Edited version of private advice

Authorisation Number: 1052261492617

Date of advice: 26 June 2024

Ruling

Subject: GST - property sales

Question

Will company name (you) be making taxable supplies as defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the properties situated at addresses (the Properties)?

Answer

Yes.

Question

If the sales of the Properties will be taxable supplies as defined in section 9-5 of the GST Act, will the margin scheme apply pursuant to section 75-5 of the GST Act to calculate the GST payable on the supplies?

Answer

No.

This ruling applies for the following period:

DDMMYY

The scheme commenced on:

DDMMYY

Relevant facts and circumstances

company 1 name (you) has been registered for GST effective from DDMMYY.

Information contained on ATO systems show that on DDMMYY your tax agent applied for an ABN on your behalf and registered you for GST, backdating both registrations to an effective start date of DDMMYY. These registrations are currently active.

On your ABN application, your main business activity was described as 'Property Investment - As Owner or Sub-Leaser of Non-Residential Property (e.g., Commercial, Industrial)'.

You were initially established by two individuals who were directors of the company:

•         Director 1 and

•         Director 2.

A dispute subsequently arose between Director 1 and Director 2.

Director 1 resigned as a director and transferred their shares to Director 2 and Director 3. Director 3 is the relative of Director 2's family member.

On relevant date you entered a Contract for Commercial Land and Buildings (the XXXX Contract) to purchase a XXXX located at XXXX location from XXXX vendor 1 and XXXX vendor 2.

The XXXX Contract records that you as Trustee for unit trust name were the 'Buyer'.

The XXXX Contract records that the Buyer's ABN was numberXXXX. The entity registered under that ABN is the unit trust name. The unit trust has never been registered for GST.

The XXXX contract provides that the sale of the XXXX was a going concern for GST purposes.

The XXXX Contract did not proceed due to delays in building and pest inspections and the contract was terminated by the seller [on] relevant date.

On DDMMYY, you entered Contract[s] for Houses and Residential Land (Purchase Contracts) to purchase 2 vacant adjoining properties (the Properties) from property vendor.

The Properties were situated at property 1 address and property 2 address.

You provided a copy of the Purchase Contract for property 1 address (property 1 Purchase Contract). You did not provide a copy of the Purchase Contract for property 2 address.

The Reference Schedule to the property 1 Purchase Contract (extract below), includes the information that the Buyer (you):

1.            is registered for GST and is acquiring the Land for a creditable purpose; and

2.            is required to make a payment under section 14-250 of the Withholding Law in relation to the supply of the Property.

Subclause number of the property 1 Purchase Contract explains the procedure for withholding and remitting any GST Property Settlement Withholding payable on property sales.

Subclause number of the property 1 Purchase Contract states:

The Buyer company name warrants that the statements made by the Buyer in the Reference Schedule under GST Withholding Obligations are true and correct.

The property 1 Purchase Contract is silent in terms of the use of the GST margin scheme.

You did not provide a copy of any written agreement between yourself and the Vendor of the Properties, agreeing to apply the margin scheme.

No finance was involved in your purchases of the Properties. The purchases of the Properties were funded by Director 1 and Director 3 who contributed percentage 1 and percentage 2 respectively.

The Properties consist of vacant land, with property 1 address having an area of measurement 1 and property 2 address having an area of measurement 2.

No improvements were made to the Properties after you acquired them.

During your ownership of the Properties, Director 1 and Director 3 were responsible for all related expenses including the payment of rates.

You do not currently own any properties.

You have not previously purchased any other properties.

The Properties were listed for sale in DDMMYY through an expression of interest.

On DDMMYY you entered into 'Contract [s] for Houses and Residential Land' (Contracts of Sale) with the Purchaser, to sell the Properties.

You did not provide a copy of the Contract of Sale for property 1 address. You provided a copy of the Contract of Sale for property 2 address (property 2 Contract of Sale).

The property 2 Contract of Sale provides that the Purchase Price is inclusive of GST if payable.

Pursuant to the option selected in Subclause number of the Special Conditions to the property 2 Contract of Sale:

The Seller warrants to the Buyer (and the Buyer has relied on) and provides notice under section 14-255(1)(a) of the Withholding Law that the Buyer is not required to make a payment under section 14-250 of the Withholding Law in relation to the supply of the Property.

The Purchaser subsequently advised you that the advice received from their solicitor was that they were required to withhold GST from the sale price. You do not have any written correspondence from the Purchaser on this issue, however, you engaged in verbal discussions with the Purchaser's solicitor around whether there was a requirement for them to withhold that GST amount.

On DDMMYY the ATO notified you that withholding payments had been received following the sales of property 1 address (in the amount of amount 1) and property 2 address (in the amount of amount 2) and that these amounts had been transferred to your ATO-held GST property credits account.

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 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

Taxation Administration Act 1953 Schedule 1 section 14-250

Taxation Administration Act 1953 Schedule 1 section 14-255

Does Division 165 apply to this private ruling?

Unless your private ruling specifically discusses Division 165, we have not considered the application of the anti-avoidance provisions to your case.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for company name.

This is to explain how we reached our decision. This is not part of the private ruling.

For 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.

Question 1

Section 9-40 provides that GST is payable on any taxable supply that you make.

Taxable supply

You make a taxable supply when you satisfy the requirements of section 9-5, which states:

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.

