Edited version of private advice

Authorisation Number: 1052283240437

Date of advice: 26 September 2024

Ruling

Subject: GST - sale of vacant industrial land

Question

Was the sale of your [percentage] interest in vacant industrial property located at [property location], to co-owner [co-owner B], a taxable supply as defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale represented a mere realisation of a capital asset.

This ruling applies for the following period:

[relevant period]

The scheme commences on:

[relevant date]

Relevant facts and circumstances

[co-owner A] (you) operated a [business] through a company structure being [company A]. [company A] commenced operation around [year] and was registered for GST. [company A] was located at [business address].

[co-owner B] and [co-owner B's spouse] were directors of a company [company B], which owned vacant industrial land at [property location] (the Property). The Property adjoined the block at [business address] on which you operated your business, [company A]. You were not otherwise associated with [company B].

From [year], [company A] rented the Property from [company B] as a storage facility for items used in its operations, as the business had run out of storage space at its own premises. At that time that you and [co-owner B] also began to manage [company A] together, each paying a share of the Property rent to [company B].

[co-owner B] managed the business with you between [year] to [year]. During this same period, [co-owner B's spouse] also worked for [company A], earning wages.

Around [year], [co-owner B] ceased [their] involvement with running [company A], and [co-owner B's spouse] ceased working for [company A]. You continued to operate [company A] on your own.

[co-owner B] and [co-owner B's spouse] then approached you and offered to sell you the Property, so that you could continue to use it in the running of your business. You could not afford to purchase the Property on your own so arrangements were instead made for you to purchase a share in the Property together with [co-owner B] who purchased the other share.

On [date], the Property was transferred from [company B] to you and [co-owner B] as tenants in common in equal shares.

You were not personally registered for GST when the Property was transferred.

The consideration that you and [co-owner B] paid for the transfer of the Property was [amount]. The acquisition of the Property from [company B] was financed through a joint loan with the [bank]. The loan repayments were made by you and [co-owner B] separately in equal shares.

All the parties understood that you intended to continue to use the Property in the same manner and for the same purposes as you had used it since [year] (that is, as storage space for [company A]).

Following the transfer of the Property and during the period of co-ownership, all outgoings in respect of the Property were met separately by you and [co-owner B] in equal shares (that is, outgoings were not paid from a joint bank account).

The loan repayments for your share of the Property were made from income generated by [company A].

Sometime after the [year] transfer of the Property ownership, a dispute arose between you and [co-owner B] and you decided to go your separate ways.

The issue of [company A] continuing to use the Property as a storage area was referred to the [court], in case [number]. As a result, a Heads of Agreement (the Agreement) was entered into between parties whereby:

•         [company A] and you were to remove all equipment presently on the co-owned Property on or before [date].

•         Thereafter neither co-owner would use the Property, except by agreement.

•         [company A] would pay [co-owner B], for the use of the Property from [date] to [date], the sum of [amount] inclusive of GST.

The Property remained vacant after [date].

On [date], you contracted to sell your [percentage] interest in the Property to [co-owner B] for [amount]. Settlement was on [date].

The amount of [amount] payable by [company A] to [co-owner B] pursuant to the Agreement was netted off against the amount payable by [co-owner B] for your [percentage] interest in the property. [company A] claimed the [amount] settlement amount payable to [co-owner B] as a business expense.

The Contract of Sale (the Contract) provided that the sale was not a taxable supply because it was not made in the course or furtherance of an enterprise that you carried on.

Special Condition [number] of the Contract also provided that the sale was not a taxable supply, subject to an ATO private ruling which was to be obtained.

Although these arrangements were documented by the parties at the relevant time, you no longer hold any paperwork in relation to either the former lease at the Property, or [co-owner B's] involvement in managing [company A].

Since the sale of your share of the Property to [co-owner B], [company A] has ceased trading.

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

Reasons for decision

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 Property 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 sale of your [percentage] interest in the Property to [co-owner B] was made for consideration (for the sale price of [amount] less the [amount] court settlement payable by [company A), it was connected with the indirect tax zone (the Property being located in Australia), and we assume that you are not registered for GST, satisfying paragraphs 9-5(a) and 9-5(c), but not paragraph 9-5(d).

There are no provisions under which the supply would be GST-free or input-taxed.

We therefore need to examine whether your supply of your share of the Property was made in the course or furtherance of 'carrying on an enterprise', and whether you were required to register for GST in satisfaction of the remaining criteria under paragraphs 9-5(b) and 9-5(d).

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)).

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 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) are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes. MT 2006/1 provides advice on the meaning of the term 'enterprise' for GST purposes.

Paragraph 153 of MT 2006/1 discusses how 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 the form of a business or in the form of an adventure or concern in the nature of trade

According to MT 2006/1, a business (per paragraph 9-20(1)(a)) generally includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade (per paragraph 9-20(1)(b)) includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of 'enterprise' beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is on determining the factors indicating a business.

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•         a significant commercial activity;

•         the purpose and intention of the taxpayer in engaging in the activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         repetition and regularity of activity; and

•         the activity is organised and carried on in a businesslike manner.

These factors in turn are derived from common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in several matters. A leading case considering isolated transactions is FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 (Myer).

The principles in Myer, along with several other authorities, were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. These cases indicate that the question of whether a business is being carried on is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above.

In your case, while the sale of your share of the Property might arguably be viewed as a significant commercial activity in that a substantial profit was made by you, your purpose and intention were not to make a profit by buying and selling the Property. You bought your share of the Property to expand the footprint of your existing adjoining business. You sold your share of the Property to [co-owner B] because your relationship with [co-owner B] had broken down as a result of your dispute.

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) provides that an enterprise may include an activity or 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.

When considering your arrangement, we have weighed up the fact that you had not been using the Property at all for a period of around [number] years when you sold your share to [co-owner B].

After ownership of the Property passed to you and [co-owner B] as individual co-owners, [company A] continued to store items at the Property until [date], in the same manner as previously, when [company A] was leasing the Property from [company B].

While you did not charge [company A] rent, by allowing [company A] to use the Property for storage you effectively granted [company A] a 'licence to occupy'.

However, by [date], [company A] had removed all equipment it had been storing at the Property and the Property was no longer being used by you or by [company A] in connection with any enterprise. For around [number] years, ([date] to [date]), you and [co-owner B] left the Property unused and vacant.

For the period that the Property was vacant, no income was generated by you from any source in connection with the Property. Therefore, you were not conducting an enterprise.

Conclusion

Your sale to [co-owner B] of your interest in the Property was not made in the course or furtherance of any enterprise that you carried on. Accordingly, paragraph 9-5(b) was not satisfied when that sale (supply) was made.

You are not registered or required to be registered for GST.

Your supply did not satisfy all the positive limbs of section 9-5.

Therefore, your supply of your interest in the Property was not a taxable supply as defined in section 9-5.