of TR 92/3 states that where a transaction or operation involves the sale of property the taxpayer must usually, but not always, have the intention of making a profit when acquiring the property.

Paragraph 36 of TR 92/3 advises that the courts have often said that a profit on the mere realisation of an investment is not income even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the points above, it is generally not a mere realisation of an investment.

Matters that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transactions are listed at paragraph 13 of TR 92/3:

(a)  the nature of the entity undertaking the operation or transaction;

(b)  the nature and scale of other activities undertaken by the taxpayer;

(c)   the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d)  the nature, scale and complexity of the operation or transaction;

(e)  the manner in which the operation or transaction was entered into or carried out;

(f)    the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g)  if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h)  the timing of the transaction or the various steps in the transaction.

You stated the Property was originally acquired as part of a bundle of adjacent properties in the same area as the family home. The Property is vacant with no building structure or habitable dwellings on the land, which has been the case since it was acquired in YYYY or YYYY. The Property was only ever vacant or used at certain times by the deceased for their family farming of raising certain animals. Whilst you are aware that the Property has development potential as residential lots, you have not spoken with property developers to consider optimising your capital value. The main reason for the sale is the ongoing holding costs such as land tax are starting to be difficult to afford.

The proceeds are therefore not ordinary income and not assessable under section 6-5 of the ITAA 1997.

Question 2

Will the proceeds received from the sale of the Property be subject to capital gains tax under Parts 3-1 and 3-3 of the ITAA 1997?

Summary

The proceeds from the sale of the Property represent the mere realisation of capital assets and the capital gains are taxable under Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

Under section 6-10 of the ITAA 1997, assessable income also includes amounts that are not ordinary income but are included as assessable income by provisions of the tax law. These amounts are called 'statutory income'. Capital gains are an example of statutory income.

Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes their net capital gain (if any) for the income year. As a general rule, a taxpayer is required to include in their assessable income any capital gain they make from a CGT event that happens to a CGT asset the taxpayer acquired on or after 20 September 1985. Pursuant to section 108-5 of the ITAA 1997, a CGT asset is any kind of property, or a legal or equitable right that is not property. Accordingly, land and buildings are CGT assets.

Proceeds from the sale of property more often represents the mere realisation of capital assets, which will fall for consideration under the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

In the course of its decision in Myer Emporium, the Full High Court said that profits made on a realisation or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realised subsequently in order to capture the profit arising from the expected increase in value. In a joint judgment, their Honours stated:

"It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction."

Paragraph 36 of TR 92/3 states:

The courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profitmaking scheme. If a transaction satisfies the elements set out in paragraph 35 it is generally not a mere realisation of an investment.

In this case the sale of the Property will be a transaction assessable under the statutory capital gains provisions.

The Property was only ever vacant or used at certain times by the deceased for their family farming of raising certain animals. Furthermore, the Property is vacant with no building structure or habitable dwellings on the land, which has been the case since it was acquired.

There was no change in purpose for which the land was held, it was the realisation of a capital asset. The proceeds from the sale of the Property are assessable on capital account under the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

GST

Under questions 3 and 4 below, unless otherwise stated:

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

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

•         all reference materials referred to are available on the ATO website www.ato.gov.au

Question 3

Was the supply of the Property by the Partnership a taxable supply under section 9-5 of the GST Act?

Summary

The supply of the Property by the Partnership was not a taxable supply under section 9-5 as the requirement specified in paragraph 9-5(b) was not satisfied. This is because the supply was not made in the course or furtherance of an enterprise that the Partnership carried on. Therefore, GST was not payable on the supply.

Detailed reasoning

Taxable supply

Under section 9-5 an entity makes a taxable supply if:

1.    the entity makes the supply for consideration,

2.    the supply is made in the course or furtherance of an enterprise that the entity carries on,

3.    the supply is connected to the indirect tax zone (Australia), and

4.    the entity is registered or required to be registered for GST.

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

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively.

