Private ruling: GST and property
Date of advice: 24 August 2016
Published: September 2016

Ruling: Q1: Will the sale of the property by the Trust to Entity A which is subject to a lease, constitute a supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. | Q2: How is Entity A's GST liability calculated on the sale of new residential premises to a new purchaser where: i The Trust and Entity A agree in writing that the sale of the property is a going concern (and the supply otherwise qualifies as a GST-free going concern); and ii Entity A develops the property into new residential premises; and iii The subsequent supply of new residential property by Entity A to a new purchaser is a supply made under the margin scheme, an agreement is made in writing prior to settlement that the margin scheme is to apply? | A2: See reason for decision. | Q3: How is Entity A's GST liability calculated on the sale of new residential premises to a new purchaser where: i The Trust and Entity A do not agree in writing that the sale of the property is a going concern (and the supply otherwise qualifies as a GST-free going concern); and ii Entity A develops the property into new residential premises; and iii The subsequent supply of new residential property by Entity A to a new purchaser is made (noting the margin scheme is not available because Entity A acquired the property as a taxable supply)? | A3: See reason for decision. | Q4: If the GST liability for Entity A on a supply of new residential premises to a new purchaser (as per Question 2 above), is compared with the GST liability in Question 3 above, is the difference equal to 1/11 th of the consideration for the acquisition of the interest from the Vendor (which is equal to the value of the property sold by the Vendor to the Purchaser In Question 1 above? See reason for decision. | A4: Yes.

Relevant facts and circumstances: The Trust purchased the property on xxxx as a GST-free supply of a going concern. Prior to the Trust purchasing the property it was last sold in yyyy. The property is a commercial property and subject to a lease which will be transferred to the Purchaser on competition. The Trust is registered for GST. The Trust entered into a contract with Entity A to sell the property. Later the Trust entered into a Deed of Variation of Contract which details the changes to the original contract, including the following stated in Clause 2.1: • The price is $Z • Completion date is kkkk • The sale is the supply of a going concern under section 38-325 of the GST Act, • The sale of the property is subject to the current lease that will be transferred to Entity A. The Trust will supply all of the things necessary for the continued operation of the property leasing enterprise to Entity A and will carry on the leasing enterprise up to the day of supply. In subsequent years Entity A intends to develop the property into new residential premises of which they intend to sell. Entity A is registered for GST.

