Private ruling: Goods and services tax (GST) and purchase of leased residential premises
Date of advice: 15 June 2017
Published: October 2017

Ruling: Q1: Are you entitled to an input tax credit on your purchase of the property? | A1: No. | Q2: Are you liable for GST on the rent? | A2: No. | Q3: Do you have any GST liability under the circumstances you have set out in relation to the property? | A3: Yes. You have an increasing adjustment under section 135-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | Q4: Can you cancel your GST registration? | A4: You are not required to be registered for GST under section 23-5 or section 144-5 of the GST Act. Certain factors would be considered by the Australian Taxation Office (ATO) in deciding whether to cancel your GST registration and the date of effect of the cancellation. See reasons for decision for further information. You will need to specify a desired date of effect of cancellation when you make your application to cancel. | Q5: What would be the consequences of you cancelling your GST registration? | A5: If you cancel your GST registration, you will no longer be required to complete GST labels of Business Activity Statements (BAS). There are no other GST implications of cancelling your GST registration. The cancellation of GST registration will not itself result in any GST liability for you. However, see advice relating to question 3.

Relevant facts and circumstances: You are registered for GST. You report GST on a particular basis. You do not have GST turnover of $75,000 or more. You are not a taxi driver. You purchased a property located in Australia (the property) pursuant to a sale contract entered into on (date). The price set out in the sale contract is (price). Settlement date was (date). The vendor was registered for GST for the transaction. The property includes a liveable dwelling (house), as stated in the sale contract. The zoning is residential. The house was in the past used as a home for a family with a number of children. The house was shifted by a previous owner to its current site from a block around the corner in (street name) many years ago and it has remained on the current site ever since. The second most recent sale of the property in question was for (price) on (date), which was after the house was moved there. There was also a sale of the property for (price) on (date). The house has the following rooms: ● bedrooms ● a storage room ● living areas ● a full sized kitchen (not just a kitchenette) ● a bathroom, which contains a bath, shower, toilet, basin, toiletries cupboard and towel racks ● a second toilet ● a laundry The façade of the building looks like a house style façade. There is a carport. The real estate agent advertisement describes the property as a home. It refers to bedrooms, living room, a bathroom and separate 2 nd toilet. It describes the ceilings and the style of the walls. The house has common office furniture and equipment in it. However, no part of the house itself has been modified to convert it to a commercial or office style room. You provided photos of the house: The vendor did not substantially renovate the house and did not do any renovations of any sort to the house. The vendor allowed a commercial tenant to occupy the property in return for rent. The vendor allowed the tenant to occupy the property continuously for over 5 years. That tenant used, and continues to use, the property as an office for a business. That tenant had originally occupied the property pursuant to an informal 'gentlemen’s agreement’ it had with the vendor. However, on (date), a written lease agreement was executed in respect of the property. This written lease agreement was in the names of the vendor (referred to as 'lessor’ in that agreement – no other party was referred to as lessor in that written lease agreement) and the tenant, but it was initialled by all three parties, that is, the vendor, the tenant, and you. The specified commencement date of the written lease agreement is (date). The specified expiry date of the written lease agreement is (date). The rent specified in that written lease agreement is (amount) per annum plus GST’ The property was sold to you subject to the tenancy under that written lease agreement. The sale contract includes a lease schedule. You have continued to lease the property to the tenant from settlement date to the current time on the terms set out in that written lease agreement and you have not used the property for any other purpose. Nothing changed at or around settlement (in regards to leasing the property) apart from the ownership of the property (you obtained ownership from the vendor, thereby becoming the new landlord). The property sale contract includes the question 'Is this a sale of a Going Concern?’ An 'X' was inserted in the 'yes’ box to the right of this question. You did not charge and collect GST on the first rent payment you received. You did not issue a tax invoice to the tenant for the first rent payment you received. You told the tenant that you were not registered for GST. On (date), you went to the real estate agent and requested that the tenant receive a copy of your monthly account which identified rental money and the real estate agent’s GST. Circumstances relating to your decisions to register, de-register and re-register for GST: ● You viewed the property while on the market, you paid a deposit (amount). The real estate sales person completed a 'Contract for Commercial Land and Buildings’. They commented that because of the $75,000, no GST would be involved, but GST may be involved because of the tenant’s business activity, calling it a going concern. The negotiated price was (price). You and the vendor signed the contract. ● The tenant and their solicitors drew up a lease agreement (that is, the written lease agreement referred to above). You, the vendor and the tenant signed (initialled) this agreement. ● You employed a solicitor to act for you. They advised that you should get an ABN. ● You went to your accountant’s office and obtained an ABN and registered for GST. ● You had no knowledge or experience whatsoever in regard to the GST system. You gave authority to the real estate agent to manage your account. You rang the ATO on 13 28 66 relating to GST on the purchase price. You were told that no GST applied to the transaction, and therefore you wondered why you needed to be registered for GST. ● As at settlement day, everything was sorted out, except for uncertainty about the GST. ● You received a phone call from