Edited version of private advice

Authorisation Number: 5010081392232

Date of advice: 18 February 2022

Ruling

Subject: GST on the sale of property which is partly commercial

Question

Is GST payable on the sale of X in accordance with Division 9 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which is partly commercial in nature?

Answer

Yes.

Question

Is the suggested method in the ruling submission of calculating the GST acceptable?

Answer

Yes, on the basis that the forest land is clearly identifiable as forming part of the commercial or residential property.

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

X purchased property on X at X. The property was originally purchased with the intention of becoming a rental property.

The property is made up of a residential dwelling with a cleared land area, buildings and other infrastructure and other land covered by dense trees.

Since buying the property X have invested an additional $X on renovations and additional works to the property including building a separate facility on site next to but not attached to the existing residential building. Total investment approximately is $X.

The property has been rented to X Pty Ltd which X are the owners for, for the purpose of X enterprise. X business is not being sold. The lease is valid till 30 June 20XX.

X have been offered approximately $X for the sale of this property.

X's methodology in trying to work out what the GST area of the property would be is set out below:

Property size is X acres with approximately X acres of cleared land at the front of the property.

Of this X acres, approximately X acres is used for commercial purposes by the tenant and this would mean that X acres are used for residential/private use.

The total X acres of land has been appraised to be valued at $X, so with X being allocated for commercial purpose, that would equate to $X of its total value, resulting in GST of $X payable upon sale.

Buildings on site have been appraised to a current market value of $X based on the appraisal done by a real estate.

Further X said in your submission that X is deemed for residential/private usage and X is deemed to be for commercial purposes.

This would equate to $X of the sale being non-GST applicable whilst $X would be subject to GST, so $X of GST payable upon sale.

The sale contract has not been drafted at the time of this ruling.

X is not aware of how the property will be used in the future by the potential buyer.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

Reasons for decision

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a 'taxable supply' where the supply is:

a.    made for consideration;

b.    made in the course or furtherance of an enterprise that you carry on;

c.     connected with the indirect tax zone; and

d.    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.

Under section 9-40 of the GST Act an entity is liable for GST on all taxable supplies that it makes. However, where an entity is making a mixed supply that is a combination of separately identifiable taxable and non-taxable parts the GST liability is only calculated on the taxable portion of the supply.

In respect to a mixed supply, the consideration received for the supply must be apportioned, and GST levied only on the consideration relating to the taxable part of the supply.

The taxable portion of a mixed supply is calculated in accordance with the formula contained in section 9-80 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/8, Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts provides the ATO view on to identify whether a supply in includes taxable and non-taxable parts.

It may be necessary to characterise what is supplied to determine whether it wholly or partly meets the requirements of section 9-5 or a provision that makes it non-taxable.

Paragraphs 11, 12,16 and 27 of GSTR 2001/8 states:

11. Where you make a supply that is identifiable as having more than one part and each part is taxable, you do not need to apportion the whole supply. This is because GST is payable on the whole supply. Similarly, if all the parts of a supply are identifiable as being non-taxable, GST is not payable on any part of the supply.

12. However where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to identify the taxable part of the supply.

16.... the term 'mixed supply' is used to determine a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Paragraphs 40 to 41, 43 and 45 of GSTR 2001/8 provide:

40. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part.

40A. An identification of the essential character of what is supplied may inform whether a particular transaction falls within terms of a specific statutory provision, and whether it does so wholly or only to some extent. You must consider all of the circumstances of the transaction to ascertain its essential character.

41. By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

43. A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

45. In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity.

As per our discussions and submission made, the residential and commercial buildings are clearly identifiable. The residential part is not utilised in the carrying on of an enterprise. Therefore, the residential part is input taxed. This means that you will be making an input taxed supply under the GST Act.

Section 9-40 of the GST Act provides that an entity is liable for GST on all taxable supplies that it makes. However, where an entity is making a mixed supply that is a combination of separately identifiable taxable and non-taxable parts the GST liability is only on the taxable part of the supply.

You have indicated that the components that make up your supplies are clearly identifiable and as a result, it would be possible to separate the applicable GST.

The basis for apportionment needs to be calculated on a reasonable basis and records must be kept to explain the method of apportionment used in particular the residential property and the forest part of the land.

The supplies are mixed supplies with the GST status of each individual component of the supply required to be assessed individually.

The taxable portion of a mixed supply is calculated in accordance with the formula contained in section 9-80 of the GST Act.

We understand there is a large forest land that is not being utilised by the X business.

The only use (if any) of the forest land is in conjunction with the residential premise. As residential premise is an input taxed supply for GST purposes, GST is not payable on the residential portion of the sale.

The taxable part of the supply will be the business premises and the land used in conjunction with the business premises. The balance of the supply will be input taxed being the supply of the residential premises and the land related to it (including the forest area).