Private ruling: Sale of property
Published: March 2014

Ruling: Q1: Is the sale of the property subject to GST? Decision The sale of the property is taxable to the extent of your ownership and to the extent that it is commercial premises. Please see reasons for decision below for details.

Relevant facts and circumstances: • You are a company carrying on an enterprise. • You are registered for the goods and services tax (GST). • You and several individuals own a property which consists of a two storey building. • At the time of the acquisition the upper floor was residential apartment with a separate entrance. The ground floor was commercial premises. • The property was acquired under a single contract of sale and the title is held in your name and those of the others, as tenants in common. • After the acquisition, the upper floor was converted to commercial premises, liaising with the local council in this regard. • Thereafter, both the upper floor and the ground floor were leased as commercial premises. • At the end of a lease, the upper floor was re-converted to residential premises. • The amount of work that was necessary for this purpose was minimal and no structural changes were made. • Subsequent to this change the upper floor was leased as residential premises and the ground floor continued to be leased as commercial premises. • You and the other individuals have not formed a partnership in relation to this ownership. • The property is leased for less than $75,000 per year. • The property is leased and managed by a real estate agent. • The other individuals are not registered for the GST in their individual capacities and are not carrying on any other enterprises other than the leasing of this property. And, as the turnover from the leasing enterprise is less than the registration turnover threshold, they are not required to be registered for the GST. • You and the other individuals have a joint bank account for the purpose of this leasing enterprise. • The estate agent collects the rent and pays the expenses and remits the balance to this bank account. • You and the other individuals borrowed funds from a bank jointly to acquire the property. • The bank loan is under the names of the individual co-owners and they are liable for their share of the loan. • The loan is managed by a separate bank account. • You and the other individuals record the income and expenditure separately for income tax purposes. • No GST is included in the rent. • You have not claimed any input tax credits in relation to the acquisitions made in this leasing enterprise. • You and the other entities now wish to sell the property. • The ground floor commercial premises are now vacant and the upper floor residential premises are currently leased. • The property will be sold under one title with the upper floor lease intact. • You and all the co-owners will be listed as vendors and the sale proceeds will be distributed directly to individual accounts as per their respective ownership shares.

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 9-80 | A New Tax System (Goods and Services Tax) Act 1999 - section 40-65

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states as follows: 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 Australia; 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. (The definitions of asterisked terms are given in section 195-1 of the GST Act) | Detailed Reasoning - What is being supplied and who is making the supply?: The property that will be supplied, in this case, consists of a two storey building. The upper floor is residential premises and is currently leased. The ground floor is commercial premises and is at present vacant. The property is owned by you (as a registered company) and other individuals. You, as a co-owner, are making the supply, together with other co-owners, when you sell the property. | Detailed Reasoning - Is the supply taxable?: In this case you are making a supply of your share of the property for consideration, it is supplied in the course or furtherance of an enterprise you carry on, the supply is in Australia and you are registered for the GST. Therefore, the supply of your share of the property is taxable. As the other co-owners are not registered or required to be registered, the supply of their shares of the property are not taxable. However, your share of the property is taxable only to the extent that it is not GST-free or input taxed. GST-free supplies are dealt with in Division 38 of the GST Act and the supply you are making does not fall within the provisions in that division. It remains to be seen whether the supply you are making, or any part of it, is an input taxed supply. The supply in this case has two separately identifiable parts - commercial premises and residential premises. In this ruling the two parts are considered separately. | Detailed Reasoning - Residential premises: The residential premises part of the supply you are making is input taxed under subsection 40-65(1) of the GST Act, which states: A sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). As the upper floor of the property you are selling is residential premises, it is input taxed. Under Division 40, no GST is payable on input taxed supplies. Therefore, no GST is payable on that part of the property. | Detailed Reasoning - Commercial premises: The commercial premises part of the supply that you are making is neither input taxed not GST-free. As you satisfy all the requirements of section 9-5 of the GST Act (given above) when you sell your share of the commercial part of the property, it is taxable. Therefore, GST is payable on that part of the supply to the extent of your ownership. | Detailed Reasoning - Apportionment of the consideration for a mixed supply: GST is payable on a mixed supply that you make, like in this case, but only to the extent that the supply is taxable. One part of the supply, that is the supply of the commercial premises, is taxable as shown above. The residential premises are input taxed and therefore non-taxable. You need to apportion the consideration for a mixed supply between the taxable and the non-taxable parts of the supply to find the consideration for the taxable part. The apportionment must be undertaken as a matter of practical common-sense. You may use any reasonable basis to apportion the consideration. However, you should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts. The basis of apportionment you choose must be supportable in the particular circumstances. Goods and Services Tax Ruling 2001/8 (GSTR 2001/8), which deals with the apportionment of consideration for a supply that includes both taxable and non-taxable parts, provides further advice on treatment of mixed supplies for GST purposes. Paragraph 70 of GSTR 2001/8 provides an example of a mixed supply. | Detailed Reasoning - Calculating the GST payable: The method of calculating the taxable part of a mixed supply is given in section 9-80 of the GST Act, which states: (1) If a supply (the actual supply ) is: (a) partly a *taxable supply; and (b) partly a supply that is *GST-free or *input taxed; The value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents. (2) The value of the actual supply, for the purpose of subsection (1), is as follows: *Price of the actual supply x 10 10 + Taxable proportion where: taxable proportion is the proportion of the value of the actual supply that represents the value of the *taxable supply (expressed as a number between 0 and 1). Once you determine the value of the taxable part of your supply, the amount of GST payable by you is 10% of the value so determined. | Detailed Reasoning - Please note: (1) A supply is taxable only where the supply satisfies the requirements of the section 9-5 of the GST Act. For example, where a supplier is not registered or required to be registered, the supply would not satisfy section 9-5 of the GST Act and therefore any supply made by such a supplier would not be taxable. (2) Supply of a lease of commercial premises is taxable where it satisfies the requirements of section 9-5 of the GST Act. The commercial leases you have supplied in respect of this property are taxable and you are required to remit the GST to the extent of your ownership of the property. You would need to correct your past activity statements to reflect these corrections. Penalties for non-compliance and general interest charges (GIC) on the GST amounts owing may apply.