Edited version of private advice

Authorisation Number: 1052079367143

Date of advice: 23 January 2023

Ruling

Subject: Deceased estate distribution

Question

1.    Is the transfer of properties and shares to the beneficiaries by the Executor of the deceased estate, under the Terms of Settlement and the order of the Supreme Court of Victoria, a taxable supply under s9-5 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

2.    Does the Executor of the deceased estate have an increasing adjustment, under Division139 of the GST Act?

Answer

1.    No, the transfer of the properties and shares to the beneficiaries by the Executor of the deceased estate, under the Terms of Settlement and the order of the Supreme Court of Victoria, will not be a taxable supply and the estate will not be liable for GST.

2.    No, the estate is not required to make an increasing adjustment under Division 139 of the GST Act.

This ruling applies for the following periods:

Financial year commencing 1 July 20XX to financial year ended 30 June 20XX

The scheme commences on:

The date of issue of this private ruling.

Relevant facts and circumstances

The deceased died on DD MM YY leaving a will dated DD MM YY.

The deceased was registered for GST from DD MM YY to DD MM YY.

After the deceased death, the deceased estate registered for GST from DD MM YY.

Probate was granted in the Supreme Court of Victoria to the executor XXX on DD MM YY to administer the deceased estate.

The deceased is survived by their only child, Beneficiary 1 and three grandchildren, Beneficiary 2, Beneficiary 3 and Beneficiary 4.

All beneficiaries are over 18 years of age and are not under any legal disability.

The beneficiaries paid the Executor a fee of $X for attending the administration of the estate and transferring the assets.

The deceased's estate comprises, among other things, real property and a portfolio of shares.

The estate properties comprise of:

•         property 1

•         property 2

•         property 3

•         property 4

•         property 5

•         property 6

•         property 7

•         property 8

The estate shares comprise of:

•         ordinary fully paid beneficiary held shares in Shares 1

•         ordinary fully paid beneficially held shares in Shares 2

•         ordinary fully paid beneficiary held shares in Shares 3

•         ordinary fully paid beneficially held shares in Shares 4

The deceased carried on an enterprises of commercial property rental in their lifetime. Just prior to their passing, the deceased disposed of two properties. At the date of their death, the only assets that formed their commercial property rental enterprise were properties 2 and 3. The rental return on these properties in the 20XX income year was below $75,000.

The estate continued to rent the following properties from DD MM YY:

•         Property 1

•         Property 2

•         Property 3 and

•         Property 6

Property 1 constituted one bedroom, one bathroom, kitchen, living / dining area and a carspace. The property was constructed in 19XX.

Property 5 constituted three bedrooms, one bathroom, kitchen, living room, dining area and a garage. The property was constructed in 19XX.

Property 6 constituted one bedroom, one bathroom, kitchen, living / dining area and a carspace. The property was constructed in 19XX.

Properties 7 and 8 are vacant undeveloped land.

The deceased inherited the properties and shares from their deceased spouse who died on DD MM YY.

The deceased's residential premises was at property 4. Prior to the deceased's death the property was subdivided. Two town houses were located on the property.

No input tax credit were claimed for these assets.

The deceased was registered for GST until DD MM YY which is when the entirety of the real estate property was transferred under the terms of the settlement.

The Executor commenced registration for GST on the date of the passing of the deceased. That registration was made for the purpose of administering the Estate and continues to this day.

Beneficiary 5was a friend of the deceased and was gifted all the deceased's personal effects, household contents, furnishings and chattels, including but not limited to jewellery, clothing, shoes and beds.

On DD MM YY, beneficiary 1 contested the will to claim further provision for their proper maintenance and support out of the deceased estate.

By Terms of Settlement, dated DD MM YY, the parties agreed that certain properties and shares of the deceased estate be transferred.

Under the terms of settlement, the transfer of the properties and shares is an acceleration of the vesting of the testamentary trust under which those properties and shares would currently be held.

Beneficiary 4 is continuing to carry on the enterprises of commercial property rental by renting out properties 2 and 3.

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 Subsection 9-20(1)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-30(4)

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 40-5

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(2)

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 72-A

A New Tax System (Goods and Services Tax) Act 1999 Section 72-5

A New Tax System (Goods and Services Tax) Act 1999 Division 138

A New Tax System (Goods and Services Tax) Act 1999 Section 138-5

A New Tax System (Goods and Services Tax) Act 1999 Section 138-17

A New Tax System (Goods and Services Tax) Act 1999 Subsection 138-17(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 139

A New Tax System (Goods and Services Tax) Act 1999 Section 139-1

A New Tax System (Goods and Services Tax) Act 1999 Subsection 139-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 139-5(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

A New Tax System (Goods and Services Tax) Regulations 2019 Section 40-5.09

A New Tax System (Goods and Services Tax) Regulations 2019 Subsection 40-5.09(3)

A New Tax System (Goods and Services Tax) Regulations 2019 Subsection 40-5.09(4)

Income Tax Assessment Act 1936 Section 318

Reasons for decision

GST is payable on taxable supplies. Under section 9-5 you make a taxable supply if:

(a)  you make the supply for consideration

(b)  the supply is made in the course or furtherance of an enterprise that you carry on

(c)   the supply is connected with Australia, and

(d)  you are registered or required to be registered.