We consider Division 38 and 40 do not apply to the facts of your case and the sale of the Property was therefore not a GST-free supply and not an input taxed supply.

Based on the facts,

•         the Property was supplied by the Partnership for the price of $X inclusive of GST (if any)

•         the Property is located in Australia, known as <the specified address>

•         the Partnership is registered for GST at the time of the supply of the Property

That meant the requirements under paragraphs 9-5(a), (c) and (d) were satisfied and the supply of the Property would be a taxable supply if paragraph 9-5(b) was also satisfied, that is, if the supply of the Property was made in the course or furtherance of an enterprise that the Partnership carried on. Accordingly, it is relevant to consider the meaning of an enterprise for GST purposes.

Enterprise

Under subsection 9-20(1) an enterprise includes an activity, or series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In this case the Partnership generates income through the leasing of the ZZZ Residential Units. Therefore, we consider the Partnership is carrying on an enterprise for GST purposes as these activities fall within the scope of paragraph 9-20(1)(c).

The Property has remained vacant and unused since it was acquired by the Partnership in YYYY and has not been leased or held for lease at any time. In this case we do not consider the sale of the Property to have a connection with the abovementioned 'leasing' enterprise and therefore, the sale has not been made in the course or furtherance of the Partnership's 'leasing' enterprise.

The next question is whether the sale of the Property was made in the course or furtherance of another enterprise carried on by the Partnership.

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) provides guidance to assist in determining whether an entity is carrying on an enterprise.

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6)extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraph 178 of MT 2006/1 refers to indicators that an entity may be carrying on a business with reference to TR 97/11.

Paragraph 265 of MT 2006/1 contains further factors that may indicate that a business or an adventure or concern in the nature of trade is being carried on.

Consistent with the discussion above in regard to income tax and assessable income, we do not consider the activities of merely holding the Property and subsequently selling the Property as being activities done in the form of a business or activities in the form of an adventure or concern in the nature of trade.

Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8) contains further characteristics that indicate the sale of a thing may be connected to or made in the course or furtherance of an enterprise at paragraphs 30 and 31:

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

•         at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•         at the time of sale it was applied in carrying on your enterprise to at least some extent; and

•         it is sold as a transaction of your enterprise.

31. Factors that tend to indicate that a sale is a transaction of the enterprise include the following:

•         the sale is made from enterprise premises;

•         payment is accepted using enterprise facilities such as a cash register or a credit card facility;

•         the proceeds of sale are deposited into an enterprise bank account; and

•         enterprise book accounts are used to record the transaction.

The list in this paragraph is not exhaustive or conclusive. All the facts and circumstances must be considered and balanced.

In analysing the relevant facts of this case including the below, we note the following:

(i)    From YYYY onwards the only activities that were carried on by the Partnership were/are that of leasing the residential properties at the specified address.

(ii)   On DDMMYYYY, the Property was transferred to the # siblings pursuant to terms of deceased' Will. From MMYYYY, when the Partnership was formed, the Property became the asset of the Partnership.

(iii)  The Property was vacant land, and the Partnership held the land from MMYYYY for around # years in the same state until the sale in MMYYYY. The Partners being the # siblings did not engage in any development activities or carry out any other improvements on the Property. They had held the land as it was, in its unimproved state and the Property was sold as is, in its original unimproved vacant state.

(iv)  The Partners had decided to realise the capital value of the Property via an on-market sale through a real estate agent as the ongoing holding costs such as land tax were starting to be difficult to afford and the # siblings were keen to wind up and dissolve the Partnership. The sale would also provide available cash for each of the siblings to fund their impending retirement and other lifestyle choices.

(v)   The disposal of the Property was due to the recent partners' fallout. The partnership assets had to be disposed of or otherwise dealt with before the official dissolution of the partnership.

(vi)  The Property was recorded in the financial statements of the Partnership.

(vii)Proceeds from the settlement of the sale of the Property were originally allocated to a trust account held by the legal representative and subsequently transferred into the individual bank accounts of the partners.

