Private ruling: GST and sale of property
Date of advice: 15 May 2019
Published: July 2019

Ruling: Q1: Was the granting of the lease made in the course or furtherance of an enterprise that the Partnership carries on? | A1: Yes, the granting of the lease was made in the course or furtherance of an enterprise that the Partnership carries on. | Q2: If the late decision by the Buyer to make an upfront payment of 24 months’ rent caused the Partnership to meet the GST registration turnover threshold, was the earlier sale of the Property made in the course or furtherance of the leasing enterprise that triggered GST registration? For the avoidance of doubt, the whole property owned by the Partnership is referred to as the Land. The Property is one part of the Land. | A2: It is not considered that a decision by the Buyer to make an upfront payment of 24 months’ rent caused the Partnership to meet the GST registration turnover threshold. Please refer to the reasons for decision for further discussion. In light of the above and the wording of Question 2, the answer to the question of whether the sale of the Property was made in the course or furtherance of the leasing enterprise that triggered GST registration is strictly speaking, not applicable. However, for completeness, we have included discussion on the question in the reasons for decision. | Q3: If the answer to Question 1 is ‘yes’ and to Question 2 is ‘no’, was the earlier sale of the Property following the commencement of the compulsory acquisition process made in the course or furtherance of a different enterprise? 3(a) If the answers to Questions 2 and 3 are both ‘no’, was the Partnership required to register for GST only in respect of the granting of the lease? 3(b) If the answer to Question 3(a) is ‘yes’, was the sale of the Property a taxable supply per section 9-5 the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) even if the Partnership was required to be registered only for the granting of the lease? 3(c) If the answers to Questions 2, 3 and 3(b) are ‘no’, if the Partnership does not reimburse the Buyer for the GST passed on in respect of the supply of the Property, then does section 142-10 of the GST Act have the effect that, by operation of law, the sale of the Property was taken to be a taxable supply for that section and Divisions 17-33 of the GST Act only and is not a supply made in the course or furtherance of an enterprise per paragraph 9-5(b) of GST Act? | A3: The answer to Question 2 is not applicable. The answer to Question 2 is not ‘no’. As such the answer to Question 3 is not applicable. However, for completeness, we have included discussion on Question 3 in the reasons for decision. 3(a) If the answers to Questions 2 and 3 are both ‘no’, was the Partnership required to register for GST only in respect of the granting of the lease? The answer to Question 2 is not applicable. On the question of whether the sale of the Property was made in the course or furtherance of the leasing enterprise that triggered GST registration, our discussion in the reasons for decision confirms in the affirmative that the sale of the Property in this case was made in the course or furtherance of an enterprise carried on by the Partnership that includes the Partnership’s leasing activities. As such, the answer to Question 3(a) is strictly speaking, not applicable. However, for completeness, we have included discussion on Question 3(a) in the reasons for decision. 3(b) If the answer to Question 3(a) is ‘yes’, was the sale of the Property a taxable supply per section 9-5 even if the Partnership was required to be registered only for the granting of the lease? The answer to Question 3(a) was not applicable. In our discussion about Question 3(a) in the reasons for decision regarding the issue of whether the client was required to register only in respect of the granting of the lease, we provided that the client was not required to register for GST only in respect of the granting of the lease. Therefore the answer to Question 3(b) is not applicable. 3(c) If the answers to Questions 2, 3 and 3(b) are ‘no’, if the Partnership does not reimburse the Buyer for the GST passed on in respect of the supply of the Property, then does section 142-10 have the effect that, by operation of law, the sale of the Property was taken to be a taxable supply for that section and Divisions 17-33 only and is not a supply made in the course or furtherance of an enterprise per paragraph 9-5(b)? The answers to Questions 2, 3, and 3(b) were not applicable. In our discussion about Question 2 in the reasons for decision regarding the issue of whether the sale of the Property was made in the course or furtherance of the leasing enterprise that triggered GST registration, our view was that the sale of the Property in the circumstances of this case was made in the course or furtherance of an enterprise carried on by the Partnership that includes the Partnership’s leasing activities. Thus the answer to Question 3(c) is not applicable. However, for completeness, we have included further discussion on section 142-10 in the reasons for decision. All further legislative references are to the GST Act unless stated otherwise.

