Edited version of private advice

Authorisation number: 1052275904106

Date of advice: 18 July 2024

Ruling

Subject: GST - sale of property

Question 1

Is the partnership carrying on an enterprise?

Answer 1

Yes. The partnership is carrying on a leasing enterprise.

Question 2

Will the sale of the property qualify as a GST-free sale of a going concern under section 38-325?

Answer 2

The partnership is not registered or required to be registered for GST. As such, section 9-5 of the GST Act is not met and the sale of the property will not be a taxable supply. The proceeds of the sale do not form part of the GST projected turnover due to section 188-25 of the GST Act that disregards supplies of capital assets.

Therefore, section 38-325 of the GST Act need not be considered as it is not relevant in relation to the sale of the property.

This ruling applies for the following periods:

Year ending 30 June 20YY, to

Year ending 30 June 20YY

The scheme commences on:

DD MM YYYY.

Relevant facts and circumstances

•         The partnership purchased the property on XX XXX XXXX.

•         The partnership has an Australian Business Number (ABN) but is not registered for GST.

•         The property was used as residence for a period of time until it was rented commercially.

•         The intention when the property was first purchased was to covert the premises into two townhouses. The decision was made not to proceed with the development and the partnership proceeded to lease the premises.

•         The premises has been leased from XXXX to a third party, initially with a commercial lease agreement till XXXX and then as a monthly overholding tenant which is ongoing.

•         The property is leased for storage and contains an office space and workshop.

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 188-20

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

Reasons for decision

Question 1

Are you carrying on an enterprise?

The term 'enterprise' is defined for GST purposes in section 9-20 and includes among other things, an activity or a series of activities done:

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

In this case the enterprise being carried on is one of commercial leasing. The property has been leased on a regular and continual basis since XXXX and the partnership receives regular lease payments.

As a result, the partnership is carrying on an enterprise of leasing.

Question 2

Under section 9-5, an entity makes a taxable supply where the supply:

a)            is made for consideration; and

b)            is made in the furtherance of an enterprise that you carry on; and

c)            is connected with the indirect tax zone; and

d)            is made by a supplier who is 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.

In this case, the property to be sold will consist of a property that is located in the indirect tax zone and the supply would be for consideration. Therefore, the sale of the property would satisfy two elements outlined above (a & c).

Accordingly, we need to determine whether the last two elements would also be satisfied. If this were the case, the supply of the property would satisfy all requirements of section 9-5 and would be a taxable supply.

It was already established in question 1 that the partnership is carrying on a leasing enterprise; however, it remains to be determined whether the sale of the property will be made in the course or furtherance of the enterprise that the partnership is carrying on under paragraph 9-5(b) and whether the partnership is required to be registered for GST under paragraph 9-5(d).

Whether the sale of the property will be in the course of the enterprise that the partnership carries on.

Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when an does an entity have a decreasing adjustment, considers the requirement in paragraph 9-5(b) that the supply is made in the course or furtherance of an enterprise. Paragraphs 28 and 29 state:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

Paragraph 30 of GSTR 2004/8 lists the following characteristics which stronglyindicate that a sale of a thing has a connection with an enterprise:

•         at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•         at the time of sale it was applied in carrying on your enterprise to at least some extent; and

•         it is sold as a transaction of your enterprise.

Each of these points will indicate a connection, and not all of the points need to be satisfied.

In this case, the partnership is selling the property which is currently leased to a third party. The property is not trading stock, but it is a depreciable asset and the property will be sold as part of the enterprise being carried on by the partnership.

Whether the partnership is required to be registered for GST

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if they carry on an enterprise and the GST turnover meets the registration turnover threshold (currently $75,000).

The partnership is receiving $X,XXX per month in lease payments. Given that the turnover resulting from the leasing enterprise for the partnership is below the turnover threshold of $75,000, the partnership is not required to be registered for GST.

Division 188 provides the meaning of GST turnover. Section 188-20 states that your projected turnover at a time during a month is the sum of the values of all supplies that you have made, or are likely to make, during that month and the following 11 months, other than supplies that are:

(a)          Supplies that are input taxed, or

(b)          Supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c)          Supplies that are not in the connection with an enterprise that you carry on.

Section 188-25 states, that in working out your projected turn over, disregard:

(a)          Any supply made, or likely to be made by way of a 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 of an enterprise.

The partnership is not registered or required to be registered for GST. The sale of the property will be the sale of a capital asset. The proceeds of the sale of the property would be excluded from the projected GST turnover calculation under section 188-25 and, as a result, the partnership is not required to be registered for GST.

In conclusion

The sale of the property will not be a taxable supply by the partnership as not all of the requirements of section 9-5 will be met.

Based on the facts of this case, there is no need to consider section 38-325 as the supply of the property will not be a taxable supply for GST purposes.