Edited version of private advice

Authorisation number: 1052290783232

Date of advice: 13 August 2024

Ruling

Subject: GST - goods acquired as part of a going concern

Question

Will the conversion of a premises that was acquired as part of a business that was a going concern into a private residence result in an increasing adjustment in accordance with Division 135 of the GST Act?

Answer

No. The conversion of the premises into a private residence will not result in an increasing adjustment under Division 135 of the GST Act.

This ruling applies for the following period:

1 July 20YY to 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You are registered for GST.

You are carrying on a farming enterprise.

In MM 20YY you entered into a contract to purchase a property that was subject to a commercial lease. The settlement is anticipated in MM 20YY.

The property address is XXXX. The transaction price is XXXX.

The vendor is also registered for GST.

The sale of the property is treated as a GST-free sale of a going concern.

The property contains a commercial building. It is your intention to end the commercial lease and convert the building into a single residential building which you will use as your principal place of residence.

After the settlement, you will continue to operate the leasing enterprise for a period before you convert the property into a private dwelling.

There will be no input taxed supplies, such as residential rent, made from the premises once you take ownership.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 11-15.

A New Tax System (Goods and Services Tax) Act 1999, Division 129.

A New Tax System (Goods and Services Tax) Act 1999, section 130-5.

A New Tax System (Goods and Services Tax) Act 1999, Division 135.

Reasons for decision

Subsection 135-5(1) of the GST Act provides for an initial increasing adjustment if:

•          an entity is the recipient of a GST-free going concern supply; and

•          the entity intends that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

You are registered for GST. You entered a contract to purchase the property subject to a commercial lease. The sale of the property to you is treated as a GST-free sale of a going concern.

As you will continue to operate the leasing enterprise through which you will make a taxable supply of the commercial lease before the property is converted to a private residence, there will be no increasing adjustment under section 135-5. The section will only be triggered when there are both i) supplies made in the course of ownership and ii) they are neither taxable supplies or GST free supplies.

Section 135-10 is designed to capture subsequent events that result in a change in which the going concern acquired was previously applied. Section 135-10 provides that if you are the recipient of a going concern, Division 129 of the GST Act will apply to that acquisition in relation to:

•          the proportion of all the supplies made through the enterprise that you intend will be supplies that are neither taxable supplies nor GST-free supplies, and;

•          the proportion of all the supplies made through the enterprise that are supplies that are neither taxable supplies nor GST-free supplies.

Division 129 operates in conjunction with subsection 135-10. Thus section 135-10 applies in the same way as Division 129 applies in relation to the extent to which you made an acquisition for a creditable purpose and the extent to which a thing is applied for a creditable purpose changes.

To determine whether you have an adjustment and calculating any adjustment under section 135-10, the mechanics are adopted from Division 129. Section 129-40 contains the method statement to work out whether you have an adjustment:

Step 1 - working out the actual application of the thing. In this case the relevant period to consider is the period starting from when you acquired the property (October 2024) and ending at the end of the adjustment period (in your case when the commercial lease ends and you terminate the leasing enterprise so that the dwelling can be converted into a private residence). During this period your supplies of leasing the commercial property will satisfy the definition of a taxable supply. Therefore, the proportion of supplies (expressed as a percentage) made during this period that are neither taxable supplies nor GST-free supplies (actual application) is 0%.

Step 2 - working out the former/intended use. It is considered you acquired the going concern for a fully creditable purpose as defined within section 11-15 of the GST Act as the intent was to continue the commercial lease that was a taxable supply. Adopting the terminology of paragraph 135-10(1)(a), the proportion of all supplies that you intend will be supplies that are neither taxable supplies nor GST-free supplies (intended or former application) is 0%.

Step 3 - not applicable.

Step 4 - not applicable.

Step 5 - where the actual application of the thing is the same as its intended or former application, you will have neither an increasing adjustment nor decreasing adjustment.

As there is no difference between the actual application and intended or former application of the thing for a creditable purpose, step 5 of the method statement follows that you will not have an increasing or decreasing adjustment pursuant to section 135-10.

Section 130-5 also creates an increasing adjustment when you make a creditable acquisition, where the acquisition was made for a creditable purpose and the goods are applied solely to private and domestic use.

However, there is no creditable acquisition as the property was not initially supplied as a taxable supply as defined within section 9-5, but rather as a GST free supply of a going concern. Thus, there will be no increasing adjustment under section 130-5 on converting the property and applying it for a private or domestic use.