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

For your supply of the Properties to be taxable, all the requirements under section 9-5 must be satisfied and the supply must not be GST-free or input taxed.

In your case, the property sales were made for consideration, they were connected with the indirect tax zone (as the Properties are located in Australia) and you are registered for GST. Therefore, paragraphs 9-5(a), 9-5(c) and 9-5(d) are satisfied.

We therefore need to examine whether your sales of the Properties were made in the course or furtherance of 'carrying on an enterprise', which would satisfy the criteria under paragraph 9-5(b).

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 provides that an enterprise includes 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 (paragraph 9-20(1)(b)); or

•         on a regular or continuous basis in the form of a lease, licence, or other grant of an interest in property (paragraph 9-20(1)(c)).

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of enterprise for the purpose of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 153 of MT 2006/1 discusses that the ABN Act and the GST Act do not define an 'activity or series of activities' and as such, these terms take their ordinary meaning. An 'activity' is essentially an act or series of acts that an entity does. Entities can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term 'activity, or series of activities' for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

In this case, you entered the property 1 Purchase Contract making a declaration that you were registered for GST and were acquiring the Land for a creditable purpose.

Furthermore, you warrant the above statements are true and correct (subclause number of the property 1 Purchase Contract).

The phrase 'creditable purpose' is defined in section 11-15 and provides that a requirement of acquiring something for a 'creditable purpose' is that the thing is acquired in carrying on your enterprise'. As such, stating in the property 1 Purchase Contract that you were acquiring the property for a 'creditable purpose' is, prima facie, acknowledgment that you considered the purchase of the property was done in carrying on your enterprise.

You also registered for an ABN and for GST effective from DDMMYY (noting this date is just prior to entering the Purchase Contracts), describing on your ABN application that your main business activity was 'Property Investment - As Owner or Sub-Leaser of Non-Residential Property (e.g., Commercial, Industrial)'. A crucial requirement for GST registration is the carrying on of an enterprise. We consider that applying for an ABN and for GST registration is further acknowledgment that you are carrying on an enterprise, or at least intended to carry on an enterprise.

Given the above, we consider your above actions including the declarations made in the property 1 Purchase Contract together with your statements made on your ABN and GST applications with the ATO, support a conclusion that you acquired the Properties in the course or furtherance of an enterprise. We also consider that the subsequent sales of the Properties are made in the course of that enterprise therefore satisfying paragraph

9-5(b).

In reaching the above decision we acknowledge and considered your following contentions/statements:

•         company name was established for the sole purpose of purchasing a XXXX business (albeit that at the time of ABN and GST registration on DDMMYY the XXXX Contract had already been terminated).

•         The GST registration of company name was an error by your tax agent and the correct entity that should have been registered was a related entity, company 2 name (again noting the XXXX Contract had been terminated prior to your tax agent applying for registration on DDMMYY). It is also noted that publicly available information on the Australian Business Register shows that company 2 name had an existing ABN and was registered for GST for the DDMMYY.

•         Your intention in acquiring the Properties was to build residential houses for the children of Director 1 and the children of Director 3 (the children). The children were born in DDMMYY and titles to the Properties were to be transferred to the children upon turning age. The Properties would not be leased prior to the transfer to the children.

Conclusion

Your supplies of the Properties have satisfied all the positive limbs of section 9-5. Furthermore, the supplies of the Properties (being vacant land) are neither GST-free nor input taxed. Therefore, your supplies of the Properties are taxable supplies as defined in section 9-5.

Question 2

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling either a freehold interest in land or a unit or granting or selling a long-term lease if you and the recipient have agreed in writing that the margin scheme is to apply.

The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the 'entire' freehold interest, unit or long-term lease through a supply that was 'ineligible for the margin scheme'.

Subsection 75-5(3) lists the circumstances where a supply is ineligible for the margin scheme. More specifically, paragraph 75-5(3)(a) provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

In this case, the Reference Schedule to the property 1 Purchase Contract includes notice by the Vendor (property vendor) stating that you (company name) are 'required to make a payment under section 14-250 of the Withholding Law in relation to the Property. ...'. That is, the Vendor has given notice that you are required to pay the Commissioner an amount relating to the GST liability of the Vendor in respect of the sale of the Property (GST at Settlement).

The GST at Settlement rules are discussed in Law Companion Ruling LCR 2018/4: Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4). Paragraph 15 of LCR 2018/4 states in part that a 'purchaser only has a GST withholding obligation when a vendor is making a taxable supply.' As such, we have concluded that the supply of the Properties to you were taxable supplies.

The property 1 Purchase Contract is silent in terms of any agreement between the parties in regard to the use of the GST margin scheme. Furthermore, you have not provided a copy of any written agreement between yourself and the Vendor of the Properties, agreeing to apply the margin scheme.

Given the above, we consider the supply of the Properties to you were taxable supplies on which the GST was worked out without applying the margin scheme.

Whilst coming to the decision above, we acknowledge and have considered the email correspondence you submitted between the Vendor's legal representative (lawyer 1) and your legal representative (lawyer 2). It is your contention that the correspondence is confirmation that GST was not applicable to the sale of the Properties from property vendor to you. However, whilst it is evident there was a dispute between you and the Vendor, we do not consider the correspondence clarifies whether the supplies of the Properties to you were or were not, taxable supplies.

Conclusion

You are not able to apply the margin scheme to your sale of the Properties pursuant to subsection 75-5(2).