Relevant facts and circumstances: Background ● The Partnership acquired the Land in 19XX. ● The Partnership purchased the Land for long term investment purposes. The Partnership had no specific plans to use it, develop it, amalgamate, subdivide or sell it in any way. The Partnership had a very long perspective including to pass the Land as an inheritance. The Partnership did not obtain construction or development finance to acquire the Land. ● The Land had an area of XX hectares. The only structures on the Land are two storage sheds with no doors. These have been kept vacant for virtually the full period of ownership and remained vacant at the time of the sale of the Property. With the exception of fences and a roadway, there have been no other improvements on the Land during the period that the Partnership owned it. Otherwise, the Land is vacant rural pasture with one driveway into it. ● Until 200X, the Land was zoned RU2 - Rural Landscape. In 200X, the council released its plan which re-zoned about half of the Land as R5 - Large Lot Residential. ● The Land was registered as rural land upon which it was required to pay rates. ● The only use that the Land was put to during the Partnership’s years of ownership was allowing a neighbour to run some cattle on it. Apart from that, the Land was not used in any of the following ways: ○ primary production activities; ○ lease/license or agistment to other parties for their use; ○ storage of goods, materials or equipment by the Partnership or anyone else; ○ clearing, developing or constructing of buildings or other structures or improvements; ○ generation of any income for the Land either from the neighbour or by the Partnership from rental, or by anyone else. ● With regard to the arrangement between the Partnership and the neighbour, the Partnership has advised the following: ○ The Partnership has allowed one neighbour to run cattle on the land for the last X years. ○ That neighbour is unrelated to any of the partners of the Partnership. ○ The neighbour’s cattle have grazed across every part of the land parcel at some point during that period. They operate a primary production business primarily on their own land. The grazing of the cattle on the Partnership’s land is in the course or furtherance of their enterprise. ○ The occupation of the land by the neighbour is not pursuant to either a written or an informal lease. Rather, the Partnership, in effect, granted an unwritten licence for the neighbour to occupy the land. The Partnership has not charged a fee to the neighbour for allowing them to occupy the land nor have they paid one. The neighbour has not paid any of the Partnership’s or the individual partners’ costs in relation to the land such as financing or interest, land tax, council rates, insurance or costs of maintenance of fences etc. The occupation is not part of a barter or in-kind arrangement whereby the neighbour has made payments to third parties on behalf of the Partnership or the individual partners, or provided goods, services or rights to the Partnership or the individual partners. ○ Neither the Partnership nor the individual partners have gained a business or financial benefit from the granting of a licence to the neighbour for them to run their cattle on the land. They recognise that a minor benefit has been to keep weeds from growing across the land. ○ Th e Partnership (and the individual partners) has incurred holding costs for their ownership of the land since it was acquired. With no income derived or consideration received from the neighbour, nor from any other source in respect of the land, the land ownership accrued significant losses. The capital gain derived (in respect of the part sold to the Buyer) from the passive ownership of the land exceeded the relevant portion of the total holding costs incurred. However, the Partnership does not believe that its long term, passive ownership accruing years of losses before making a capital gain constitutes an “enterprise”. The residue of the Land not subject to lease to the Buyer continues to accrue ongoing holding costs hence losses. ○ The Partnership submits that there cannot be a reasonable expectation of profit or gain from such a passive activity. ○ The Partnership submits that it is highly likely that the residue parcel has declined in value within the last X months as has most property. ○ The Partnership submits that its passive ownership of the land and its simple allowance of a neighbour to occupy the land arguably does not even meet the threshold test of “an activity or series of activities” in section 9-20(1). ● The Partnership applied for their ABN and GST registration from XXXX 20XX. ● Between the purchase date 20XX, the Partnership did not: ○ register themselves with the ATO as a partnership or otherwise for income tax