In weighing up the relevant factors, we consider the activities carried on by the Partnership in holding the land for around # years inactively and selling the Property in its original unimproved state as is, did not amount to an enterprise for GST purposes. We are of the view that the supply of the Property was the mere realisation of a capital asset.

Conclusion

As there was no connection to an enterprise established in relation to the sale of the Property, the supply of the Property would not be made in the course or furtherance of an enterprise that the Partnership carried on and therefore paragraph 9-5(b) was not satisfied. As one of the requirements of a taxable supply under section 9-5 was not satisfied, the Partnership's supply of the Property was not a taxable supply and GST was not payable on the sale.

Question 4

Is the Partnership entitled to cancel its GST registration pursuant to section 25-55 of the GST Act?

Summary

The Commissioner must cancel the GST registration of the Partnership under section 25-55 if the Partnership applies for cancellation.

Detailed reasoning

Subdivision 25-B provides on how an entity's registration can be cancelled.

Section 25-55 states:

(1)  The Commissioner must cancel your registration if:

(a)  you have applied for cancellation of registration in the approved form ; and

(b)  at the time you applied for cancellation of registration, you had been registered for at least 12 months; and

(c)   the Commissioner is satisfied that you are not required to be registered.

Note: Refusing to cancel your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953 ).

(2)  The Commissioner must cancel your registration (even if you have not applied for cancellation of your registration) if:

(a)  the Commissioner is satisfied that you are not carrying on an enterprise; and

(b)  the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months.

Note: Cancelling your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).

(3)  The Commissioner must notify you of any decision he or she makes in relation to you under this section. If the Commissioner decides to cancel your registration, the notice must specify the date of effect of the cancellation.

We understand that the Partnership will make an application to the Commissioner to request cancellation of its GST registration.

The Partnership has been registered for GST since YYYY. As such, when the Partnership makes an application to cancel its GST registration, it would have been registered for at least 12 months.

This means, paragraphs 25-55(1)(a) and (b) will be satisfied if you make an application, and where paragraph 25-55(1)(c) is also satisfied, the Commissioner must cancel your GST registration. Accordingly, it is relevant to consider whether the Commissioner is satisfied that you are not required to be registered for GST.

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

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold ($75,000 for entities other than non-profit bodies and certain other entities).

The Partnership is carrying on a leasing enterprise thus satisfying paragraph 23-5(a). As such, the relevant issue to consider next is whether the Partnership's GST turnover meets the GST registration turnover threshold, which is $75,000 in the Partnership's case.

Subsection 188-10(1) provides that 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.

Section 188-15 defines 'current GST turnover'. 'Current GST turnover' at any time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during the current month and the preceding 11 months.

Section 188-20 defines 'projected GST turnover'. 'Projected GST turnover' at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months.

However, the following supplies are excluded from calculations of both 'current GST turnover' and 'projected GST turnover:

•         Supplies that are input taxed;

•         Supplies not made in connection with an enterprise that you carry on.

In this case you wish to cancel your GST registration with effect from DDMMYYYY. Based on the facts, the Partnership's only revenue and expected revenue in the period DDMMYYYY to DDMMYYYY is the proceeds from the sale of the Property as well as the residential rental income of approximately $X from the ZZZ Residential Units.

As discussed above at Question 3, the sale of the Property was not made in connection with, or in the course or furtherance of, an enterprise carried on by the Partnership. Furthermore, we consider the supplies of the ZZZ Residential Units by way of lease to be input taxed pursuant to section 40-35. Therefore, the value of these supplies is excluded from the calculation of the 'current' and 'projected' GST turnover.

Noting that the assessment (turnover test) required under paragraph 23-5(b) is required to be conducted on a month-to-month basis, in the event the ZZZ Residential Units are sold, the sales would be input taxed supplies pursuant to section 40-65 provided the premises do not constitute 'new residential premises' as defined for GST purposes at the time of settlement.