the accountant, who stated “we need to be getting sorted for your BAS and GST”. You advised the accountant that GST was not involved and you had already deregistered and thinking of doing the same with your new ABN. (A.T.O phone advice) “If it’s not required, why have it?” ● The accountant advised you that as the vendor of the property is registered for GST, you were advised to be registered also. You were registered so that the vendor could not add GST onto your purchase price. The accountant recommended that you stay registered for GST. ● You requested that the accountant re-register you for GST. Another 10% of the purchase price i.e. (amount) is unaffordable. You had already told the tenant not to pay GST and to just pay the basic rent. Then you went back and apologised requesting that they pay the (amount) shortfall. The tenant agreed. ● No GST was imposed by the vendor. Your GST registration 'protected you’, so you were led to believe. Your BAS reporting ● You reported zero at label 1A (GST on sales label) of your (particular tax period) BAS. You reported a positive amount at label 1B (input tax credit label) of that BAS. ● You reported a positive amount at label 1A of your (particular tax period) BAS. You reported zero at label 1B of that BAS. Your contentions regarding question 3 Your understanding of section 135-5 of the GST Act is that if what you actually use the going concern for is different from what you intended to use it for when you acquired it, you will have an adjustment for change in creditable purpose under Division 129 of the GST Act. In your situation, it is clear that there has been no change in use of the property post the purchase. The original ruling from the ATO determined that the rental of the property is actually residential rent and therefore, input taxed for GST purposes, even though it is rented for use as office space. This was the same rental scenario that was in place when you purchased the property. Under this interpretation, what you purchased in (month) was existing residential property which was being leased as residential premises. You note that the property has also been sold on (date) for (price) and on (date) for (price), so it is clearly not new residential premises. As such, this is not a taxable supply for GST purposes, and as such there was no need to apply the going concern exemption, and this is a GST-free supply of existing residential property. The contract is therefore incorrect in having marked the going concern box as yes. The previous owner was charging GST on the rent, as they viewed this as a commercial lease, and therefore, their understanding was that there was potential for GST on the sale contract, and hence, they marked the going concern box in the sale contract as yes. Again, the original private ruling has clarified this situation as residential rent due to the underlying characteristics of the property, and hence the previous owner’s interpretation was incorrect. As such, on the basis that the property you purchased was actually existing residential property being leased for residential rent, and that there has been no change in use post the purchase, you request that the ruling be revised, and the ATO confirm that there is no GST increasing adjustment owed by you.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(3) | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4) | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 23-15 | A New Tax System (Goods and Services Tax) Act 1999 section 23-65 | A New Tax System (Goods and Services Tax) Act 1999 section 25-10 | A New Tax System (Goods and Services Tax) Act 1999 section 25-15 | A New Tax System (Goods and Services Tax) Act 1999 section 25-55(1) | A New Tax System (Goods and Services Tax) Act 1999 section 25-55(2) | A New Tax System (Goods and Services Tax) Act 1999 section 25-57(1) | A New Tax System (Goods and Services Tax) Act 1999 section 25-57(2) | A New Tax System (Goods and Services Tax) Act 1999 section 25-60(1) | A New Tax System (Goods and Services Tax) Act 1999 section 29-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 Division 129 | A New Tax System (Goods and Services Tax) Act 1999 section 135-5 | A New Tax System (Goods and Services Tax) Act 1999 section 135-10 | A New Tax System (Goods and Services Tax) Act 1999 section 138-5 | A New Tax System (Goods and Services Tax) Act 1999 section 144-5 | A New Tax System (Goods and Services Tax) Act 1999 section Division 188

Reasons for decision: Summary: You are not entitled to an input tax credit on your purchase of the property because; ● you did not acquire the property for a creditable purpose ● the sale of the property to you was not a taxable supply | Detailed Reasoning - Detailed reasoning: You make a creditable acquisition if you meet the requirements of section 11-5 of the GST Act, which states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose: and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered or *required to be registered. (*Denotes a term defined in section 195-1 of the GST Act) Acquisition for creditable purpose You acquire something for a creditable purpose if you meet the requirements of section 11-15 of the GST Act. Subsection 11-15(1) of the GST Act states; You acquire a thing for a creditable purpose if you acquire it in *carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. You acquired the property in carrying on your leasing enterprise. However, leasing out residential premises 'to be used predominantly for residential accommodation’ is input taxed under section 40-35 of the GST Act. Paragraphs 9 and 10 of GSTR 2012/5 discuss the meaning of 'residential premises to be used predominantly for residential accommodation’ for the purposes of the GST Act. They state: 9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' 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. 10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office). In accordance with paragraphs 9 and 10 of GSTR 2012/5, it is just the physical characteristics of the relevant premises that are relevant and not any other things, for example, zoning or what it is being used for at a particular time. Paragraphs 14 and 15 of GSTR 2012/5 elaborate on the physical characteristics of residential premises to be used for residential accommodation, for the purposes of the GST Act. They state: 14. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation. 