Edited version of private advice

Authorisation Number: 1052344434359

Date of advice: 20 December 2024

Ruling

Subject: GST - property - taxable supply

Question 1

Was the sale by [co-owner 1] and [co-owner 2] (the Vendors) of co-owned property situated at [relevant address], also described as [the relevant title folio description] (the Property), to [the purchasing entity] (the Purchaser), a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

The sale of [co-owner 1's] interest in the Property was a taxable supply.

The sale of [co-owner 2's] interest in the Property was not a taxable supply.

This ruling applies for the following period:

[the relevant period]

The scheme commenced on:

[the relevant date]

Relevant facts and circumstances

On [the relevant date] [co-owner 1] and [co-owner 2] (the Vendors) acquired approximately [the relevant size] of vacant land situated at [the relevant address], also described as [the relevant title folio description] (the Property), as joint tenants and co-owners.

On [the relevant date] the Vendors transferred their ownership type to tenants in common.

Each co-owner used the Property throughout the duration of their co-ownership to carry out independent [relevant enterprises]. Neither business generated enough income to exceed the GST threshold in any given year of operation, generally each earning less than [the relevant amount] annually.

Infrastructure at the Property consists of [the relevant infrastructure] which relate to the [relevant enterprise activities]. The [relevant infrastructure] were used by the Vendors for [the relevant enterprises], with some also being leased to an unrelated party.

[co-owner 1] has an active ABN [relevant number] and has been registered for GST since [the relevant date].

[co-owner 2's] former ABN [relevant number] was cancelled on [the relevant date] and [they have] not been registered for GST since [the relevant date].

On [the relevant date] [co-owner 1] granted a [the relevant period] lease (the Lease) over approximately [the relevant size] of land at the Property to a third party, [tenant] (the Tenant).

The Tenant used the land in [their] own independent [relevant enterprise], erecting [relevant infrastructure] in the leased area for this purpose.

The Lease, which expires on [the relevant date], has a nominal annual fee of [the relevant amount].

As both co-owners were entitled to receive income from the Tenant, a tax law partnership was formed with respect to the third-party Lease (the Partnership).[1]

On [the relevant date] the Partnership registered for an ABN backdated to [the relevant date]. During the process of the ABN registration, the Partnership was also inadvertently registered for GST. The GST registration was subsequently cancelled on [the relevant date].

On [the relevant date], the Vendors entered into a Contract of Sale (the Contract) for the Purchaser to acquire the Property for consideration in the amount of [the relevant amount] (excluding GST).

Settlement of the Property occurred simultaneously with the Contract.

The Property was sold subject to the Lease.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

•                section 9-5

•                section 9-20

•                section 23-5

•                section 188-25

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

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.

When the Property was sold, the supply was made for consideration in the amount of [the relevant amount] (excluding GST), the supply was of property located in Australia (and was therefore connected with the indirect tax zone), and one of the co-owners, [co-owner 1], was registered for GST.

We therefore need to examine whether the co-owners were 'carrying on an enterprise', which would satisfy the requirements under paragraph 9-5(b) and whether [co-owner 2] was required to be registered for GST pursuant to paragraph 9-5(d).

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act.

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));

•                an adventure or concern in the nature of trade (paragraph 9-20(1)(b)); or

•                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 (paragraph 9-20(1)(c)).

In this case, with respect to satisfying the requirements of paragraph 9-5(b), the co-owning Vendors separately derived individual income from [the relevant enterprise activities] plus they were jointly entitled to income from leasing activities they carried on at the Property. These activities satisfy both paragraphs 9-5(b) and 9-20(1).

The Vendors' enterprises ceased when the Property was sold.

Termination of an enterprise

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) relevantly provides at paragraph 28 that a supply which you make in the course of terminating an enterprise is a supply which is made in the course or furtherance of the enterprise which you carry on.

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) likewise provides at paragraph 140:

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

The Vendors' supply of the Property by way of sale terminated both any residual [relevant enterprise] and their connection with the third-party leasing enterprise, in satisfaction of section 9(b).

In [co-owner 1's] case, [they were] registered for GST at the time of the sale of [their] share of the Property and remain registered currently. Therefore, [their] sale of [their] share of the Property was a taxable supply pursuant to section 9-5.

Finally, given that [co-owner 2] was not registered for GST at the time of the sale, we need to consider whether [co-owner 2] was required to be registered for GST pursuant to paragraph 9-5(d).

GST registration

Section 23-5 provides that you are required to be registered for GST if:

•                you are carrying on an enterprise; and

•                your GST turnover meets the registration turnover threshold.

In this case, the income earned by each Vendor from their respective [relevant enterprise activities] and the leasing enterprise, fell well short of the GST turnover registration threshold.

On the other hand, the proceeds from the Vendors' sale of the Property exceeded the GST registration turnover threshold.

However, according to MT 2006/1, certain types of assets, (including machinery), are considered investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the enjoyment of the person.

The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Further, section 188-25 excludes certain supplies made when working out your projected turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a)           any supply made, or likely to be made, by you by way of 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:

-                ceasing to carry on an enterprise; or

-                substantially and permanently reducing the size or scale of an enterprise.

GSTR 2001/7 explains that tangible 'Capital assets' can include the following items that are retained by you for income producing purposes:

•                your factory, shop, or office;

•                your land on which they stand;

•                fixtures and fittings;

•                furniture, machinery; and

•                motor vehicles.

For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of an enterprise ceasing, or the substantial and permanent reduction in size or scale of an enterprise.

GSTR 2001/7 provides the following relevant example:

Example 1: Ceasing to carry on an enterprise

48. James, a grazier, aged seventy, decides to retire from his farm. He holds a clearing sale and sells all his livestock, machinery and implements to various buyers. He receives $80,000 from the sale that will be included in his current GST turnover. He is not registered for GST, as his GST turnover from selling livestock is usually around $35,000.

49. If James has a GST turnover of $75,000 or more he is required to be registered for GST. Although he normally would have sold some of this livestock in his day to day operations, the whole herd has been sold at this time solely as a consequence of ceasing to carry on his enterprise. The effect of subparagraph 188-25(b)(i) is that the $80,000 is excluded from his projected GST turnover.

50. An objective assessment of James' projected GST turnover is below $75,000 taking into account his age and the permanent nature of his decision. His current GST turnover is above $75,000 but because his projected GST turnover is below $75,000, his GST turnover does not meet the registration turnover threshold. Thus, James is not required to register for GST.

In this case, the application of section 188-25 and the principles outlined in GSTR 2001/7 would mean that the Property is considered to be a capital asset and that the income from the sale of the Property should therefore be disregarded when calculating [co-owner 2's] projected GST turnover for registration purposes.[2]

Accordingly, [co-owner 2] was not required to register for GST.

Therefore, paragraph 9-5(d) was not satisfied with respect to [co-owner 2's] sale of [their] share of the Property and it was not a taxable supply.

GST will be payable on [co-owner 1's] supply because it met all of the criteria under section 9-5 for a taxable supply; whereas no GST will be payable on [co-owner 2's] supply, as it did not meet the section 9-5 criteria.

[1] 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 paragraph 43.

[2] Please note that the individual co-owners retained ownership of the Property despite a tax-law partnership applying in relation to the third-party Lease. The Partnership did not assume ownership of the Property.