Edited version of private advice

Authorisation Number: 1052297252041

Date of advice: 10 September 2024

Ruling

Subject: GST - sale of property

Question 1

Will the sale of the whole property, which includes two commercial eases, be a taxable supply in accordance with section 9-5?

Answer 1

The portion of the property that does not form part of the leasing enterprise being carried on, will not be a taxable supply when sold, however the portions of the property that are the subject of the commercial leases will be a taxable supply in accordance with section 9-5 of the GST Act.

Question 2

If the answer to question 1 provides that all or part of the property is a taxable supply under section 9-5 when sold, would any portion of the property qualify as a GST-free supply of a going concern under section 38-325?

Answer 2

Yes. Provided all of the provisions of section 38-325 of the GST Act are met, the portions of the property that are subject to the commercial leases, will qualify as a GST-free supply of a going concern under section 38-325, as long as the purchaser of the property is not one of the current lessors.

Question 3

If an individual was to purchase the property, for private use with the intention of building a residential premises on the property, would this change the GST treatment of the supply?

Answer 3

No. The intention of the purchaser in relation to the ongoing use of the property does not change the GST treatment of the supply.

This ruling applies for the following periods:

Financial year ending 30 June 20XX, to

Financial year ending 30 June 20XX.

The scheme commences on:

The date this private ruling is issued

Relevant facts and circumstances

•                You, hold an Australian business number (ABN) and are registered for goods and services tax (GST).

•                You own a property that is XX acres in size.

•                You acquired the property through a settlement.

•                The property currently has two commercial leases in place.

•                The whole property is zoned rural.

•                The property sits on one title.

•                One lease is current until XXXX

•                The other lease is now a month-by-month lease.

•                The remaining portion of the property is used for personal use.

•                There is no residential premises located on the property.

•                The property is not being used for any farming activities.

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 38-325

Reasons for decision

Question 1

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

1.              is made for consideration; and

2.              is made in the course or furtherance of an enterprise being carried on; and

3.              is connected with the indirect tax zone; and

4.              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 is located in the indirect tax zone, will be for consideration and the supplier of the property is registered for GST. Therefore, 3 of the elements (1,3&4) of section 9-5 will be satisfied when the property is sold. Accordingly, we need to determine whether the other element (2) would be satisfied. If this were the case, the sale of the whole property would satisfy all of the requirements under section 9-5 and would be a taxable supply.

It is already established that you lease two portions of the property to commercial enterprises which takes up an area of X sq metres of the total property. Therefore, you are carrying on a leasing enterprise.

As such, the portion of the property that is subject to the commercial leases will be a taxable supply under section 9-5 as the sale will be in the course or furtherance of the leasing enterprise being carried on and all of the elements of section 9-5 are satisfied in relation to this portion of the property.

We now need to consider the remaining portion of the property that you have stated you use for personal use and is not subject to a lease.

Whether the sale of the property will be in the course of the enterprise that you carry on

Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when an does an entity have a decreasing adjustment (GSTR 2004/8), 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, you are selling the property which is partly leased to two third parties. The balance of the property is not trading stock, is not a depreciable asset and the property will not be sold as part of the leasing enterprise being carried on by you.

Application in this case

We have already determined that the leased portion of the property when sold will be a taxable supply. We now need to determine whether the remaining private portion of the property will qualify as an adventure or concern in the nature of trade and be a separate enterprise.

You have stated that the private portion of the property is not subject to a lease, does not contain a residential premises and is not used for any farming activities.

The sale of the private portion of the property does not meet any of the provisions under section subdivision 38-O as it would not be a GST-free supply of farmland.

The sale of the private portion of the property does not meet the provisions of subdivision section 40-C as it would not be an input taxed supply of residential premises.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' while paragraphs 247 and 257 consider the six badges of trade being:

•                The subject matter of realisation

•                The length of period of ownership

•                The frequency or number of similar transactions

•                Supplementary work on or in conjunction with the property realised

•                The circumstances that were responsible for the realisation; and

•                Motive.

The subject matter of realisation

You obtained the property in XXXX as part of a settlement. You use this portion of the property for private purposes. You now intend to sell the property as a whole as it sits on one title.

The length of time of ownership

You have owned the property since XXXX.

The frequency and number of similar transactions

This is a one-off transaction in that the property is being sold as a whole and not as separate parts.

Supplementary work on or in connection with the property realised

There is no commercial activity being carried out on the private portion of the property as it is used for private purposes; however, the area does contain sheds.

The circumstances that were responsible for the realisation

The decision has been made to sell the property as a whole.

Motive

The motive for selling the property is to dispose of the property.

We do not see that the sale of the private portion of the property would qualify as an adventure or concern in the nature of trade.

Conclusion

In relation to the leased portion of the property all of the elements of section 9-5 will be met when sold and as a result this portion of the property will be subject to GST.

The private portion of the property will not be subject to GST as this portion of the property does not form part of an enterprise being carried on. This portion of the property is neither GST-free or input taxed under subsections 38-O and 40-C.

When sold, you will be required to apportion any expenses in relation to the sale between personal and business use. This can be done using a reasonable apportionment methodology.

Question 2

Section 38-325 provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is a GST-free supply if it is supplied under an arrangement for the supply to be a going concern.

Section 38-325 states:

(1)                The supply of a going concern is GST-free if:

(a)           the supply is for consideration; and

(b)           the recipient is registered or required to be registered; and

(c)            the supplier and the recipient have agreed in writing that the supply is of a going concern.

(2)                A supply of a going concern is a supply under an arrangement under which:

(a)           the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise; and

(b)           the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise being carried on by the supplier)

The first requirement is that the enterprise being sold would need to be identified. As provided in question 1 you are carrying on a leasing enterprise in relation to the leased portion of the property. That is, the leased portion of the property, along with the commercial leases, would need to be identified in the contract of sale as well as the private portion of the property.

In order for a sale of the leasing enterprise to qualify as a GST-free supply of a going concern, all of the provisions of section 38-325 must be satisfied.

If the sale of the leasing enterprise and the property was to a third party that was not one of the two current lessee's, and all of the provisions of section 38-325 are met, then the sale of the enterprise would qualify as a GST-free sale of a going concern.

However, should one of the existing lessees of the property consider purchasing the property, then you would have to consider the consequences and have the contract of sale reflect this.

Goods and services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) provides the following:

Supply by a lessor of the benefits of covenants under a lease

108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

Although the other provisions of section 38-325 may be satisfied if you were to sell the leasing enterprise to one of the existing lessee's, paragraph 38-325(2)(a) cannot be satisfied in relation to that portion of the enterprise as all things necessary to carry on the leasing enterprise cannot be provided. That is because the current lease will cease as at the date of settlement and an entity cannot have a lease with themselves.

Section 38-325 states that for a supply to be a GST free supply of a going concern, all things necessary for the continued operation of the enterprise must be supplied.

Question 3

The purchaser's intention in relation to what they decide to do with the property after settlement does not change the GST treatment status of the supply by the seller. The purchaser would be purchasing a property which consists of a private portion which is not subject to GST and a commercial portion and leasing enterprise which would be a taxable supply.