15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation. In accordance with GSTR 2012/5, the addition of office furniture and minor fittings to a house so that office activities can be conducted from the house is not sufficient to transform the physical character of the house from residential to commercial. Paragraphs 44 and 45 state: Example 9 - the addition of furniture and minor fittings is not sufficient to modify physical characteristics 44. Rebecca is a solicitor. She lives in a terrace house that is not new residential premises, and decides to convert a room at the front of the house into an office for her practice. Rebecca arranges the installation of an electricity point and telephone line for the place in the room where she intends to set-up a printer and facsimile machine. She fits the room out with book shelves, filing cabinets, desk, office chairs, a table for the printer and facsimile machine, and suitable floor coverings. She also has an advertising sign placed outside the front door of her house. Rebecca does not modify any of the other rooms in the house . 45. These changes are not sufficient to modify the physical characteristics of the terrace house into premises other than residential premises to be used predominantly for residential accommodation. The furniture and fittings that Rebecca has brought into the room do not change the physical characteristics of the house itself. Also, the installation of an electricity point and telephone line, and the placement of a sign outside the house, are not sufficient modifications to alter the physical characteristics of the premises so that they are no longer residential premises to be used predominantly for residential accommodation. If Rebecca sells or leases the premises she will be making a wholly input taxed supply under section 40-65 or section 40-35 respectively . Your property in its entirety has the physical features that make it suitable for use as residential accommodation. As in the scenario in example 9 above, the changes made by commercial occupants in your case (for example, bringing in office equipment) are not sufficient to modify the physical characteristics of the house into premises other than residential premises to be used predominantly for residential accommodation. The fact that the current tenant is using the property for commercial purposes – as an office, does not prevent the property from being classified as 'residential premises to be used predominantly for residential accommodation’ for the purposes of the GST Act. Therefore, the property is 'residential premises to be used predominantly for residential accommodation’, for the purposes of section 40-35 and 40-65 of the GST Act, and therefore you are making an input taxed supply by leasing out the property. You purchased the property in order to make input taxed supplies (leasing out the property). Therefore, you did not purchase the property for a creditable purpose and the requirement of paragraph 11-5(a) of the GST Act is not met. Taxable supply to acquirer In accordance with paragraph 11-5(b) of the GST Act, one of the requirements for an acquisition to be creditable is that the purchaser received a taxable supply. A supplier makes a taxable supply if it meets the requirements of section 9-5 of the GST Act, which states: 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. (Indirect tax zone means Australia). The vendor in your case meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is: ● the vendor sold the property for consideration (the sale price) ● they vendor made the sale in the course or furtherance of their leasing enterprise ● the supply was connected with Australia (as the property is located in Australia), and ● the vendor was registered for GST for the transaction. Therefore, what remains to be determined is whether the sale of the property is GST-free or input taxed (the two categories of GST exemption). The relevant GST exemption provisions in respect of the sale of the property to you are section 40-65 of the GST Act (input taxed sales of residential premises), subsection 9-30(4) of the GST Act and section 38-325 of the GST Act (GST-free supplies of going concerns). To the extent that a supply would otherwise be both GST-free and input taxed, the supply is generally classified as GST-free and not input taxed (in accordance with subsection 9-30(3) of the GST Act). There are some exceptions to this rule. | Detailed Reasoning - Input taxed sale of residential premises: Subject to the overriding rule in subsection 9-30(3) of the GST Act, a sale of residential premises is input taxed under section 40-65 of the GST Act to the extent they are 'to be used predominantly for residential accommodation’ with the exception of: ● commercial residential premises (such as a hotel or motel), and ● * new residential premises other than those used for residential accommodation before 2 December 1998. Section 40-75 of the GST Act defines ' new residential premises’ . It states: (1)*Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a*long-term lease; or (b) have been created through *substantial renovations of a building, or (c) have been built, or contain a building that has been built to replace demolished premises the same land. Paragraphs (b) and (c) have effect subject to paragraph (a). (2) However, the *residential premises are not new residential premises if, for the period of at least 5 years since: (a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) – the premises first became residential premises; or (b) if paragraph (1)(b) applies - the premises were last substantially renovated; or (c) if paragraph (1)(c) applies – the premises were last built; the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a) of the GST Act. In accordance with paragraph 55 of Goods and Services Tax Ruling GSTR 2003/3, the definition of substantial renovations requires consideration of what work has been done to the building since it was acquired by the current owner. The property in your case is residential premises to be used predominantly for residential accommodation, for the purposes of the GST Act due to its physical characteristics (in accordance with paragraph 40 of GSTR 2012/5). The sale of the property to you was not a sale of commercial residential premises, such as a hotel etc. Paragraph 40 of GSTR 2003/3 considers the scenario where a residential building is built on a particular block, but later relocated to a different, vacant lot. It states: 40. Where a residential building is relocated from one block of land to a different vacant block, we consider that the building and new block of land become new residential premises. The