purposes; ○ obtain a tax file number; ○ claim income tax deductions for expenses in relation to the Land (nor were these expenses claimed by another entity); ○ register for GST, nor lodge activity statements nor claim input tax credits for acquisitions in relation to the Land; ○ claim input tax credits for the purchase of the Land as it was pre-GST; ○ apply for any approvals in respect of the Land such as for DAs, re-zoning, or subdivision; ○ report the Land as either a place of residence for council rates, land tax, car registration, immigration records when travelling or a place of business (nor did any other entity). Background to the sale ● As far as the Partnership was aware the Land had not been earmarked for a road to go through it. Hence the Partnership was quite surprised when they received a proposed acquisition notice (PAN) in 20XX. The PAN was replaced by one issued later in that year which was in turn replaced by another issued later in that year. ● The Partnership entered negotiations with the Buyer regarding the acquisition price and terms of sale. The Partnership ultimately agreed to sell the Property to the Buyer rather than have it compulsorily acquired. The Buyer proposed only to acquire X hectares of the entire lot. ● The Buyer also sought to lease other parcels within the lot during the construction phase. It drafted an agreement for lease of those parcels for an initial term of XX months at a rental of $Y per month exclusive of GST. The revised the Buyer offer letter is dated XXX 20XX. The total proposed rental over that period was $YY. ● Following execution of the sale contract, the Buyer revised the proposed acquisition of the temporary lease. An agreement for lease was signed by the Partnership on XXX 20XX and executed by the Buyer on XXX 20XX. ● Shortly after that, an advance payment of 24 months’ rent totalling $YYY inclusive of GST was deposited into the respective bank accounts of the partners of the Partnership. ● A contract of sale was executed on XXX 20XX. The sale settled on XXX 20XX in respect of which a copy of a Settlement Notice and tax invoice has been provided to the ATO. The sales proceeds were deposited into the separate bank accounts of each of the partners of the Partnership. ● The background to the GST clause in the contract is provided as follows: ○ While contract negotiations had proceeded for a period, the parties only put their minds to GST in late XXXX 20XX. The contract was reaching final draft stage by that point. ○ The Partnership considered that it had not conducted an enterprise with nor on the Land. That is why they had never registered for TFN, ABN, nor GST. That is why they had not claimed income tax deductions nor GST credits for years of expenses and acquisitions in relation to the Land. ○ The Buyer indicated that the only GST alternatives that it would permit in the property sale contract would be to indicate that it was not subject to GST or that it was a taxable supply that was not subject to the margin scheme. It also required that decision to be made and communicated to it in less than 24 hours. ○ The Buyer was unwilling to allow the Partnership to treat the price as without GST where the contract was amended to include a ''plus GST (if any)" reference, GST recovery clause, a margin scheme agreement, a margin scheme default agreement or even an agreement to seek an ATO ruling with the parties agreeing to defer the GST conclusion until that point. ○ The Partnership was extremely concerned about the prospect of not reporting and recovering a potential $Z GST liability on the sale (to an entity that can claim an input tax credit). To avoid that risk the Partnership chose to indicate on the contract that the sale was a taxable supply without using the margin scheme, increase the price for 10% GST, register for an ABN and GST and issue a tax invoice to the Buyer. ○ The Partnership considered that while such treatment for the property sale is largely GST symmetrical and revenue neutral for the Partnership, the Buyer and the Commissioner, the Partnership is concerned about the implications of that action upon income and other taxes and in respect of the residue remaining from the original land following the sale of that part of the total parcel to the Buyer. The Partnership is concerned that by settling for GST registration to avoid GST risk, they may risk higher income tax liabilities. They may also face GST liabilities on subsequent sales of land to entities other than the Buyer which it cannot recover by increasing the price or GST liabilities because they cannot claim input tax credits. For example, to potential home owners. That is the reason why the Partnership has applied for an ATO ruling rather than simply relying on Division 142 in the event that the supply may not be subject to GST.


