Edited version of private advice

Authorisation Number: 1052031519638

Date of advice: 7 September 2022

Ruling

Subject: Goods and services tax and the requirement to be registered for GST

Question 1

Are you carrying on an enterprise for the purpose of assessing your requirement to register for GST?

Answer

Yes, the leasing out of properties on a regular or continuous basis is an enterprise under paragraph 9-20(1)(c) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 2

Should the sale of commercial property have been included in your calculation of projected GST turnover for the purpose of assessing your requirement to register for GST prior to your voluntary registration?

Answer

No, section 188-25 of the GST Act provides that in working out your projected GST turnover, you disregard any supply made by way of transfer of ownership of a capital asset.

This ruling applies for the following period:

1 February 2021 to 30 June 2023

The scheme commences on:

1 February 2021

Relevant facts and circumstances

Property A was originally purchased jointly by Mr and Mrs X. Subsequently, they constructed factory units on the land of Property A. The land containing Property A has been zoned for commercial use since it was acquired.

Mr X passed away and his 50% beneficial ownership share of Property A passed to his wife, as did his 100% beneficial ownership entitlement to Property B and C.

Property B and C were originally purchased as one singular vacant block on one title. Property B and C was zoned for residential use when first acquired and was initially intended to be the residence of Mr and Mrs X. They constructed a residence on the property and used it as their primary residence.

Later, the land containing Property B and C was rezoned for commercial use. The then single title containing Property B and C was subdivided into two separate titles. Property B (the smaller land area) contained two factory units. Property C (the larger land area) contained two factory units, one storage unit and the residential house.

Mr and Mrs X used all of Property C as their primary residence until such time as the factory units were constructed on the property after which, half of Property C was used as the primary residence of the family. Property C was used as the family primary residence for a period of time estimated to be thirty years after the residence was constructed on the land. Later, the family moved out of the residence at which point, the property was used for the sole purpose of generating rental income.

The commercial properties contained a total of six factory units and a storage unit that were rented out by Mrs X in order to generate an income to live on up until her death.

The commercial rental income derived from Property A, B and C combined did not exceed $75,000 and has never been sufficient to require GST registration under the GST turnover threshold rules. The lease of these properties were the only supplies that were being made as no other enterprise was being conducted during the period under consideration.

After the death of Mrs X her estate (you) started the process of disposing of the assets of the estate in order to distribute the assets in accordance with the wishes of Mrs X's will. You entered into a contract of sale to sell Property A for $XX. The sale of Property A was settled in January 2022.

In December 2021 you registered for GST believing that you were required to register for GST as Property A is a commercial property the sale of which would be subject to GST. You lodged a business activity statement for the quarter ended 31 March 2022 remitting a net amount to the ATO on the sale of Property A.

The parties to the sale agreement of Property A did not agree in writing that the sale constituted the sale of a going concern. The "GST is not applicable to this Contract" option was selected by the parties on the contract of sale. You believe the purchaser of Property A was not registered for GST at the time of purchasing Property A.

You further entered into a contract of sale to sell Property B which was settled in May 2022 and you entered into a contract of sale to sell Property C which was settled in July 2022.

Property B and Property C has been sold on the basis of being taxable supplies as agreed between you and the purchasers.

Relevant legislative provisions

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

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

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 188-15

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1

Paragraph 9-20(1)(c) of the GST Act provides that an enterprise is 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 a property.

The leasing out of Properties A, B and C on a regular or continuous basis would therefore be an enterprise under paragraph 9-20(1)(c) of the GST Act.

Question 2

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You are required to be registered under this Act if:

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

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

(*denotes a term defined under section 195-1 of the GST Act).

In this case, you are carrying on an enterprise of leasing of commercial properties and residential premises. As such, paragraph 23-5(a) of the GST Act is satisfied.

For the purpose of paragraph 23-5(b) of the GST Act, subsection 188-10(1) of the GST Act provides that your GST turnover meets the registration turnover threshold if:

• 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
• your projected GST turnover is at or above the turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for non-profit entities).

Section 188-15 of the GST Act provides that 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, but not including input taxed supplies. You sold and settled commercial Property A for $XX. Hence as at 31 January 2022, your current GST turnover exceeds the GST turnover threshold of $75,000.

However, in accordance with subsection 188-10(1) of the GST Act, to determine if you are required to be registered for GST you must also determine whether your projected GST turnover is at or above the registration threshold.

Section 188-20 of the GST Act provides that 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, not including input taxed supplies.

Section 188-25 of the GST Act provides that the following are disregarded in working out your projected GST turnover:

(a)  any supply made, or likely to be made, by you 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.

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 guidelines on determining whether a taxpayer's GST turnover meets the registration turnover threshold.

Paragraphs 31 and 32 of GSTR 2001/7 provides that generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise and can include factory, shop, office, and your land which are retained by you to produce income.

In this case you own the properties and use them to generate rental income; as such, the properties are capital assets of yours. Accordingly, the sales of the properties are disregarded in calculating your projected GST turnover. As your other projected income was less than $75,000, your projected GST turnover would not have met or exceed the GST turnover threshold for GST registration.

Given your GST turnover would not have met the registration turnover threshold, paragraph 23-5(b) of the GST Act would not have been satisfied. Therefore, you were not required to include the sales in assessing your requirement to be registered for GST prior to you voluntarily registering for GST.