land and building, as a 'package', have not previously been sold together, or the subject of a long-term lease. It may also be necessary to consider whether the supply of the now vacant land after the removal of the building is a taxable supply in its own right. The vacant land is not residential premises. In accordance with paragraph 40 of GSTR 2003/3, once the house in your case was relocated from another lot to the current lot, the house and the current lot together became new residential premises for the purposes of the GST Act. The sale of the property to you was not a sale of new residential premises because that sale was not the first sale of the land and house as a package and the vendor did not substantially renovate those residential premises. Therefore, the sale of the property to you meets the requirements of section 40-65 of the GST Act and would have been input taxed if it were not for section 38-325 and subsection 9-30(3) of the GST Act. | Detailed Reasoning - Supplies of things used solely in connection with making supplies that are input taxed but not financial supplies: Subsection 9-30(4) of the GST Act states: A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with supplies that are input taxed but are not *financial supplies. The sale of the property to you was a supply of something other than new residential premises. The vendor used the property solely in connection with making input taxed supplies, by renting out these residential premises and these supplies were not financial supplies. Therefore, the requirements of subsection 9-30(4) of the GST Act are met. | Detailed Reasoning - GST-free supply of going concern: A supply of a going concern may be GST-free under subsection 38-325(1) of the GST Act. There are no other provisions of the GST Act under which the sale of the property to you could be GST-free. Subjection 38-325(1) of the GST Act states: 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. Subsection 38-325(2) of the GST Act defines supply of a going concern. It states: 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). Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 set out the two elements that are essential for the continued operation of an enterprise. It states: 75. Two elements are essential for the continued operation of an enterprise: ● the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and ● the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion. Paragraphs 149 to 151 of GSTR 2002/5 discuss the 'all things necessary for the continued operation of an enterprise’ requirement in relation to leasing enterprises. They state” 149. The term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise. 150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating. 151. The activity of leasing a building which has previously been leased to a tenant remains an 'enterprise' of leasing for the purposes of section 9-20 during the period of temporary vacancy when a new tenant is being actively sought by the building owner. However, where a building has not previously been leased to a tenant, but is being actively marketed, an 'enterprise of leasing' is not operating until the activity of leasing actually commences. The activity of leasing commences when at least one tenant enters into an agreement to lease or occupies the building. The vendor in your case leased the property up to the time of settlement of sale. Therefore, it was operating a leasing enterprise up to that time. In accordance with paragraph 107A of GSTR 2002/5, where the identified enterprise is one of property leasing, the supply of the property subject to the existing leases is all that is required to satisfy paragraph 38-325(2)(a) of the GST Act. The vendor in your case suppled to you a property subject to an existing tenancy. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met. Additionally, the vendor leased out the property up to the time of settlement. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met. Hence, the vendor supplied a going concern to you under subsection 38-325(2) of the GST Act. We shall now consider whether the supply of this going concern meets the requirement of subsection 38-325(1) of the GST Act. The property was sold to you for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met. You were registered for GST when you purchased the property. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is met. In your case, the vendor and purchaser agreed in writing that the sale of the property subject to the existing tenancy was the sale of a going concern. Therefore, the requirement of paragraph 38-325(1)(c) of the GST Act is met. As the sale of the property meets the requirements of subsection 38-325(1) of the GST Act, the sale is a GST-free supply of a going concern. The sale of the property to you would have otherwise been input taxed and GST-free at the same time if were not for the tie breaker provision, subsection 9-30(3) of the GST. In accordance with that provision, the GST-free supply status overrides the input taxed status. As the sale of the property to you was GST-free, it was not a taxable supply. Therefore, you do not meet the requirement of paragraph 11-5(b) of the GST Act. Consideration The purchase price you paid for the property is consideration for the sale. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act. Registered or required to be registered for GST In accordance with section 25-15 of the GST Act, if the Commissioner decides under section 25-10 of the GST Act, as the date of effect of your registration ( your registration day ), a day before the day of the decision, then you are taken for the purpose of determining whether an acquisition you made on or after that day was a creditable acquisition to have been registered from and including your registration day. In accordance with section 25-65 of the GST Act, if the Commissioner decides under section 25-60 of the GST Act, as the date of effect of the cancellation of your registration ( your cancellation day ), a day before the date of the decision, your registration is taken for the purpose of determining whether an acquisition you made on that date was a creditable acquisition to have been cancelled from and including your cancellation day. You registered for GST; then cancelled your GST registration. You later re-registered for GST with effect from (date) and your GST re-registration is still active. Therefore, you are taken to have been registered for GST at the time of acquisition of the property (date) for the purpose of