Reasons for decision: Detailed Reasoning - 1. Was the granting of the lease made in the course or furtherance of an enterprise that the Partnership carries on?: Taxable supplies Section 9-5 provides that: 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. Asterisked terms are defined in the Dictionary at section 195-1. Relevantly, with regard to enterprises, paragraph 9-20(1)(c) provides that: (1) An enterprise is an activity, or series of activities, done: (a) … (b) … (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or (d) … Paragraphs 153 to 169 of 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) discusses the meaning of ‘activity, or series of activities’ and provides that an activity is essentially an act or series of acts that an entity does, and that the meaning of the term 'activity, or series of activities' can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity. Although more relevant for Questions 2 and 3, those paragraphs also provide that an entity may be carrying on an enterprise which includes activities that by themselves could amount to smaller enterprises, and the elements that could indicate that part of an enterprise may itself be an enterprise. When discussing the meaning of ‘in the course or furtherance’ paragraphs 28 and 29 of Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8) provide that: 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[18] 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. Paragraphs 30 and 31 of GSTR 2004/8, relevantly provide: 30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your 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. 31. Factors that tend to indicate that a sale is a transaction of the enterprise include the following: ● the sale is made from enterprise premises; ● payment is accepted using enterprise facilities such as a cash register or a credit card facility; ● the proceeds of sale are deposited into an enterprise bank account; and ● enterprise book accounts are used to record the transaction. The list in this paragraph is not exhaustive or conclusive. All the facts and circumstances must be considered and balanced. In light of the above, it is considered in this case that the granting of the lease by the Partnership to the Buyer constitutes an enterprise pursuant to paragraph 9-20(1)(c) and that the granting of the lease was made in the course or furtherance of the enterprise that the Partnership carries on. 2. If the late decision by the Buyer to make an upfront payment of 24 months’ rent caused the Partnership to meet the GST registration turnover threshold, was the earlier sale of the Property made in the course or furtherance of the leasing enterprise that triggered GST registration? An entity satisfies paragraph 9-5(d) if the entity is registered, or is required to be registered. In this case, the Partnership is registered. Therefore paragraph 9-5(d) is satisfied. Notwithstanding this, for completeness, we discuss the requirements to who is required to be registered below. Who is required to be registered Section 23-5 provides that: You are required to be registered under this Act if: (a) you are *carrying on an *enterprise; and (b) your *GST turnover meets the *registration turnover threshold. Relevantly, section 188-10 provides that: (1) You have a GST turnover that meets a particular * turnover threshold if: (a) your * current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your * projected GST turnover is below the turnover threshold; or (b) your projected GST turnover is at or above the turnover threshold. By virtue of subsection 188-10(3), a turnover threshold includes the ‘registration turnover threshold’ which is, relevantly to this case, defined by reference to regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 as $75,000. With regard to projected GST turnover, subsection 188-20(1) relevantly provides that: General (1) Your projected GST turnover at a time during a particular month is the sum of the * values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than: (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connection with an *enterprise that you *carry on. Similarly, current GST turnover, is calculated per subsection 188-15(1) by reference to the values of all supplies made, or are likely to be made during the 12 months ending at the end of that month. The value of a taxable supply is defined by subsection 9-75(1) to be its ‘price multiplied by 10/11’. Section 156-22 also provides that: Leases etc. treated as being on a progressive or periodic basis For the purposes of this Division, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis, for the period of the lease, hire or arrangement. As such, the granting of the lease by the Partnership to the Buyer would be treated as a supply made on a progressive or periodic basis for the period of the lease. It is noted that paragraphs 94 to 100 of Goods and Services Tax Ruling GSTR 2000/35 Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis (GSTR 2000/35) discuss the application of Division 156 to advance payment arrangements including advance payments. Those paras provide that for attribution purposes, the GST on the advance payment is to be attributed upfront. However, the requirements in subsections 188-20(1) and 188-15(1) do not refer to attribution but rather, the values of all the supplies that you have made, or are likely to make, during the relevant tax periods. As such, for the purposes of subsections 188-20(1) and 188-15(1), the relevant supplies the value of which would be taken into account would be the supplies that are made, or are likely to be made progressively or periodically over the relevant tax periods. In this case, despite the upfront payment of 24 months of rent by the Buyer, it is the value of such supplies of the Partnership over the relevant tax periods that are taken into account. The value of such supplies per month is in the order of $Y per month exclusive of GST. Thus it is not considered that the upfront payment of 24 months of rent by the Buyer caused the Partnership to meet the GST registration turnover threshold. Whether the sale of the Property was made in the course or furtherance of the leasing enterprise The question of whether the granting of the lease was made in the course or furtherance of an enterprise that the Partnership carries on was discussed in the reason for decision to Question 1. In that discussion, reference, was made to paragraphs 28 to 31 of GSTR 2004/8 as well as paragraphs 153 to 169 of MT 2006/1. Specifically, paragraphs 161 to 164 of MT 2006/1 provides that: | Detailed Reasoning - Example 15 - activities associated with the sale of real property: 161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise? 162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included: ● assessing the economic viability of the project; ● purchasing the land; ● engaging an architect; ● constructing a block of units on the land; ● engaging a real estate agent and auctioneer; and ● arranging for the sale of the units at auction. 