Edited version of private advice

Authorisation Number: 1052011700720

Date of advice: 25 July 2022

Ruling

Subject: GST and property

Question

Will Entity A make a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when he supplies the Property to Entity B, under the Deed of Settlement.

Answer

No.

This ruling applies for the following period:

25 July 20XX to 24 July 20XX

The scheme commences on:

23 March 20XX

Relevant facts and circumstances

Entity A is the XXXX of Entity B.

In XXYYYY, Entity A and the spouse purchased the Property.

From XXYYYY until mid-YYYY, Entity A and the spouse operated the Business under the name of Entity C. The Business was operated from the Property.

The Business was transferred from Entity A and the spouse to Entity D [the D Trust] and from mid-YYYY until early YYYY the Business continued to operate from the Property. The Business did not have an ABN.

In approximately YYYY, Entity B commenced working at the Business with Entity A, who was the General Manager of the Business.

From XXYYYY, Entity A owned the Property as sole proprietor. Entity A has an ABN but has never been registered for GST.

In early YYYY, Entity A and Entity B reached an agreement for the division of the Business into two operating parts. Both businesses continued to operate from the Property. The business operated by Entity B (Entity E) did not pay rent to Entity A for the use of the property.

Entity E was registered for GST between XXYYYY and XXYYYY.

Entity D has been registered for GST since 1 July 20XX.

In XXYYY, Entity E ceased to carry on business and ceased to trade from the Property at that time.

On XXYYYY, Entity B registered a caveat (the First Caveat) against the Property as equitable owner. In particular, Entity B alleged that Entity A had made certain representations to him which he allegedly relied upon to his detriment and which entitled him to an equitable interest in the Property and/or a right or entitlement to become the owner thereof. Entity A denied that any such right, entitlement or interest existed.

Following a notice being given by Entity B pursuant to the relevant legislation, Entity B instituted proceedings in the Supreme Court seeking to extend the operation of the First Caveat.

By Deed of Settlement, Compromise and Release, dated XXYYYY (the Deed of Settlement), Entity A and Entity B agreed to settle all matters arising out of or in relation to the claims by Entity B concerning the Property, the First Caveat and the court proceedings between them in the Supreme Court.

Clause X of the Deed of Settlement provides that on the Settlement Date:

(i)      Entity A will transfer the Property to Entity B or his nominee; and

(ii)     contemporaneously with the transfer, Entity B will pay to Entity A X% of the market value of the Property.

Settlement Date is defined in clause X of the Deed of Settlement to mean the earlier of:

(i)      XXYYYY; or

(ii)     in the event of the death of Entity A, the date being X months subsequent to the grant of probate or letters of administration in respect of the estate of Entity A; or

(iii)    the date being X months from the date of any Notice of Election given by Entity A to Entity B.

Clause X of the Deed of Settlement provides that the market value of the Property shall be determined by agreement between the parties or, in the absence of agreement, by a sworn valuation of a licensed valuer to be appointed by the President for the time being of the Australian Property Institute Inc.

Clause X of the Deed of Settlement provides that, subject to any agreement between the parties, Entity A shall request a private ruling from the ATO about whether GST will be payable in respect of the transfer of the Property pursuant to the terms of the Deed of Settlement.

The First Caveat was removed from the certificate of title for the Property.

On XXYYYY, Entity B registered a New Caveat on the Certificate of Title for the Property to protect his rights under the Deed of Settlement. There are no other encumbrances on the Title.

Settlement for the transfer of the Property from Entity A to Entity B (or his nominee) pursuant to the terms of the Deed of Settlement was due to take place on XXYYYY.

Entity A does not own any land in Australia other than the Property and his residence.

Since Entity E vacated the Property, the Entity D has continued to occupy part of the Property to carry on Business and other parties have occupied or leased different parts of the Property. At the current time, the Property is occupied by:

(a)  Entity D

(b)  Entity F

(c)   Entity G

(d)  Entity H

The tenants have never had and do not have, written leases to occupy the Property and they occupy the particular premises as monthly tenants.

The tenants pay rent to Entity A as follows:

Entity A is not involved in any commercial enterprise associated with buying and selling real estate in Australia.

The gross income from all sources for Entity A is less than the GST registration turnover threshold and he has not been required to register for GST.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-40

Section 23-5

Section 195-1

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

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

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 for GST.

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

Of relevance in this case, is whether you are making a supply of the Property in the course or furtherance of an enterprise that you carry on. If so, as you are not registered for GST, we must determine whether you are required to be registered for GST.

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•         in the form of a business;

•         in the form of an adventure or concern in the nature of trade;

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

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

Entity A (you) have owned the Property as sole proprietor since XXYYYY. Since XXYYYY, Entity D and other business entities/individuals, detailed below, have operated from the Property and have been liable for agreed rental payments during that period. None of the business entities/individuals operating from the Property have entered into a formal lease agreement with you.

Based on these facts, we consider that you are carrying on an enterprise for GST purposes, being activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

As you are not currently registered for GST, the next issue to consider is whether you are required to be registered for GST.

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 (currently $75,000).

As discussed above, it is considered that the rental of the Property constitutes an 'enterprise' for GST purposes.

The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if:

(a)  your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or

(b)  your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is the sum of your turnover for the current month and the previous 11 months. Your current GST turnover is not at or above the threshold of $75,000

Your 'projected GST turnover' is the sum of your turnover for the current month and the next 11 months.

Paragraph 188-25(a) provides that when calculating your projected turnover, you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether the sale of the Property to your son, pursuant to the Deed of Settlement, is excluded from the calculation of your projected GST turnover.

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 (GSRT 2001/7) discusses what is regarded as a 'capital asset' at paragraphs 31 to 36.

Whilst not specifically defined for GST purposes, the term 'capital assets' generally refers to those assets that make up the profit yielding subject of an enterprise and 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. In this case, the Property has been held by you for approximately X years and you have been the sole registered owner of the Property for approximately X years. The Property has been used solely for business purposes.

Given the facts in this case, we consider the sale of the Property constitutes the transfer of a capital asset for the purposes of section 188-25 and will therefore be disregarded when calculating your projected GST turnover.

As the proceeds from the sale of your Property are disregarded when calculating your projected GST turnover, your projected GST turnover will be below the GST registration turnover threshold and you are not required to be registered.

Conclusion

GST is payable on any taxable supplies that you make. One of the requirements of a taxable supply is that you are registered or required to be registered for GST.

In this case, you are neither registered nor required to be registered for GST and as such will not be making a taxable supply when you sell the Property to Entity B.