determining whether you meet the requirement of paragraph 11-5(d) of the GST Act. Hence, you meet that criterion. Conclusion You are not entitled to an input tax credit on your purchase of the property because; ● you did not acquire the property for a creditable purpose ● the sale of the property to you was not a taxable supply | Detailed Reasoning - Question 2: Leasing out the property is an input taxed supply. Therefore, this supply is not taxable. Hence, GST is not payable on the rental income you receive. | Summary: You have an increasing adjustment under section 135-5 of the GST Act as: ● you purchased residential premises, and the sale of the property to you was a GST-free supply of a leasing going concern; and ● you purchased the property with the intention of making wholly input taxed supplies under section 40-35 of the GST Act, thereby continuing on the enterprise that the vendor operated. | Detailed Reasoning - Detailed reasoning: Subsection 135-5(1) of the GST Act requires a purchaser of a GST-free supply of a going concern to make an increasing adjustment if they intend that some or all of the supplies made through the enterprise to which the supply of the going concern relates will be supplies that are neither taxable supplies nor GST-free supplies. An increasing adjustment is a type of GST liability to the ATO. Subsection 135-5(1) of the GST Act states: You have an increasing adjustment if: (a) you are the *recipient of a supply of a going concern, or a supply that is *GST-free under section 38-480; and (b) you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies. Subsection 135-5(2) of the GST Act states: The amount of the increasing adjustment is as follows: 1 x Supply price x Proportion of non-creditable use 10 Where: proportion of non-creditable use is the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies, expressed as a percentage worked out on the basis of the *price of those supplies. s upply price means the *price of the supply in relation to which the increasing adjustment arises. Section 135-10 of the GST Act provides that later adjustments may be required if the input taxed proportion of the purchaser’s actual supplies is different to that planned. Subsection 135-10(1) of the GST Act states: If you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to: (a) the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies; and (b) the proportion of all the supplies made through the *enterprise that are supplies that are neither taxable supplies nor GST-free supplies; in the same way as that Division applies: (c) in relation to the extent to which you made an acquisition for a *creditable purpose: and (d) in relation to the extent to which a thing acquired is *applied for a creditable purpose. Paragraph 6.255 of the Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 (EM) explains sections 135-10 and 135-10 of the GST Act. It states: Under the general rule for supplies there will be GST included in the price for an acquisition. If the acquisition is not entirely for a creditable purpose you are not entitled to a full input tax credit for it. This means that you bear some of the cost of the GST on the acquisition in proportion to your private or input taxed use. However, if the thing you acquire is GST-free and you use it only partly for a creditable purpose there is no GST for you to bear. This applies to acquisitions of going concerns that are supplied GST-free. Further, paragraphs 6.256 to 6.258 of the EM state: Division 135 provides for an adjustment to ensure that you account for GST in proportion to the private or input taxed use of a going concern that you acquire. The adjustment increases your net amount by an amount equal to the GST you would bear on the acquisition if it had been a taxable supply to you. The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit you would have been entitled to for the acquisition if the supply had been a taxable supply. This is the effect of section 135-5. This means that you only get a going concern GST-free to the extent that you intend to make taxable supplies with it. If what you actually use the going concern for is different from what you intended to use it for when you acquired it, you will have an adjustment for change in creditable purpose under Division 129. ATO Interpretative Decision ATO ID 2007/180 Goods and Services Tax GST and 'supplies made through the enterprise' for the purposes of Division 135 states: It can be seen from the above statements in the EM that the underlying objective of Division 135 of the GST Act is to provide for one or more adjustments to ensure that a recipient of a GST-free supply of a going concern accounts for GST to the extent that the going concern is used for non-creditable purposes. In this context, it is appropriate to interpret the phrase 'supplies made through the enterprise' for the purposes of paragraphs 135-10(1)(a) and 135-10(1)(b) of the GST Act to include a supply that is a sale of the enterprise itself. It accords with the purpose of Division 135 of the GST Act and the policy intent of the GST Act as a whole to view the sale of the enterprise itself as a use of the going concern acquired. This view results in an appropriate amount of GST being accounted for in relation to the acquisition of the going concern that reflects the proportion of its non-creditable use. The alternative view that the sale of the enterprise itself is not a supply 'made through the enterprise' would, contrary to the policy and legislative context of the GST Act, result in an adjustment which does not reflect the total use of the enterprise acquired. This in turn could result in an underpayment or overpayment of GST depending on whether the sale of the enterprise is a taxable supply, an input taxed supply or a GST-free supply. | Detailed Reasoning - Your first contention: The sale of the property meets the requirements of section 40-65 of the GST Act. Therefore, on that basis, it would not have been a taxable supply if it were not GST-free under section 38-325 of the GST Act. Hence, there was no need to apply the going concern exemption to make the sale non-taxable. Consequently, the correct classification of the sale is input taxed, pursuant to section 40-65 of the GST Act and not GST-free under the going concern exemption. | Detailed Reasoning - Our response to your first contention: Although there was no need to apply the going concern exemption by marking the going concern box in the sale contract in order to make the sale non-taxable, because the sale meets