163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise. 164. If there are a number of separate activities, the entity may be carrying on an enterprise which includes activities that by themselves could amount to smaller enterprises. If that is the case, the following elements are indicators that part of an enterprise may itself be an enterprise: ● a degree of autonomy; ● a separate management structure; ● a system of internal user charging; ● a separate budget; and ● agreements with internal service providers or external users. In this case, the factual circumstances do not support a conclusion that there are separate enterprises of ‘leasing’ and ‘selling of property’ respectively. In light of this and the views referred to above in GSTR 2004/8 and MT 2006/1, our view is that the sale of the Property was made in the course or furtherance of an enterprise carried on by the Partnership that includes the Partnership’s leasing activities. 3. If the answer to Question 1 is ‘yes’ and to Question 2 is ‘no’, was the earlier sale of the Property following the commencement of the compulsory acquisition process made in the course or furtherance of a different enterprise? In the reasons for decision to Question 2, we stated that our view is that the sale of the Property was made in the course or furtherance of an enterprise carried on by the Partnership that includes the Partnership’s leasing activities. In the circumstances of this case, we do not consider there to be another separate enterprise carried on by the Partnership. 3(a) If the answers to Questions 2 and 3 are both ‘no’, was the Partnership required to register for GST only in respect of the granting of the lease? As discussed in the reasons for decision in Question 2, an entity satisfies paragraph 9-5(d) if the entity is registered, or is required to be registered. In this case, the Partnership is registered. Therefore paragraph 9-5(d) is satisfied. Notwithstanding this, for completeness regarding to whether the Partnership is required to be registered, we provided that the upfront payment of 24 months of rent by the Buyer would not cause the Partnership to meet the GST registration turnover threshold. As such, we do not consider that the Partnership would be required to register solely due to its granting of the lease. Additional information Practice Statement Law Administration PS LA 2011/8 concerns the registration of entities and provides the policy and procedures to be followed on a range of issues including the registration of entities. Paragraphs 81 to 86 of PS LA 2011/8 discuss the date of effect of cancellation of GST registration. In particular, paragraph 84 provides that: 84. When an entity that is registered but was not required to be registered (a voluntary registration) applies to cancel its registration: ● If the Commissioner is satisfied that the entity has never operated on a GST-registered basis, the Commissioner may accept the application to cancel the GST registration from a retrospective date chosen by the entity. ● If the entity has operated on a GST-registered basis but has ceased doing so before the application to cancel registration is made, the Commissioner may accept the entity's application to cancel its GST registration from the start of the tax period which commences on or after the date it stopped operating on a GST-registered basis. ● If the entity is still operating on a GST-registered basis at the time of the application to cancel registration, the date of cancellation will generally not be retrospective. The Commissioner will negotiate a prospective date if the application does not state one. The last dot point at paragraph 84 is considered relevant for the Partnership’s consideration. 3(b) If the answer to Question 3(a) is ‘yes’, was the sale of the Property a taxable supply per section 9-5 even if the Partnership was required to be registered only for the granting of the lease? The answer to Question 3(a) was not applicable. Therefore, strictly speaking, the answer to Question 3(b) is not applicable. For completeness, regarding the question of whether the sale of the Property was a taxable supply per section 9-5 even if the Partnership was required to be registered only for the granting of the lease, our view is that the sale of the Property constitutes a taxable supply. The reason for this is that the requirements of section 9-5 are met in this case, and the circumstances of this case does not support characterisation of the sale as either GST-free or input taxed. Furthermore, as mentioned in our reasons for decision above, the Partnership is registered. Therefore paragraph 9-5(d) is satisfied. The upfront payment of 24 months of rent by the Buyer would not cause the Partnership to meet the GST registration turnover threshold. As such, we do not consider that the Partnership would be required to register solely due to its granting of the lease. 3(c) If the answers to Questions 2, 3 and 3(b) are ‘no’, if the Partnership does not reimburse the Buyer for the GST passed on in respect of the supply of the Property, then does section 142-10 have the effect that, by operation of law, the sale of the Property was taken to be a taxable supply for that section and Divisions 17-33 only and is not a supply made in the course or furtherance of an enterprise per paragraph 9-5(b)? The answers to Questions 2, 3, and 3(b) were not applicable. Thus the answer to Question 3(c) is, strictly speaking, not applicable. For completeness, with regard to the operation of section 142-10, our view is that section 142-10 operates with the intent to deem the excess from subsection 142-5(1) that has been passed on as having always been payable and on a taxable supply, as opposed to deeming a supply being made in the course or furtherance of an enterprise per paragraph 9-5(b). Paragraphs 15 to 17 of Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1), which are not reproduced here, highlights the operation of section 142-10. We do not consider the way in which section 142-10 operates alters the GST classification of the sale of the Property by the Partnership in this case.