SUSAN YOUNG
Tax Training
INSTITUTE OF
PUBLIC
ACCOUNTANTS
EXPENSIVE GST TRAPS IN
REAL ESTATE
NOV 2014
These training materials are provided on the understanding that the author does
not accept any responsibility for their use nor warrants their accuracy. The
materials should not be used or treated as professional advice. Readers and
training participants should rely on their own enquiries in making any decisions
concerning their own interests.
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CONTENTS
PAGE
TRAPS IN DETERMINING WHETHER THERE IS A GST LIABILITY
What is an enterprise
Do you have to register for GST if the sale of a capital asset brings your
turnover above the registration turnover threshold
Can you deregister for GST before the sale?
TRAPS IN DETERMINING WHETHER A PROPERTY BEING SOLD IS
RESIDENTIAL PREMISES OR NOT
What are residential premises?
Purchaser’s intention not relevant
Sale of a rental property
Sale of the private home
Supplies requiring apportionment
The sale of vacant land
Land supplied with a building
Leasing holiday apartments
Issue of a call option
TRAPS WITH THE SALE OF NEW RESIDENTIAL UNITS – THE
CHANGE OF USE RULES
New residential premises
Strata titling
Sale of new residential premises and changes in creditable purpose
TRAPS WHEN SELLING PROPERTY AT AN AUCTION AND
COMPLETING THE CONTRACT
Sale at an auction - was the purchase price in the contract
GST-inclusive or not
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TREATMENT OF FORFEITED DEPOSITS
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PART PAYMENTS
A part payment is quite different to a deposit
GST treatment of part payments
Supplies and acquisitions made on a progressive or periodic basis
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TRAPS WITH VENDOR FINANCE
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SOME TRAPS IN USING THE MARGIN SCHEME
Restriction on use of the margin scheme
Need for agreement in writing
No input tax credits for purchasers
Calculating the margin
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TRAPS WHEN SELLING PROPERTY AND AGREEING THE
SUPPLY IS A GOING CONCERN
Conditions to be satisfied
Make sure both parties agree in writing
Carrying on an enterprise
All things necessary must be supplied
Supplier needs to carry on the enterprise until the day of the supply
Be wary of a ‘supply of a going concern’ which would
otherwise be input taxed
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CESSATION OF REGISTRATION
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EXPENSIVE GST TRAPS IN REAL ESTATE
TRAPS IN DETERMINING WHETHER THERE IS A GST LIABILITY
Introduction
The first issue to be resolved with any sale of real estate is whether there is a
GST liability. If there is, and none is collected from the purchaser and remitted to
the Taxation Office (ATO), this is going to be an expensive exercise down the
track when the ATO finds out.
However, it should be noted there is only a liability to GST where:
-
an enterprise is being carried on and
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the annual turnover is at least $75,000 ($150,000 for non-profit bodies) and
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a taxable supply is made in the course of or furtherance of the enterprise.
What is an enterprise
As mentioned above, there is no GST liability on any transaction unless an
enterprise is being carried on.
Enterprise is defined at section 9-20 of the GST Act to include an activity or
series of activities done:
-
in the form of a business (including any profession, trade, employment,
vocation or calling);
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in the form of an adventure or concern in the nature of trade; or
-
on a regular or continuous basis, in the form of a lease, licence or other grant
of an interest in property.
An enterprise does NOT include activities done by an individual or partnership of
individuals without reasonable expectation of profit or gain.
GST Determination GSTD 2006/6 states an adventure or concern in the nature
of trade includes a commercial activity that does not amount to a business but
which has the characteristics of a business deal. However, the sale of the family
home, a private car or other private assets is not, without other factors being
present, an adventure or concern in the nature of trade.
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The ATO has issued Miscellaneous Taxation Ruling MT 2006/1 which
discusses when it considers an enterprise is being carried on for GST purposes.
At paragraph 270 of that ruling, the ATO states that in isolated transactions where
land is sold that was purchased with the intention of resale at a profit, the ATO
considers these activities to be an enterprise.
This would be so whether the land was sold as it was when it was purchased or
whether it was subdivided before sale. The ATO regards this to be in the form of
an adventure or concern in the nature of trade.
The ruling gives a number of examples.
Example – GST payable
Stefan and Krysia discover that the local council has recently changed its bylaws to allow for smaller lots in the area. They decide to take advantage of the
by-law change. They purchase a block of land with the intention to subdivide it
into two lots and to sell the lots at a profit. They carry out their plan and sell both
lots of land at a profit.
Their activities are an enterprise being an adventure or concern in the nature of
trade. Their activities are planned and carried out in a businesslike manner.
Example – GST payable
Tobias finds an ocean front block of land for sale in a popular beachside town.
He devises a plan to enable him to afford to live there. He decides to purchase
the land and to build a duplex. He plans to sell one of the units and retain and
live in the other. The object of his plan is to enable him to obtain private
residential premises in an area that would otherwise be unaffordable for him.
Tobias carries out his plan. He purchases the land, and lodges the necessary
development application with the local council. The development application is
approved by the council, Tobias engages a builder and has the duplex built. He
sells one unit, and lives in the other.
His intentions and activities have the appearance of a business deal. They are
an enterprise.
Further, there is a reasonable expectation of profit or gain as his plan has
enabled him to be able to keep and live in one of the units.
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Example – GST payable
Prakash and Indira have lived in the same house on a large block of land for a
number of years. They decide that they would like to move from the area and
develop a plan to maximise the sale proceeds from their land.
They consider their best course of action is to demolish their house, subdivide
their land into two blocks and to build a new house on each block.
Prakash and Indira lodge the necessary development application with the local
council and receive approval for their plan. They arrange for :