the requirements of section 40-65 and subsection 9-30(4) of the GST Act, the requirements of section 38-325 of the GST Act are also met. As the requirements of section 40-65 and subsection 9-30(4) of the GST Act, which are input taxed supply provisions, and section 38-325 of the GST Act, which is a GST-free supply provision, are met, the scenario in your case involves a sale of property that would have otherwise been input taxed and GST-free if it were not for the tie-breaker provision, subsection 9-30(3) of the GST Act. Therefore, we need to apply the rules in subsection 9-30(3) of the GST Act. Subsection 9-30(3) of the GST Act states: To the extent that a supply would, apart from this subsection, be both *GST-free and *input taxed: (a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for supplies of that kind to be input taxed; or (b) the supply is input taxed and not GST-free, if that provision requires the supplier to have so chosen. The provisions under which the sale of the property would have been input taxed if not for the existence of section 38-325 and subsection 9-30(3) of the GST Act are section 40-65 and subsection 9-30(4) of the GST Act. Input taxed status under either of these provisions does not hinge on the supplier making an election or choice to make its supplies of that kind input taxed. Therefore, the sale of the property to you is a GST-free supply of a going concern. The GST-free status overrides the input taxed status. There is no rule in the GST Act that a sale of residential premises that meets the requirements of section 40-65 or subsection 9-30(4) of the GST Act cannot be GST-free under section 38-325 of the GST Act. There is no rule in the GST Act that a sale that would be non-taxable due to the operation of provisions of the GST Act other than section 38-325 of the GST Act cannot be GST-free under section 38-325 of the GST Act. | Detailed Reasoning - Your second contention: Your understanding of section 135-5 of the GST Act is that if what you actually use the going concern for is different from what you intended to use it for when you purchased it, you will have an adjustment for change in creditable purpose under Division 129 of the GST Act. In your situation, it is clear that there has been no change in use of the property post the purchase. | Detailed Reasoning - Our response to your second contention: Sections 135-10 and 135-10 of the GST Act each provide for a separate adjustment to arise in certain situations where an entity purchases a GST-free supply of a going concern or a GST-free supply of farm land. Whether an adjustment arises under a particular section in Division 135 of the GST Act turns on the requirements set out in that section. Section 135-5 of the GST Act provides for an initial adjustment where an entity purchases a GST-free supply of a going concern and it intends to make input taxed supplies through the enterprise it purchases. Section 135-10 of the GST Act provides for later adjustments under Division 129 of the GST Act where the proportion of all supplies the purchaser actually makes through the enterprise that are input taxed is different to that intended at the time of purchase of the going concern. The rules for an adjustment to arise under section 135-5 of the GST are to some extent different to the rules for an adjustment to arise under section 135-10 of the GST Act. It is not a requirement for an adjustment to arise under section 135-5 of the GST Act that the exact same circumstances that give rise to an adjustment under section 135-10 of the GST Act exist. When section 135-10 and Division 129 of the GST Act are read in combination, section 135-10 of the GST Act in effect provides for a possible adjustment under Division 129 of the GST Act where the actual use of the thing acquired is different to the intended use. An adjustment can arise under Division 129 of the GST Act where the extent of actual application (of the thing acquired) for a creditable purpose is different to the intended extent of creditable application and also where the actual extent of creditable application changes over time. For example, an adjustment can arise under Division 129 of the GST Act if something is acquired 100% for a creditable purpose (that is, at the time of purchase, the intention was to apply the thing 100% for a creditable purpose) but it is applied 100% for a non-creditable purpose. Section 135-5 of the GST Act does not provide for an adjustment under Division 129 of the GST Act (the Division dealing with situations involving a change in use of a thing acquired) or specify that the actual use of the thing acquired must be different to the intended use or that the actual use must change over time in order for an adjustment to arise under section 135-5 of the GST Act Therefore, it is not a requirement for an adjustment to arise under section 135-5 of the GST Act that the actual extent of creditable use of the relevant thing acquired is different to the intended extent of creditable use. This is despite the fact that an adjustment under section 135-10 of the GST Act requires a change in creditable use. The wording of subsection 135-5(2) of the GST Act requires one to look at the proportion of all supplies made through the relevant enterprise that the purchaser intends will be supplies that are input taxed (or non-taxable and non-GST-free for some other reason). The formula in subsection 135-5(2) of the GST Act indicates that the higher the percentage of all supplies the purchaser intends to make that would be input taxed supplies (or other non-taxable, non GST-free supplies), the higher the increasing adjustment under section 135-5 of the GST Act. Therefore, a liability potentially arises under section 135-5 of the GST Act where the purchaser intends to use the thing acquired to make input taxed supplies (or other non-taxable, non-GST-free supplies). There is nothing in section 135-5 of the GST Act that specifies that the actual application is to be taken into account to determine whether there is an adjustment under that provision. The provision requires a consideration of the purchaser’s intended use, but not actual use. Our conclusion You acquired a GST-free going concern, being a leasing enterprise. When you purchased the property, you had the intention of making supplies through that enterprise, that is, leasing out the residential premises, and these supplies would be neither taxable nor GST-free supplies (they would be input taxed). You thereby continued to carry on the enterprise that the vendor