Private ruling: GST and adjustments
Date of advice: 11 October 2018
Published: December 2018

Ruling: Q1: Will you have an increasing adjustment pursuant to Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 when you cancel your GST registration? | A1: No

Relevant facts and circumstances: You are registered for GST effective from xx/xx/xxxx with quarterly tax periods applying. You have entered into an agreement where you will be the recipient of a GST-free going concern comprising of a leasing enterprise in regard to a commercial property situated at a specified location (the Property). You intend to carry on the leasing enterprise as a long-term investment. Date of settlement was xx/xx/xxxx. The annual rental turnover generated for the leasing of the Property less than $XXX. You do not intend to acquire additional properties in the near future or conduct business which would require GST registration. You are contemplating cancelling your GST registration effective from xx/xx/xxxx following the settlement of the Property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 27-40 | Subsection 27-40(2) | Division 129 | Subsection 129-20(1) | Subsection 129-20(2) | Subsection 129-20(3) | Section 129-40 | Section 129-90 | Division 135 | Section 135-5 | Subsection 135-5(1) | Section 135-10 | Paragraph 135-10(1)(a)

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 Division 135 provides that a recipient of a supply of a going concern will have an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the enterprise that will be neither taxable nor GST-free supplies. Later adjustments will be needed if the proportion changes over time. Paragraphs 6.255 to 6.258 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 provide guidance as to the policy intent behind Division 135 stating: 6.255 Under the general rules 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. 6.256 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 . 6.257 This means that you only get a going concern GST-free to the extent that you intend to make taxable supplies with it. | Detailed Reasoning - Adjustment for change in creditable purpose: 6.258 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 . Subsection 135-5(1) provides for an initial increasing adjustment if: ● an entity is the recipient of a GST-free going concern supply; and ● the entity intends 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. In this case you will satisfy the first limb of subsection 135-5(1) in that you were the recipient of a GST-free going concern. You acquired the going concern on xx/xx/xxxx (settlement date). Although you planned to cancel your GST registration at some point (possibly xx/xx/xxxx), as your GST turnover would not meet the GST registration turnover threshold and you would not be required to be registered, immediately after settlement date you intended and continued to make supplies of commercial property by way of lease which were taxable supplies as you were registered for GST at that time (and the other criteria for a taxable supply were satisfied). Therefore you did not satisfy the second limb of subsection 135-5(1). In other words, you acquired the going concern for a fully creditable purpose. Section 135-10 is designed to capture subsequent events that result in a change in which the going concern was previously applied. Section 135-10 provides that if you are the recipient of a going concern, Division 129 applies to that acquisition in relation to: ● 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 ● the proportion of all the supplies made through the enterprise that are supplies that are neither taxable supplies nor GST-free supplies. For the purpose of Division 129 as it operates in conjunction with subsection 135-10, the above applies in the same way as Division 129 applies in relation to the extent to which you made an acquisition for a creditable purpose and the extent to which a thing is applied for a creditable purpose. In regard to the application of section 135-10 and any adjustment made pursuant to Division 129, any adjustment will be attributed pursuant to section 129-90. That is the adjustment is to be attributed in respect of an ‘adjustment period’ as defined in subsection 129-20(1) taking into consideration the number of adjustment periods applicable in subsections 129-20(2) and 129-20(3). Subsection 129-20(1) also provides that a tax period provided for under section 27-40 will also be an ‘adjustment period’. Subsection 27-40(2) provides that if an entity’s GST registration is cancelled, the entity’s tax period ceases as at the end of the day on the date the cancellation takes effect. This is referred to as an entity’s concluding tax period. For example, if your GST registration is cancelled on xx/xx/xxxx, subsection 27-40(2) provides that your tax period will cease as at the end of the day on xx/xx/xxxx (effectively resulting in the tax period being for 1 day). Subsection 129-20(1) provides that this tax period is also an ‘adjustment period. For the purpose of determining whether you have an adjustment and calculating any adjustment under section 135-10, the mechanics are adopted from Division 129. Section 129-40 contains the method statement to work out whether you have an adjustment: ● Step 1 – working out the actual application of the thing. In this case the relevant period to consider is the period ‘starting when you acquired the thing (xx/xx/xxxx) and ending at the end of the adjustment period (xx/xx/xxxx). During this period your supplies of leasing the commercial property will satisfy the definition of a taxable supply. Therefore, the proportion of supplies (expressed as a percentage) made during this period that are neither taxable supplies nor GST-free supplies (actual application) is 0%. ● Step 2 – working out the former/intended use. As discussed above, it is considered you acquired the going concern for a fully creditable purpose. Following on, adopting the terminology of paragraph 135-10(1)(a), the proportion of all supplies that you intend will be supplies that are neither taxable supplies nor GST-free supplies (intended or former application) is 0%. ● Step 3 – not applicable. ● Step 4 – not applicable. ● Step 5 – where the actual application of the thing is the same as its intended or former application, you will have neither an increasing adjustment nor decreasing adjustment. In this case the actual application of the going concern is 0% and the intended or former application is 0%. Therefore you will have neither an increasing adjustment nor decreasing adjustment pursuant to section 135-10. | Detailed Reasoning - Cancellation of GST registration: Section 25-55 provides that the Commissioner must cancel your GST registration if: ● you have applied for cancellation in the approved form; and ● and at the time you applied for cancellation, you had been registered for GST for at least 12 months; and ● the Commissioner is satisfied that you are not required to be registered. ● Section 25-57 provides that the Commissioner may cancel your GST registration if: ● you apply for cancellation less than 12 months after registering for GST; and ● the Commissioner is satisfied that you are not required to be registered. Subsection 25-57(2) provides that in considering your application, the Commissioner may have regard to: ● how long you have been registered ● whether you have previously been registered ● any other relevant matters Section 26-60 provides that if your registration is cancelled under either section 27-55 or 27-57, the Commissioner must decide the date on which the cancellation takes effect.