Private ruling: GST and the sale of property
Date of advice: 11 July 2016
Published: August 2016

Ruling: Q1: 1. Is the supply of the Property pursuant to a contract of sale a mixed supply that is partly input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999) (GST Act); and partly GST-free as a supply of a going concern under section 38-325 of the GST Act ? 2. If so, to what extent of the sale price of the Property is input taxed and GST-free? | A1: 1. Yes, the supply of the Property pursuant to a contract of sale is a mixed supply that is partly input taxed under section 40-65 of the GST Act and partly GST-free under section 38-325 of the GST Act. 2. The extent of the sale price that is attributable to the input taxed and the GST-free components should be determined using a method that reasonably apportions the sale price between the two components. Please read below.

Relevant facts and circumstances: You own a property (the Property) which comprises of a commercial component and a residential component. These areas have been leased to third parties. You have entered into a contract of sale to sell the whole property. The residential lease will expire before settlement of the Property. You will enter into a new lease with the current tenants of the commercial area which will cover the entire property. You will carry on this leasing enterprise until the date of settlement and you will assign the new lease to the purchaser of the Property. You and the purchaser of the Property have agreed to sell the commercial component of the Property as a supply of a going concern. The contract of sale is made at arms-length. The property will be sold at market value. The purchaser is registered for GST

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

Reasons for decision: Summary: Section 38-325 of the GST Act states: (1) The *supply of a going concern is GST-free if: (a) the supply is for *consideration; and (b) the *recipient is *registered or *required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. (2) 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 a part of a larger enterprise carried on by the supplier). (terms marked with asterisks (*) are defined in section 195-1 of the GST Act). | Detailed Reasoning - Is the sale of the Property a supply of a going concern?: In order for a supply to be a supply of a going concern, paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The enterprise that you have been carrying on is that of a leasing enterprise. Whilst the residential lease will terminate prior to settlement of the contract of sale, you will be entering into a new lease before the sale contract settles. You will be assigning the new lease to the purchaser and you will be carrying on this leasing enterprise until the day of settlement. Accordingly all the requirements of subsection 38-325(2) of the GST Act will be satisfied and as such the sale of the Property is a supply of a going concern. | Detailed Reasoning - Is the sale of the Property a GST-free supply of a going concern?: Commercial component Given that the: • property will be sold at market value; • purchaser is registered for GST; and • you and the purchaser have agreed in writing that the commercial portion of the sale is supply of a going concern, to the extent that the sale covers the commercial portion of the Property, all the requirements of subsection 38-325(1) of the GST Act are satisfied. On this basis, the sale of the Property by you is a GST-free supply of a going concern to the extent that the sale covers the commercial portion of the Property. Note that the commercial portion of the Property includes any outside area that has been used by the commercial tenants under the Commercial lease. | Detailed Reasoning - Residential component: Given that you and the purchaser of the Property did not agree in writing that the sale of the residential component is a supply of a going concern, all the requirements under subsection 38-325(1) of the GST Act are not satisfied in regards to this portion and therefore is not a GST-free supply. Under section 40-65 of the GST Act a sale of residential premises is considered as an input taxed supply and as such is not a taxable supply. Accordingly, to the extent that the sale of the Property covers the residential portion of the Property this portion is an input taxed supply. Note that the residential area includes any area outside of the building that has been used by the residents under the residential lease. Consequently, the sale of the Property by you is a mixed supply comprising of an input taxed component and a GST-free component. | Detailed Reasoning - Apportionment of the price of the Property:: Goods and services tax ruling, Goods and Services Tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioners' views about apportioning the consideration of a mixed supply which is partly taxable and partly non-taxable. Whilst the sale of the Property in this case is a fully non-taxable supply, the principles set out in GSTR 2001/8 in regards to how to apportion the consideration between different can be used in this case to apportion the sale price between the GST-free component and the input taxed component. It is proposed in this case to apportion the consideration of the sale of the Property equally between the commercial and the residential portions based on the floor area of the Property. If both the outside areas (including common areas) and the inside floor area of the building have been used equally by the commercial tenants and the residential tenants then apportioning the sale price equally between the commercial area and the residential area is considered to be a reasonable methodology. However, if the value per square metre is inconstant then, please refer to the following which is stated in GSTR 2001/8. | Detailed Reasoning - Relative floor area in a supply of property: 106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas. | Detailed Reasoning - Additional information: Please refer to section 135 of the GST Act for any increasing adjustments that may be required to be made by the purchaser.