Private ruling: GST and sale of property
Date of advice: 15 June 2017
Published: October 2017

Ruling: Q1: Is your supply of Lot 2 situated at a specified location an input taxed supply? | A1: Yes | Q2: Is your supply of Lot 1 situated at a specified location a supply that is made in the course or furtherance of an enterprise that you carry on? | A2: Yes. | Q3: Is your supply of Lot 1 a GST-free supply of a going concern? | A3: Yes

Relevant facts and circumstances: You are registered for GST. You are a registered tax concession charity. You acquired land situated at a specified location in the 1950s (the Property). The Property is adjacent to a XYZ facility (XYZ Centre) which you operate. The Property is approximately XX hectares and comprises two lots (Lot 1 and Lot 2). You entered into a contract for the sale of the Property to a specified entity (the Purchaser). No development has yet commenced on the Property and will not commence prior to settlement. Publically available information obtained from the Australian Business Register on mid 201X states the Purchaser is registered for GST effective from mid 201X. Lot 1 Lot 1 (the Grazing Lot) is approximately X hectares. The Grazing Lot is subject to a licence arrangement allowing livestock to be grazed across the Grazing Lot (the Licenced Area). The Licenced Area also contains feeding and water troughs for use by the livestock. The original licence agreement was entered into in 199X with a further written agreement being entered into in 199Y. No licence fee was payable under these agreements however the Licensee had certain obligations in relation to maintenance of the fences. These agreements were expressed to be for a term of 1 year after which they were to be reviewed. The Licensee has had access to the Licensed Area since that time. In the context of the impending transfer, it is proposed that you will enter into a further written licence agreement (Grazing Licence) with the Licensee prior to settlement which will: (a) clarify that the Licensed Area is the entire Grazing Lot; and (b) remove the obligation to maintain fencing but require payment of a nominal sum as a licence fee. The Grazing Licence will be assigned to the Purchaser on completion. You will carry on the enterprise of the licencing of the Grazing Lot to the Licensee until completion of the sale contract. A minor section of the driveway which provides access to the Residential Lot crosses into the Grazing Lot. This area is approximately between 100m 2 and 115m 2 representing approximately 0.13% of the Grazing Lot. This area is not included in the Licenced Area and as such excluded from the Grazing Licence. Lot 2 Lot 2 (the Residential Lot) is approximately X hectares. The Residential Lot contains two residential premises. The premises both contain functional kitchens and bathrooms and also contain living and sleeping areas. The premises are neither 'new residential premises’ nor 'commercial residential premises’. One of the residential premises located on the Residential Lot is subject to a heritage order (the Heritage Property). The heritage order affects the buildings making up the Heritage Property and a portion of the adjoining land. There is also a private driveway which goes through primarily the Residential Lot but crosses a small part of the Grazing Lot through which the residential premises are accessible. The Residential Lot is available to the occupants of the residential premises (together with visitors to the XYZ Centre). The entire area of the Residential Lot is mowed and kept in good order for the use of the occupants of the residential premises (together with visitors to the XYZ Centre). There are no formal leases in place regarding the occupancy of the two residential dwellings. The dwellings are available to members and visitors of the adjoining XYZ Centre. On occasion, the dwellings have been occupied by caretakers who maintain the Property. The occupants of the residential dwellings are not restricted in their use of Residential Lot as a whole. Part of the lot on which the XYZ Centre is located is subject to a lease to Telstra Corporation Limited (the Telstra Lease). This lease grants access rights over the Grazing Lot and the Residential Lot, as well as the right to lay cables over, under or within these adjacent lots in connection with the permitted use. Under the Contract, the Purchaser agrees that the Property is sold subject to the access rights granted under the Telstra Lease.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Paragraph 9-20(1)(e) | Section 9-40 | Subsection 38-325(1) | Subsection 38-325(2) | Paragraph 38-325(2)(a) | Paragraph 38-325(2)(b) | Section 40-65 | Section 195-1.