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

All the above requirements of section 9-5 of the GST Act must be satisfied for a supply to be taxable. Where the transfer of the assets meets all the requirements above, then the transfer will be a taxable supply.

Input Taxed

Residential Premises

The sale of resident premises is input taxed under section 40-65, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

Residential premises is defined in section 195-1 to mean land or a building that:

•         is occupied as a residence or for residential accommodations; or

•         is intended to be occupied, and is capable of being occupied, as a residential accommodation

(regardless of the term of the occupation or intended occupation) and includes a floating home)

Under subsection 9-30(4) a supply of residential premises input taxed. The subsection states:

A supply is taken to be supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

The words 'other than new residential premises' means that subsection 9-30(4) will not apply to the supply of new residential premises but to the supply which is 'used' solely in connection with a supply that is input taxed.

The Commissioner of Taxation has provided guidance in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) as to the extent to the which the relevant residential premises are 'to be used predominantly for residential accommodation'.

Paragraph 10 of GSTR 2012/5 provides that premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are for a purpose other than to provide residential accommodation.

Residential premises provide shelter and basic living facilities. Paragraphs 14 and 15 of GSTR 2012/5 advises:

Living accommodation provided by shelter and basic living facilities

14. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree permanence. It includes lodging, sleeping or overnight accommodation.

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be use predominantly for residential accommodation.

Residential premises are not new residential premises if they have been previously sold as residential premises. (s 40-75(1))

Residential premises are not new residential premises, if for the period of at least 5 years:

•         since the premises first became residential premises or

•         the premises have only been used for making supplies that are input taxed such as being used as residential rental properties

(s 40-75(2))

Properties 1, 4, 5 and 6 consist of a residential dwelling and associated structures (carport/garage and shed) used with the residence on the land. Each property as described (being the residential dwelling and associated structures on the land) is residential premises in that the property is occupied as a residence or for residential accommodation. The premises in question have no commercial characteristics and are not new residential premises. They have the physical characteristics which provide for sleeping accommodation and allow the occupant to prepare food. Accordingly, the physical characteristics of residential accommodation.

The premises at Properties 1, 4, 5 and 6 are residential premises. These premises are input taxed. Therefore, they don't meet the criteria of a taxable supply.

Shares

Financial supplies are input taxed under section 40-5 and as set out in the New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations).

Under section 40-5.09 of GST Regulations the provision, acquisition or disposal of an interest mentioned in the table to subsection (3) or (4) of that regulation is a financial supply if it is:

•         for consideration;

•         in the course or furtherance of an enterprise;

•         connected with Australia;

•         the supplier is:

-       registered or required to be registered; and

-       is a financial supply provider in relation to supply of the interest.

As such, the supply of shares are an input taxed financial supply (acquisition-supply) under Item 10 of subsection 40-5.09(3) of GST Regulations. The supply of Shares 1, 2, 3 and 4 are input taxed under Item 10 of subsection 40-5.09(3) of the GST Regulations. The supply of the shares do not meet the criteria for being a taxable supply.

Other Premises

In relation to the property and land comprising of:

(a)  Property 2

(b)  Property 3

(c)   Property 7

(d)  Property 8

The first issue to consider is whether the estate is carrying on an enterprise. If so, the next issue is whether the transfer of the properties and shares are in the course or furtherance of an enterprise that the estate carries on.

Carrying on an enterprise

Section 195-1 defines carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise. Winding up an enterprise is considered to be part of carrying on an enterprise for GST purposes. Hence, the supply of an asset upon winding up is a supply made in the course of the estate's enterprise.

Subsection 9-20(1) provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•         'in the form of a business' (paragraph 9-20(1)(a))

•         'in the form of an adventure or concern in the nature of trade', including isolated or 'one-off' transactions (paragraph 9-20(1)(b)).

An enterprise does not include an activity or services of activity done as a private recreational pursuit or hobby (subsection 9-20(2)). The estate was carrying on a business of residential and commercial rental properties.

The vacant land at Properties 7 and 8 was held by the deceased for XX years. The land was inherited from their spouse. The Properties 7 and 8 has never been developed and there is no intention to develop the land. The size of the activity is small and lacks the character of a property development business. Properties 7 and 8 do not form part of the estate's business of residential and commercial rental enterprise. As such, properties 7 and 8 don't meet the requirements of a taxable supply.

In relation to the properties used within the commercial rental business being properties 2 and 3, the leasing of commercial property is in the course or furtherance of an enterprise. Therefore, the next issue is to consider whether the estate made the supply for consideration.