In addition, based on the facts, the activities carried out by the Partnership in relation to the acquisition, holding and sale of the Other Properties are similar to that of the Property other than that the sale of the Other Properties will settle around mid-YYYY. As such we would also conclude the supply of the Other Properties would not be made in the course or furtherance of an enterprise that the Partnership carries on.

Consequently, you do not satisfy paragraph 23-5(b) and are not required to be registered for GST pursuant to section 23-5. In turn, paragraph 25-55(1)(c) will also be met, and the Commissioner must cancel your GST registration under subsection 25-55(1) if you have applied for cancellation.

Question 5

If the answer to Question 4 is 'yes', will the Commissioner retrospectively cancel the Partnership's GST registration with effect from DDMMYYYY pursuant to section 25-60 of the GST Act?

Summary

As the answer to question 4 is 'yes', the Commissioner will cancel the Partnership's GST registration effective from DDMMYYYY, this date being the start of the tax period which commenced after the date the Partnership had stopped operating on a GST-registered basis.

Detailed reasoning

Section 25-60 provides for the date of effect of your cancellation. Under section 25-60(1):

The Commissioner must decide the date on which the cancellation of your registration under subsection 25-55(1) or (2) or section 25-57 takes effect. That date may be any day occurring before, on or after the day on which the Commissioner makes the decision.

Note: Deciding the date of effect of the cancellation of your registration is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953 ).

Practice Statement Law Administration PS LA 2011/8 The registration of entities sets out the policy and procedures to be followed on a range of issues relating to the registration of entities, including cancelling GST registration. The following paragraphs are extracted for your information.

82. The Commissioner will not cancel the registration with effect from a date on which the entity was required to be registered, and will not usually do so from any date when the entity was operating as if it were registered for GST.

84. When an entity that is registered but was not required to be registered (a voluntary registration) applies to cancel its registration:

•         If the Commissioner is satisfied that the entity has never operated on a GST-registered basis, the Commissioner may accept the application to cancel the GST registration from a retrospective date chosen by the entity.

•         If the entity has operated on a GST-registered basis but has ceased doing so before the application to cancel registration is made, the Commissioner may accept the entity's application to cancel its GST registration from the start of the tax period which commences on or after the date it stopped operating on a GST-registered basis. (Emphasis added)

•         If the entity is still operating on a GST-registered basis at the time of the application to cancel registration, the date of cancellation will generally not be retrospective. The Commissioner will negotiate a prospective date if the application does not state one.

86. The Commissioner will be satisfied that an entity has stopped operating (or never operated) on a GST-registered basis from a certain date if, from that date or an earlier date, the entity:

•         did not hold themselves out to other businesses as being registered for GST

•         did not issue any tax invoices or adjustment notes

•         did not claim any input tax credits, special transitional credits or indirect transitional credits, and

•         has made a declaration to the ATO that satisfies all of the above points.

In this case,

•         the Partnership had operated on a GST-registered basis up to the MMYYYY quarter tax period. For this period the Partnership reported sales of $X with GST payable $X and input tax credits claimed of $X. These BAS amounts relate to the following:

o   The GST payable reported was due to a refund on advertising costs incurred in the sale of the Paynesville property and the remainder of the sales reported relates to residential rental income.

o   Input tax credits claimed relate to accounting fees incurred.

•         the MMYYYY quarter BAS has not been lodged by the Partnership at the time of this ruling.

•         from YYYY onwards (after the sale of your last commercial property) and until currently, the Partnership's enterprise has consisted only of the leasing of the ZZZ Residential Units.

Based on the above facts, we consider the ABC Partnership had operated on a GST registered basis up to the MMYYYY quarter tax period, and pursuant to section 25-60 the Commissioner will accept cancellation of the Partnership's GST registration effective from DDMMYYYY. This date being the start of the tax period which commenced after the date the Partnership had stopped operating on a GST-registered basis.