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply if: ● you make the supply for consideration ● the supply is made in the course or furtherance of an enterprise that you carry on ● the supply is connected with the indirect tax zone, and ● you are 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. | Detailed Reasoning - Question 1 – Lot 2 (the Residential Lot): Section 40-65 provides that the sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent the premises are 'commercial residential premises’ or 'new residential premises’ (other than those used for residential accommodation before 2 December 1998). Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises. Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. In this case the dwellings will satisfy the definition of 'residential premises’ as the premises provide shelter and basic living facilities being functional kitchens and bathrooms and living and sleeping areas. The premises are neither 'new residential premises’ nor 'commercial residential premises’. One further issue to be considered is in regard to the area of land surrounding the residential dwellings and to what extent that surrounding land is included in the sale of 'real property to the extent that the property is residential premises to be used predominately for residential accommodation’ and classified for GST purposes as an input taxed supply. The term 'residential premises’ is defined in section 195-1 as land or a building that: a) is occupied as a residence or for residential accommodation; or b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a floating home. Paragraph 46 of GSTR 2012/5 states: There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises. In this case the Residential Lot is approximately X hectares and contains two residential dwellings. The occupants of the residential dwellings have unrestricted access to the entire Residential Lot. The Residential Lot does not exhibit any characteristics that indicate the residential dwellings and adjoining land are used for purposes other than residential accommodation. Given the above, we consider that the sale of the Residential Lot in its entirety will be an input taxed supply pursuant to section 40-65. | Detailed Reasoning - Question 2 - Lot 1 (the Grazing Lot): Section 9-20 provides that the term 'enterprise’ includes, among other things, an activity or series of activities done: ● in the form of a business; ● in the form of an adventure or concern in the nature of trade; ● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; ● by a charity. Section 195-1 states that the phrase 'carrying on’ in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise’. In this case, we consider that your activities in regard to the Grazing Lot are done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property when you grant a licence over the Grazing Lot. 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 provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. Paragraphs 303 to 307 of MT 2006/1 discusses activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Given the above, we consider that the sale of the Grazing Lot is made in the course or furtherance of an enterprise that you carry on. | Detailed Reasoning - Question 3: Subsection 38-325(2) provides that for GST purposes, a supply of a going concern is a supply under an arrangement under which: (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and (b) 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). Goods and Services Tax Ruling GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of the going concern provisions for GST purposes. | Detailed Reasoning - Identified enterprise: Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2). As discussed above, we consider you will be carrying on an enterprise when you grant a licence in relation to the Grazing Lot. As such, the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) must be satisfied in relation to the identified enterprise for there to be a supply of a going concern. | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: Paragraph 107A of GSTR 2002/5 states in part that 'where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a)’. Paragraph 108 continues providing that in respect of an enterprise consisting solely of the leasing of property, all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants. In this case, it is proposed that you will enter into a further written licence agreement with the Licensee prior to settlement which will clarify that the Licensed Area is the entire Grazing Lot. Furthermore the written licence agreement will be assigned to the Purchaser on completion of the sale contract. Whilst we note that there are legal differences between a lease and a licence, we consider that where all parties are agreeable that the rights and obligations under the licence are to be transferred to the Purchaser, paragraph 38-325(1)(a) will be satisfied. As all the requirements for subsection 38-325(2) will be satisfied, the supply of the Grazing Lot will be a going concern for GST purposes. | Detailed Reasoning - GST-free supply of a going concern: Subsection 38-325(1) provides that the sale of a going concern will be GST-free if: ● the supply is for consideration; and ● the recipient is registered or required to be registered; and ● the supplier and the recipient have agreed in writing that the supply is of a going concern. In this case, the supply of the Grazing Lot is made for consideration, the Purchaser is registered for GST and prior to the completion of the sale contract, you will enter into a written agreement with the Purchaser agreeing that the supply of the Grazing Lot is a supply of a going concern. Given the above, all of the criteria in subsection 38-325(1) will be satisfied and the supply of the Grazing Lot will be a GST-free supply of a going concern. In regard to the area of land not included in the Grazing Licence, we consider that the small area of land in question will not impact the GST-free status of the sale of the entire Grazing Lot as a going concern.