Consideration

The properties were transferred for no consideration. Generally, this means the supply would not be a taxable supply. However, subdivision 72-A applies to supplies made to an associate without consideration.

Under section 72-5, a supply to an associate for no consideration, does not stop the supply from being a taxable supply if:

•         the associate is not registered or required to be registered, or

•         the associate acquires the thing supplied otherwise than solely for a creditable purpose.

For GST purposes, an 'associate' has the meaning with reference to section 318 of the Income Tax Assessment Act 1936. An 'associate' of a trustee includes an entity that benefits under the trust.

In this situation, Properties 2 and 3 will be transferred to Beneficiary 4 (a beneficiary of the Estate). Total rental income received from the commercial properties during the previous years was below the GST turnover threshold of $75,000. Beneficiary 4 is not registered and is not required to be registered for GST.

The term 'creditable purpose' is defined in section 11-15 and provides that an entity acquires a thing for a creditable purpose to the extent that they acquire it in carrying on their enterprise. However, the thing will not be acquired for a creditable purpose to the extent the acquisition either relates to making input taxed supplies or, the acquisition is of a private or domestic nature.

Beneficiary 4 acquired the commercial property and is continuing to carry on the enterprise of leasing commercial rental properties. Properties 2 and 3 supply was acquired for a creditable purpose; Therefore, section 72-5 doesn't apply. The transfer of properties know as properties 2 and 3 do not satisfy the definition of a 'taxable supply'.

Conclusion

The transfer by the estate of the following assets does not satisfy the definition of a 'taxable supply' as they are input taxed, therefore they are not liable for GST:

•         Property 1

•         Property 4

•         Property 5

•         Property 6

•         Shares 1

•         Shares 2

•         Shares 3

•         Shares 4

The transfer by the estate of the following assets does not satisfy the definition of a 'taxable supply' as the supply is not made in the course or furtherance of an enterprise that the estate carried on, therefore they are not liable for GST:

•         Properties 7

•         Properties 8

The transfer by the estate of both the properties 2 and 3 does not satisfy the definition of a 'taxable supply' as the supply was made for no consideration to a recipient who was acquiring them for a creditable purpose. Therefore, these properties are not liable for GST.

Increasing Adjustments

Division 138 provides for an increasing adjustment when the registration of an entity is cancelled. Section 138-5 of the GST Act states:

1.    You have an increasing adjustment if:

(a)  your registration is cancelled; and

(b)  immediately before the cancellation takes effect, your assets include anything in respect of which you were, or are, entitled to an input tax credit.

However, Division 138 does not apply to situations listed under section 138-17. Subsection 138-17(1) ensures that there is no increasing adjustment under Division 138 in relation to assets of an entity whose registration is cancelled, to the extent that the assets related to an enterprise that the entity carried on before the cancellation, if:

•         the cancellation arises as a result of the death of the entity; and

•         the executor or trustee of the deceased estate is registered or required to be registered for GST; and

•         the executor or trustee of the deceased estate continues, immediately after the cancellation, to carry on the enterprise of the deceased.

As such, Division 138 does not apply to the estate.

Division 139 contains special rules for distributions from deceased estates. Section 139-1 explains that distributions from deceased estates for private consumption that are not taxable supplies may involve disposing of assets that were acquired or imported in circumstances which gave rise to input tax credits.

Division 139 provides for an increasing adjustment to cancel such input tax credits.

Subsection 139-5(1) of the GST Act provides that you have an increasing adjustment if:

(a)  you are the executor or the trustee of a deceased estate; and

(b)  you are registered or required to be registered for GST, and

(c)   you supply an asset of the deceased to a beneficiary of the deceased estate; and

(d)  the supply is not a taxable supply, and is not a supply that is GST-free or input taxed; and

(e)  you were, or are, or the deceased was, entitled to an input tax credit for the deceased person's acquisition or importation of the asset.

However, subsection 139-5(3) provides that an adjustment does not arise under section 139-5 in respect of the asset if:

(a)  the asset related to an enterprise that the deceased person carried on and the beneficiary intends to continue to carry on that enterprise; or

(b)  there were one or more adjustment periods of the deceased person's acquisition or importation of the asset, and the last of those adjustment periods has ended before the cancellation of your registration takes effect.

The properties 2 and 3 were used as part of the deceased commercial rental property enterprise. The beneficiary of the properties intends to continue the commercial rental property enterprise.

Properties 1 and 6 was used as part of the deceased residential renting enterprise. Residential properties are input taxed under section 40-65, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. Both properties were used for residential accommodation. The deceased was not entitled to input tax credits for the properties.

Shares 1, 2,3 and 4 are input taxed under section 40-5. The deceased was not entitled to input tax credits for the shares.

Properties 4, 5, 7 and 8 were not used by the deceased as part of their enterprise. The deceased was not entitled to input tax credits for these properties.

No adjustments are required under Division 139 on the transfer of the properties or shares to the beneficiaries.