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: You make a taxable supply where you satisfy section 9-5 of the GST Act, in that: • you make a supply for consideration, • the supply is made in the course or furtherance of an enterprise that you carry on, and • the supply is connected with the indirect tax zone, and • you are registered or required to be registered GST. However, the supply is not taxable to the extent that it is GST-free or input taxed. From the facts provided the Trust will make a supply for consideration on settlement of the property, the supply of the property will be made in the course or furtherance of an enterprise that you carry on - being of leasing, the supply will be connected with the indirect tax zone as it is done in the indirect tax zone, and you are registered for GST. There are no provisions that would result in the supply of the property being input taxed however it may be GST-free under section 38-325 of the Act GST. This provision provided for GST-free supplies of going concerns if: • the supply is for consideration, • the recipient is registered or required to be registered for GST, and • the supplier and the recipient have agreed in writing that the supply is of a going concern. Furthermore, a supply of a going concern is a supply under an arrangement under which: • the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and • 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 carried on by the supplier). The Trust will make a supply of a going concern under section 38-325 of the Act GST where the supply of the property is for consideration, Entity A is registered for GST, the Trust and Entity A agree in writing that the supply is a supply of a going concern of a leasing enterprise, the Trust supplies to Entity A all of the things necessary for the continued operation of the leasing enterprise, and the Trust carries on the enterprise until the day of supply. Where the Trust sells the property as a GST-free going concern to Entity A and Entity A develops the property then supplies new residential property to a new purchase under the margin scheme, the calculation for the margin will be worked out under section 75-10 of the GST Act. If a taxable supply of property is under the margins scheme, the amount of GST on the supply is 1/11 of the margin for the supply. Pursuant to section 75-11 of the GST Act, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the property. Subsection 75-11(5) of the GST Act provides if you acquired property from an entity as a supply of a going concern that was GST-free, the entity was registered at the time, the margin for the supply you make of new residential premises is the amount by which the consideration exceeds the consideration that was provided for the acquisition (paragraph 75-11(5)(e)(ii)). Furthermore, GSTR 2006/8 discusses the ATO view on when you acquire or supply real property and provides at paragraph 36 to 38 that the Commissioner considers that for the sale of freehold interest or stratum unit, the acquisition and the supply is made at settlement as this is when the purchaser obtains unconditional possession of a registrable instrument of transfer or an instrument of transfer what would be registrable once stamped. The price for the sale of the leasing enterprise comprising of a commercial building and lease is $Z. However, the consideration for the supply and the consideration for the acquisition should take into account adjustments on settlement that are commonly made for rates, land tax and other outgoings. Goods and Services Tax Determination GSTD 2006/3 contains a detailed discussion and is enclosed with the GST private ruling. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as legal expenses and stamp duty. It also does not cover costs incurred in developing the real property, prior to or after its acquisition. This is made clear under section 75-14 of the GST Act in that for working out the consideration for the acquisition the following are disregarded: (a) the cost or value of any other acquisition that have been made by you, or any work that has been performed in relation to the real property, and (b) the cost or value of any other acquisition that are intended to be made by you, or any work that is intended to be performed after you have acquired the real property, including acquisitions or work connected with bringing the real property into existence. Where Entity A develops the property into more than one new residential premise the consideration for the acquisition of the property will need to be apportioned. To ascertain the proportion of the purchase price that relates to a new residential premise, you may use any fair and reasonable method of apportionment. The method of apportionment used must result in the sum of the proportionate amount of the purchase price that relates to each new residential premise equalling in total, the actual consideration for the acquisition. You cannot change the method of apportionment after sales of new residential premises have been made unless the changed method is applied to calculate the margin for all the sales. Examples of some methods that you may use are listed under paragraph 59 of GSTR 2006/8 followed with examples. This Public ruling has been included with your GST private ruling. Therefore, once the portion of the acquisition is worked out that applies to the new residential premise being supplied; it is then the margin between that amount and the consideration that the GST is applied to at 1/11. You make a taxable supply where you satisfy section 9-5 of the GST Act. From the facts provided the Trust will make a supply for consideration on settlement of the property, the supply of the property will be made in the course or furtherance of an enterprise that you carry on, the supply will be connected with the indirect tax zone as it is done in the indirect tax zone, and you are registered for GST. The Trust having made a taxable supply in this circumstance would have a GST liability of 1/11 of the consideration for the supply of the property. Entity A in purchasing the property would make a creditable acquisition where they satisfy section 11-5 of the GST Act. This section provides that you make a creditable acquisition if: • you acquire anything for a creditable purpose so for use in your enterprise, and • the supply of the thing to you is a taxable supply, and • you provide, or are liable to provide, consideration for the supply, and • you are registered or required to be registered for GST. Therefore, Entity A would make a creditable acquisition pursuant to section 11-5 of the GST Act. As they would acquire the commercial property for use in their enterprise and not for a purpose of make input taxed supplies (such was developing and renting out residential premises), the supply of the commercial property would be taxable to Entity A, Entity A would provide consideration for the property, and Entity A is registered for GST. Where Entity A was to develop the commercial property into new residential premises and sell them they would be taxable supplies when sold where section 9-5 of the GST Act is satisfied. In that Entity A would supply new residential premises for consideration, the supply would be made in the course or furtherance of an enterprise that Entity A carries on, the supply would be connected with the indirect tax zone as it is done in the indirect tax zone, and Entity A is registered for GST. Therefore, where Entity A was to sell a new residential premise, they would make a taxable supply and have a GST liability of 1/11 of the consideration received. In comparing the outcome of Question 2 and 3, if Entity A was to provide a new residential premise under the margin scheme the amount of GST is applied only to the value added represented by the development of the property. Where Entity A was to not use the margin scheme it would be the value added represented by the development and the amount of the acquisition from the Trust that applied to the new residential premise that the GST applies to, being the entire amount of consideration. So you are correct in that the difference where the margin scheme is not applied will be the amount of GST that applies to the acquisition of the property that will apply to the new residential premise.