Edited version of private advice

Authorisation Number: 1052179104693

Date of advice: 16 October 2023

Ruling

Subject: GST - sale of property

Question

Will your sale of Lot 1 be a taxable supply as defined by section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No.

This ruling applies for the following period:

DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Entity A is registered for GST and carries on an enterprise of leasing commercial property.

Individual A and Individual B (Individuals A & B) are not registered for GST either as individuals or as a partnership.

In YYYY, Entity A and Individuals A & B acquired property (the Property) as tenants in common.

More specifically, the Entity A holds a 50% interest in the Property and Individuals A & B hold the remaining 50% interest in the Property as joint tenants.

The Property is approximately x hectares and contains a residential dwelling consisting of four bedrooms, kitchen, bathroom and living areas.

Since the time of the acquisition, the Property has been rented to unrelated third parties.

The Property has not been used for primary production or commercial purposes.

Entity A and Individuals A & B intend to subdivide the Property into three lots:

• Lot 1
• Lot 2
• Lot 3.

Lot 2

• Lot 2 will be retained by Entity A.
• Entity A intends to subdivide Lot 2 into two further lots (Lot 2A and Lot 2B).
• Entity A will retain Lot 2A.
• Lot 2B will be gifted to a related party of Entity A.

Lot 3

• Lot 3 will be retained by Individuals A & B.

Lot 1

• Lot 1 is subject to a put and call option agreement (the Agreement) between Entity A and Individuals A & B (the Vendors) and Entity Z (the Purchaser).
• The Agreement is dated dd/mm/yyyy.
• The Agreement provides that the purchase price is $x.
• The Purchaser is unrelated to the Vendors and intends to subdivide Lot 1 into lots and develop new residential premises for sale.

The existing residential dwelling is located on the portion of the Property which will become the lot retained by Entity A once the respective subdivision and transfers occur (proposed Lot 2A).

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 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

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

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

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

Income Tax Assessment Act 1997 Section 995-1

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.

Section 195-1 provides that if a provision of the GST Act uses the expression 'you', it applies to entities generally, unless its application is expressly limited.

The first issue to consider is determining the relevant entity that will supply Lot 1 to the Purchaser.

For GST purposes, the term 'entity' includes a partnership (paragraph 184-1(1)(e)). The term 'partnership' is defined in section 195-1 with reference to section 995-1 of the Income Tax Assessment Act 1997 as:

(a)  an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or

(b)  a limited partnership.

Goods and Services Tax Ruling GSTR 2004/6; Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) discusses at paragraph 10 that the second limb of paragraph (a) of the definition of a 'partnership' above includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. This type of partnership is referred to as a 'tax law partnership'.

In this case, Entity A and Individuals A & B together acquired the Property in YYYY and have jointly received residential rental income in respect of the Property from that time. Furthermore, the Agreement provides that Entity A and Individuals A & B, as Vendors, will supply Lot 1 to the Purchaser.

Therefore, we consider the supply of Lot 1 to the Purchaser will be made by the tax law partnership of Entity A and Individuals A & B. As such, we will consider the application of section 9-5 from the perspective of the partnership of Entity A and Individuals A & B (the Partnership).

It is common ground that paragraph 9-5(a) and 9-5(c) are satisfied as the supply of Lot 1 will be made for consideration and the Property is situated in the indirect tax zone (Australia).

The issues in this case are whether the supply of Lot 1 is made in the course or furtherance of an enterprise carried on by the Partnership and if so, as the Partnership is not registered for GST, whether the Partnership is required to register.

Enterprise

Section 9-20 provides an enterprise is an activity, or series of activities, done (among other things) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

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

As discussed above, the Partnership has leased the Property from the date of acquisition in YYYY. We consider the Partnership has, for GST purposes, carried on an enterprise of leasing residential property since YYYY. The sale of Lot 1 is considered to be an activity done in the termination of that leasing enterprise.

Therefore, the sale of Lot 1 by the Partnership will satisfy paragraph 9-5(b).

Registration

Section 23-5 provides 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.

As discussed above, we consider you are carrying on an enterprise and therefore satisfy paragraph 23-5(a).

The current registration turnover threshold for entities other than non-profit bodies is $75,000.

Subsection 188-10(1) provides that you will meet the registration 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 the term 'current GST turnover' as the sum of the values of supplies made in a particular month and the previous 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

Section 188-20 defines the term 'projected GST turnover' as the sum of the values of supplies make in a particular month and are likely to make in the following 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

Section 40-35 provides that the supply of residential premises by way of lease, hire or licence that are to be used predominately for residential accommodation is input taxed. Therefore, the value of the supplies made by the Partnership of residential premises by way of lease is disregarded when considering whether the Partnership meets the registration turnover threshold.

Furthermore, section 188-25 provides that in working out your projected GST turnover you should disregard, amongst other things, any supply made or likely to be made by you by way of a transfer of ownership of a capital asset of yours.

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) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

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.

We consider Lot 1 will fall within the scope of a 'capital asset' and therefore the sale will be disregarded in calculating the projected turnover of the Partnership pursuant to section 188-25.

Given the above, the turnover of the Partnership will not meet the registration turnover threshold and paragraph 23-5(b) will not be met. Consequently, the Partnership is not required to be registered under section 23-5 and paragraph 9-5(d) will not be satisfied.

Conclusion

The sale of Lot 1 to the Purchaser will not be a 'taxable supply' as defined in section 9-5. As such, the Partnership will not be liable for GST in respect of the sale under section 9-40.