operated. We consider that one of the requirements for an adjustment to arise under section 135-5 of the GST Act is that the purchaser continues to carry on the enterprise that the vendor of the going concern operated. Paragraph 135-5(1)(a) of the GST Act refers to the vendor’s supply of the going concern to the purchaser and paragraph 135-5(1)(b) of the GST Act requires that the purchaser intends that some or all of supplies made through the enterprise to which that supply of the going concern relates will be supplies that are neither taxable nor GST-free supply. The enterprise to which the supply of the going concern relates is the vendor’s enterprise as they supply the going concern. Example 33 in Goods and Services tax Ruling GSTR 2002/5 details a scenario where an entity purchases leased residential premises with leases intact. It states: Example 33: availability of input tax credits 202. Gerald acquires a block of flats which are subsequently let as residential premises for several years. Gerald sells the property to Grace with existing leases intact. The supply is for consideration, Gerald and Grace are both registered for GST and they agree in writing that the 'supply is of a going concern'. In the course of the sale, Gerald consults a solicitor and utilises the services of a real estate agent. 203. As the acquisition of the premises by Gerald is for the purpose of making input taxed supplies, it is not acquired for a creditable purpose and input tax credits are not available in relation to the acquisition. The acquisitions made in the course of the leasing activities, such as plumbing and painting, are also not acquisitions for a creditable purpose. The input tax credits in relation to these acquisitions are not available to Gerald. 204. The supply of the premises as a 'supply of a going concern' is GST-free and acquisitions made in the course of making that supply are made for a creditable purpose. The input tax credits in relation to the acquisition of legal services and real estate services are available to Gerald. Footnote 22 of GSTR 2002/5 states: As Grace intends to continue to lease the premises for residential purposes, she will be making wholly input taxed supplies and will have an increasing adjustment under section 135-5. See Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49 at [46]; 2014 ATC 20-474; (2014) 92 ATR 241. Your case involves the same scenario as in example 22 in GSTR 2002/5 in the following crucial respects: ● you purchased residential premises, and the sale of the property to you was a GST-free supply of a leasing going concern; ● the vendor was using the property to make input taxed supplies of residential premises under section 40-35 of the GST Act; and ● you purchased the property with the intention of making wholly input taxed supplies under section 40-35 of the GST Act, thereby continuing on the enterprise that the vendor operated. The scenario in your case is also the same as the scenario in paragraph 12 of Goods and Services Tax Determination GSTD 2012/1 (GSTD 2012/1) in all crucial respects. Paragraphs 9 to 12A of GSTD 2012/1 state: 9. In the following example, all of the entities are registered for GST. | Detailed Reasoning - Example - Sale of residential premises subject to a lease: 10. Property Ltd, as owner of all of the lots in a residential apartment complex in which each apartment is individually strata titled, leases the apartments to Management Pty Ltd under individual leases. Young Pty Ltd then purchases the lots from Property Ltd subject to the existing leases to Management Pty Ltd . 11. No GST is payable by Young Pty Ltd in relation to the leases because Young Pty Ltd does not make taxable supplies of the leases. Young Pty Ltd is not entitled to input taxed credits in respect of the purchases of the apartments because it makes an input taxed supply of the apartments by way of lease after the sale. Additionally, Young Pty Ltd is not entitled to input tax credits for acquisitions associated with the purchases of the apartments, such as legal services, or for any acquisitions concerning the supply of the apartments by way of lease, such as management services, insurance and maintenance. 12. The fact that Young Pty Ltd acquired the apartments subject to the existing leases indicates an intention at the time of the acquisition for the leases to continue. In the absence of evidence to the contrary, Young Pty Ltd would therefore have an increasing adjustment under Division 135 if it acquired the apartments as part of a GST-free supply of a going concern . 12A. When determining the proportion of non-creditable use as part of calculating any Division 135 adjustment, the price of the input taxed supplies of residential premises that Young Pty Ltd intends to make by way of lease includes the rent to be paid under the existing leases. If Young Pty Ltd only intends to make input taxed supplies of residential premises by way of lease through the enterprise it acquired, the amount of any Division 135 adjustment it has would be one tenth of the price of the supply of the going concern. In accordance with paragraph 12 of GSTD 2012/1 the fact that you acquired the property in your case subject to the existing lease indicates you had an intention at the time of acquisition for the leases to continue. Decision Impact Statement Commissioner of Taxation v. MBI Properties Pty Ltd states: A purchaser of leased residential premises as a GST-free going concern, with the intention of continuing to observe and act in accordance with the covenants of the existing lease, is liable for an increasing adjustment under section 135-5. The scenario in your case has the features set out in the paragraph immediately above. Therefore, you have an increasing adjustment under section 135-5 of the GST Act. In accordance with subsection 135-5(2) of the GST Act and paragraph 12A of GSTD 2012/1, the amount of the increasing adjustment you have under section 135-5 of the GST Act is 10% of the settlement adjusted purchase price of the property. This calculation is supported by the EM, which states: The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit you would have been entitled to for the acquisition if the supply had been a taxable supply. This is the effect of section 135-5. If the sale of the property to you had been taxable, the GST would have been equal to 10% of the price you actually paid. If the sale of the property to you had hypothetically been a taxable supply, you would not have been entitled to any input tax credit, because you