Edited version of private advice

Authorisation Number: 1052162670699

Date of advice: 15 September 2023

Ruling

Subject: GST and property

Question 1

Are you, <name of entity>, entitled to cancel your GST registration prior to the settlement of the contract of sale of the property situated at <address> (the Property) pursuant to Subdivision 25-B of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. You are not entitled to cancel your GST registration prior to the settlement of the contract of sale of the Property pursuant to Subdivision 25-B of the GST Act.

Question 2

If the answer to question 1 is 'yes', will the sale of the Property as a non-taxable supply result in an increasing adjustment liability for you under Division 135 of the GST Act?

Answer

Not applicable

This ruling applies for the following period:

Financial year ended DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In this ruling, the expressions 'you/'your', '<name of entity>', 'the Trustee', 'the Trust' refer to the entity being <full name of entity> and are used interchangeably.

You have been registered for GST since DDMMYYYY.

You acquired the Property in or around MMYYYY as a GST-free supply of a going concern consisting of a leasing enterprise.

You are a special purpose entity that was established to undertake the acquisition, development, and sale of the developed Property (the Enterprise).

The Property was to be developed by you into a mixed use, multi-storey residential, retail, and commercial precinct.

You have incurred preliminary costs in respect of the development of the Property.

As the Property was to be sold, it has been held as your trading stock since its acquisition.

<Name of entity> was established for the sole purpose of undertaking the Enterprise. The Property is the only asset that the Trust holds.

The lease that was in place at the time of acquiring the Property ended and the tenant vacated the Property. For a period of approximately # months, from MMYYYY to MMYYYY, you leased the Property to a <description of business(es)> operator. You also made a part of the Property available on an ad-hoc complimentary basis to a local community market. This arrangement ended in MMYYYY.

Given recent market conditions and the current depressed demand for new apartments in <Suburb>, you have decided not to proceed with the Enterprise and to cease your development.

As a result of making the decision to cease your enterprise, you agreed to sell the Property to an unrelated third-party purchaser, <name of purchaser> (the Purchaser).

A contract of sale was entered into between the parties on DDMMYYYY (Contract of Sale). You have provided a copy of the Contract of Sale.

The Contract of Sale noted a description of the Property as all of the land in Certificates of Title volume # folio #, volume # folio #, volume # folio # and volume # folio #.

Pursuant to the Particulars of Sale in the Contract of Sale, settlement is due on the later of

(a) DDMMYYY;

(b) # days after either party serves notice to the other party in writing calling for settlement; and

(c) # days after the date that the Purchaser notifies the Vendor that the FIRB Condition is satisfied.

Once settlement has occurred and the remaining compliance obligations are completed, as there are no other assets held by you, the Trust will be wound up.

Relevant legislative provisions

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

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

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for <name of entity>. This is to explain how we reached our decision. This is not part of the private ruling.

In the reasons below, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all reference materials cited are available on the ATO website www.ato.gov.au

Question 1

Are you entitled to cancel your GST registration prior to the settlement of the contract of sale of the property situated at <address> (the Property) pursuant to Subdivision 25-B of the GST Act?

Detailed reasoning

The provisions in Subdivision 25-B consider 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)

Practice Statement Law Administration PS LA 2011/8 The registration of entities (PS LA 2011/8) sets out the policy and procedures to be followed by Tax Officers on a range of issues relating to the registration of entities, including cancelling GST registration. An entity that is required to be registered for GST cannot cancel its GST registration.

In your case, you have been registered for GST since DDMMYYYY. As such, when you make an application to cancel your GST registration, you would have been registered for at least 12 months.

This would mean that paragraphs 25-55(1)(a) and (b) will be satisfied and the Commissioner must cancel your GST registration provided paragraph 25-55(1)(c) is also satisfied.

Whether paragraph 25-55(1)(c) will be satisfied would depend on the application of section 23-5 to the facts of your case.

Section 23-5 states that an entity is required to be registered for GST if:

(a)       the entity is carrying on an enterprise; and

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

The term "carrying on" an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

An entity ceases carrying on an enterprise when it concludes doing everything in the course of terminating its enterprise.

In this case, <name of entity> is a special purpose entity that was established to undertake the Enterprise.

We consider your sale of the Property is an activity done in the course of the termination of the Enterprise. That is, prior to the settlement date, you will still be considered as carrying on the Enterprise and paragraph 23-5(a) will be satisfied.

The relevant issue to consider next is whether paragraph 23-5(b) will be satisfied, that is, whether your GST turnover meets the GST registration turnover threshold. The relevant threshold in your case is $X.

Section 188-10 considers whether your GST turnover meets, or does not exceed, a turnover threshold and states:

(1)  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.

(2)  You have a GST turnover that does not exceed a particular turnover threshold if:

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

(b)       your projected GST turnover is at or below 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.

In this case, you have asked whether you are entitled to cancel your GST registration prior to the settlement of the contract of sale of the Property.

Based on the facts, prior to the settlement date your expected turnover will be the proceeds from the sale of the Property which will exceed $75,000. Therefore, it is relevant to consider whether the sale proceeds need to be included in the calculation of your projected GST turnover for the purpose of paragraph 23-5(b).

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 relevant guidelines.

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

•               any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

•               any supply made, or likely to be made, by you solely as a consequence of:

-     ceasing to carry on an enterprise; or

-     substantially and permanently reducing the size or scale of an enterprise.

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53 of this Ruling.)

Note: the first and second dot points in paragraph 29 above refer to the legislative reference of paragraphs 188-25(a) and 188-25(b) respectively in paragraph 30.

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of GSTR 2001/7.

Meaning of 'capital assets'

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.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. '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'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

You held the Property as trading stock (revenue asset) since its acquisition as you originally intended to develop and sell the developed properties. Later, when you decided not to proceed with the development but to instead sell the undeveloped Property, we do not consider the character of the Property changed. Accordingly, paragraph 188-25(a) would not apply.

In considering paragraph 188-25(b), the turnover will be excluded from calculating the GST turnover of an entity where the supply made, or likely to be made, by the entity is 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.

GSTR 2001/7 states:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade.²⁰ As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

We consider the principle in the above paragraphs applies to your circumstances and the sale proceeds from the sale of the Property will not be disregarded when working out your projected GST turnover prior to the settlement date. Consequently, your GST turnover will meet the GST registration turnover threshold and paragraph 23-5(b) will be satisfied. You are required to be registered for GST.

As this means section 25-55(1)(c) will not be satisfied, the Commissioner must not cancel your GST registration. That is, you are not entitled to cancel your GST registration prior to the settlement of the contract of sale of the Property pursuant to Subdivision 25-B of the GST Act.