Private ruling: Capital gains tax, and goods and services tax
Date of advice: 16 December 2016
Published: May 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: On the sale of the property, will capital gains tax (CGT) event A1 occur? | A1: Yes | Q2: If the answer to question 1 is yes, will you be able to apply the main residence exemption on your interest in the property to the residential part? | A2: Yes | Q3: If the answer to question 1 is yes, will amounts received for your interest in the property to the commercial part be assessable as capital gains? | A3: Yes Issue 2 - Goods and services tax | Q4: Are you required to be registered for goods and services tax (GST) in accordance with section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you sell the property? | A4: No, you are not required to be registered for GST under section 23-5 of the GST Act, when you sell the property. | Q5: Will you have a GST liability arising from the sale of the property? | A5: No, you will not have a GST liability arising from the sale of the property.

Relevant facts and circumstances: You and your spouse purchased the property as co-owners in April 20XX. The property consists of a commercial part and a residential part on the one title. You resided in the residential part of the property (residential part). You do not and have not operated any enterprises from the residential part of the property. You do not have an office set up in the residential part of the property. There is a commercial part of the property (commercial part). You purchased the property as an operating business The business was originally operated as a sole trader. The licenced business was then operated under a partnership between you and your spouse. The licenced business was relinquished in July 20XX. From July 20XX, to December 20XX, your spouse conducted a business out of the commercial part of the property. From December 20XX, another business leased the commercial part of the property The current rental return on the commercial part of the property is approximately $X per annum. You conduct an enterprise of leasing a commercial property. You conduct no other enterprises. You propose to sell the whole property with the lease for an amount in excess of $75,000 You have no intention of re-entering the commercial property-leasing market.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-190 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | A New Tax System (Goods and Services Tax) Act 1999 section 7-1. | A New Tax System (Goods and Services Tax) Act 1999 section 9-5. | A New Tax System (Goods and Services Tax) Act 1999 section 9-20. | A New Tax System (Goods and Services Tax) Act 1999 section 23-5. | A New Tax System (Goods and Services Tax) Act 1999 section 23-10. | A New Tax System (Goods and Services Tax) Act 1999 section 23-15. | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 184-1. | A New Tax System (Goods and Services Tax) Act 1999 section 188-10. | A New Tax System (Goods and Services Tax) Act 1999 section 188-15. | A New Tax System (Goods and Services Tax) Act 1999 section 188-20. | A New Tax System (Goods and Services Tax) Act 1999 section 188-25. | A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision: Detailed Reasoning - CGT Event A1: The most common CGT event (CGT event A1) happens when you dispose of an asset to someone else. When this occurs a CGT A1 event will occur. The time of the event is when you enter into the contract for its disposal or if there is no contract when the change of ownership occurs. When you dispose of your property, this will be considered a CGT A1 event. Main Residence Exemption Section 118-190 of the ITAA 1997 is about using a dwelling for producing assessable income. Subsection 118-190(1) allows a partial exemption for a CGT event that happens in relation to a dwelling if it was used for the purpose of producing assessable income (such as rental income, and operating a business on premises). In your case, you will be entitled to a partial main residence exemption under subsection 118-190(1) of the ITAA 1997 as your main residence was used for the purpose of producing assessable income. Small Business Concessions Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: i. you are a small business entity for the income year ii. you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for 15 years and the asset was an active asset of yours for a total of at least half of your ownership period until the CGT event. You purchased the property in April 20XX, and used the commercial portion of the property for your licenced business until July 20XX. From July 20XX, to December 20XX, your spouse conducted a specific business out of the commercial part of the property. From this date onwards, the property was leased to a third party thereby becoming a passive asset. The commercial portion of the property was an active asset for X years, and a passive asset for X years (currently) - therefore the CGT asset was not used in the carrying on of a business for at least half of the ownership period. This does not satisfy the requirements to access any small business CGT concessions. Assessable Capital Gains In order to calculate the proportion of property on which any future capital gains may be assessable requires a reasonable apportionment. As a general approach, a reasonable apportionment can be made on the basis of a valuation. A valuation of the property would split the total value between the residential portion and the commercial portion of the property. This would include allowing a reasonable figure for access to the general living areas of the property including garages, sheds, and outdoor areas. The value of the area used to produce income is divided by the total area of the property to arrive at the percentage of the capital gain or loss that capital gains tax may apply. | Detailed Reasoning - Conclusion: You need to determine an amount of capital gains for the commercial portion of the property, to include in your assessable income. The final sale proceeds will need to be apportioned between the main residence portion and the commercial portion of the property, with the apportionment based on a valuation undertaken. | Summary: You are not required to be registered for goods and services tax (GST) in accordance with section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you sell the property. | Detailed Reasoning - Reasons for decision: Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: (a) it is carrying on an enterprise; and (b) its annual turnover meets the registration turnover threshold. An entity is required to be registered An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership. Based on the facts provided, the property is owned by two individuals, you and your spouse. We first need to examine whether the property will be provided by each individual separately or by a partnership for GST purposes. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership of you and your spouse (the partnership). Accordingly, the application of section 23-5 of the GST Act will apply from the perspective of the partnership, who will be the supplier of the property. For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property. | Detailed Reasoning - Carrying on an enterprise: We consider that the partnership is carrying on a leasing enterprise. Subsection 9-20(1) of the GST Act defines enterprise to include among other things an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. In your case, the partnership is carrying on a leasing enterprise because the commercial part of the property is rented to a real estate agency. The commercial part of the property formed part of the asset that was used in your leasing enterprise. What remains to be considered is whether the partnership's annual turnover meets the registration turnover threshold. | Detailed Reasoning - Annual turnover: According to subsection 23-15(1) of the GST Act, the registration turnover threshold is $75,000 unless you are a non-profit body. Subsection 188-10(1) of the GST Act provides: 'You have an annual turnover that meets a particular *turnover threshold if: (a) your *current annual turnover is at or above the turnover threshold and the Commissioner is not satisfied that its *projected annual turnover is below the turnover threshold; or (b) your projected annual turnover is at or above the turnover threshold.' Subsection 188-15(1) of the GST Act provides: Your current annual turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than: (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connection with an *enterprise that you carry on. You advised that the partnership supplied the commercial part of the property to a business as part of its leasing enterprise. The rental return on the commercial property is approximately $XX,000 per annum. We consider that the partnership's current annual turnover is below the turnover threshold. It is necessary then, to determine whether the partnership's projected annual turnover is at or above the turnover thresholder. Subsection 188-20(1) of the GST Act provides: Your projected annual turnover at a time during a particular month is the sum of the *values of all supplies that you have made, or are likely to make, during that month and the next 11 months, other than: (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connection with an *enterprise that you *carry on.' In your case the amount the partnership will receive from the sale of the property will cause your projected GST turnover to exceed the registration turnover threshold. As the sale of the property comprises of both a residential part and commercial part, we will need to consider both separately. In your case, you have resided in the residential part of the property. This is your principal residence. The sale of your residence is a private asset. Therefore, the sale of the residential part of the property will be disregarded in working out the partnership's projected GST turnover. In relation to the sale of the commercial part of the property, section 188-25 of the GST Act provides a further exception in working out your projected GST turnover. It states: (a) In working out your projected GST turnover, disregards: (b) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and any supply made, or likely to be made, by you solely as a consequences of: (I) ceasing to carry on an enterprise; or (II) substantially and permanently reducing the size or scale of an enterprise. The effect of section 188-25 of the GST Act is to exclude certain supplies, such as capital supplies that would cause a person to cross the registration turnover threshold even though the person's ordinary turnover falls below that threshold. The meaning of 'capital assets' is discussed in Goods and Services Tax Ruling GSTR 2001/7. Generally the term 'capital assets' refers to those assets that make up the profit yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits. Capital assets are to be distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. In your case, the commercial part of the property formed part of the profit yielding subject of the partnership's leasing enterprise. The commercial part of the property was not acquired for the purpose of subdivision and sale. As such, the commercial property is considered to be a capital asset and the sale of the commercial property is excluded when calculating the partnership's projected GST turnover. As subsection 188-25(a) of the GST Act is satisfied, we do not need to consider subsection 188-25(b). Based on the information you have provided, the partnership's projected GST turnover is less than $75,000. Unless the partnership has made other taxable supplies which cause it to meet the registration turnover threshold, the partnership is not required to be registered for GST under section 23-5 of the GST Act when the partnership sells the property. Accordingly, you are not required to be registered for GST when you sell the property. | Summary: You will not have a GST liability arising from the sale of the property | Detailed Reasoning - Detailed reasoning: Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act 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 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. (* denotes a term defined in section 195-1 of the GST Act) One of the requirements of a taxable supply is that the entity making the supply is registered or required to be registered for GST. The partnership is the entity making the supply. The partnership may choose to register for GST despite its turnover not meeting the registration turnover threshold (subsection 23-10(1) of the GST Act). However the partnership is not required to be registered for GST. If the partnership chooses not to register for GST, the sale of the property will not be a taxable supply because all of the requirements of section 9-5 of the GST Act will not be met. You will therefore have no GST liability when you sell your property.