did not acquire the property for a creditable purpose under section 11-15 of the GST Act (as you acquired the property with the intention of using it to make input taxed supplies). Therefore, the difference between what would have been the GST on the sale if it had been taxable and the input tax credit you would have been entitled to for the acquisition if the sale was taxable is equal to 10% of the price of the property. In accordance with ATO Interpretative Decision ATO ID 2007/72 Goods and Services Tax GST and attribution of an increasing adjustment for a recipient of a GST-free supply of a going concern, the adjustment is reported as a positive amount at label 1A of the BAS for the (particular tax period), as that is the tax period in which you purchased the property. Consideration of section 135-10 of the GST Act in relation to your circumstances As your actual use of the property has always been to make input taxed supplies (which are not taxable or GST-free supplies) and when you purchased the property you intended to make input taxed supplies (which are not taxable or GST-free supplies) only, you do not have a further adjustment under section 135-10 of the GST Act at this stage. If you make a taxable or GST-free supply of the property or taxable or GST-free supply through an enterprise you operate from the property at some point in the future, you would need to consider whether you have a further adjustment under section 135-10 of the GST Act. For example, if you sell the property and the sale is a GST-free supply of a going concern you could potentially have a decreasing adjustment under section 135-10 of the GST Act. | Detailed Reasoning - Question 4: When the Commissioner must cancel GST registration Subsection 25-55(1) of the GST Act states: The Commissioner must cancel your *registration if: (a) you have applied for cancellation of registration in the *approved form; and (b) at the time you applied for cancellation of registration, you had been registered for at least 12 months; and (c) the Commissioner is satisfied that you are not *required to be registered. Subsection 25-55(2) of the GST Act states: The Commissioner must cancel your *registration (even if you have not applied for cancellation of your registration) if: (a) the Commissioner is satisfied that you are not *carrying on an *enterprise; and (b) the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months. When the Commissioner may cancel your GST registration Subsection 25-57(1) of the GST Act states: The Commissioner may cancel your *registration if: (a) less than 12 months after being registered, you apply for cancellation of registration in the *approved form; and (b) the Commissioner is satisfied that you are not *required to be registered. Subsection 25-57(2) of the GST Act states: In considering your application, the Commissioner may have regard to: (a) how long you have been *registered; and (b) whether you have previously been registered; and (c) any other relevant matters. Deciding the date of effect of cancellation In accordance with subsection 25-60(1) of the GST Act, the Commissioner must decide the date on which the cancellation under subsection 25-55(1) or (2) or section 25-57 takes effect. In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if: ● they are carrying on an enterprise; and ● their GST turnover is $75,000 or more a year. Additionally, in accordance with section 144-5 of the GST Act, taxi drivers are required to be registered for GST. In accordance with Division 188 of the GST Act, as your leasing of residential premises is an input supply, the rent is not included in GST turnover. You don’t have GST turnover of $75,000 or more and you are not a taxi driver. Therefore, you are not required to be registered for GST under section 23-5 or section 144-4 of the GST Act. An entity must cease to operate on a GST-registered basis before the ATO will consider cancelling their GST registration. An entity is considered to have ceased operating on a GST-registered basis from a certain date if, from that date, the entity: ● did not hold themselves out to other businesses as being registered for GST (for example, stating that they were registered for GST or charging or collecting GST) ● did not issue any tax invoices or adjustment notes ● did not claim any input tax credits, special transitional credits or indirect transitional credits, and· ● has made a declaration to the ATO that satisfies all of the above points. If the entity has reported a positive GST amount (not zero) at label 1A of a given BAS, the GST registration will not be cancelled with effect from a date within the tax period to which the BAS relates as the entity was thereby participating in the GST system during that tax period. You are entitled to be registered for GST (as you are carrying on an enterprise), but are not required to be registered for GST. Additionally, you have been registered for GST for less than 12 months. Therefore, it is up to the discretion of the ATO whether to cancel your GST registration with effect from a date that is less than 12 months after the start date of your current GST registration. You may apply for cancellation of your GST registration and the ATO will consider the application. You will need to specify a desired date of effect of cancellation. As you claimed an input tax credit in your BAS for the (particular tax period), the ATO would not cancel your GST registration with effect from a date falling within that tax period. You reported a positive amount at label 1A of your (particular tax period) BAS. As this is a positive amount, the ATO would not cancel your GST registration with effect from a date falling within that tax period. | Detailed Reasoning - Question 5: An increasing GST adjustment may arise for an entity under section 138-5 of the GST Act if: ● their GST registration is cancelled and ● immediately before the cancellation takes effect, the assets of the entity include anything in respect of which the entity was entitled to an input tax credit. (However, the rule above is subject to certain time limits) No adjustment arises under section 138-5 of the GST Act in respect of your purchase of the property even if you cancel your GST registration (regardless of the date of effect of the cancellation), as you were not entitled to an input tax credit on your purchase of the property. You will no longer be required to complete GST labels in BAS after your GST registration is cancelled. There are no other GST implications of you cancelling GST registration.