their house to be demolished ;
the land to be subdivided ;
a builder to be engaged ;
two houses to be built ;
water meters, telephone and electricity to be supplied to the new houses ;
and
a real estate agent to market and sell the houses.
Prakash and Indira carry out their plan and make a profit. The activities are an
enterprise as a number of activities have been undertaken which involved the
demolition of their house, subdivision of the land and the building of new houses
Example – GST not payable
Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.
They decide to sell part of the land and apply to subdivide the land into two 1.25
hectare lots. The survey and subdivision are approved. They retain the
subdivided lot containing their house and the other is sold.
Ursula and Gerald are not carrying on an enterprise and are not entitled to an
ABN in respect of the subdivision as the subdivision and sale are a way of
disposing of some of the land on which their home is situated. It is the mere
realisation of a capital asset.
Example – GST not payable
A number of years ago Elsie and Karin purchased some acreage on which to
keep their horses, which they rode on weekends. Karin now accepts a job
overseas and they decide to sell the land.
They put the land on the market with little success. The local real estate agent
then advises that it would be easier to sell the land if it was subdivided into
smaller lots. They arrange for a development application to be lodged with the
local council and obtain approval to subdivide the land into nine lots. Elsie and
Karin arrange for the land to be surveyed. The land has a road running along its
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boundary and has some existing services such as electricity. Only minimal
activity is required to subdivide the land.
The sale is not considered to be an enterprise and is the mere realisation of a
capital asset.
Example – GST not payable
Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years.
They live a self-sufficient lifestyle. As a result of a number of circumstances
including their advancing years, Oliver's deteriorating health, growing debt and
drought conditions they decide to sell.
Oliver and Eloise put Flat Out on the market and are unable to find any buyers.
They then receive advice from the real estate agent that they may be able to sell
smaller portions of it. They initially arrange for council approval to subdivide part
of Flat Out into 13 lots. They undertake the minimal amount of work necessary
and sell the lots. They continue to live on the remaining part of their property.
A few years later Oliver and Eloise decide to sell some more land to meet their
increasing debt obligations. They arrange for council approval to subdivide
another part of Flat Out into four lots. Again they undertake the minimal amount
of work necessary to enable the lots to be subdivided and arrange for the real
estate agent to sell these lots.
Three years later Oliver's and Eloise's personal and financial circumstances are
such that they again decide to sell some more land. They arrange for further
council approval to subdivide part of their remaining property into three lots.
Again they undertake the minimal amount of work necessary to enable the lots to
be sold and arrange for the real estate agent to sell the lots.
Over the years involved Oliver and Eloise have subdivided 30 % of Flat Out.
They continue to live on the remaining part of their property.
Oliver and Eloise are not carrying on an enterprise. They are merely realising a
capital asset. In this example the following factors are relevant :


There is no change of purpose or object with which the land is held - it has
remained their home.

There is no coherent plan for the subdivision of the land - the subdivision
has been undertaken in a piecemeal fashion as circumstances change.

A minimal amount of work has been undertaken in order to prepare the
land for sale. There has been no building on the subdivided land. The only
work undertaken was that necessary to secure approval by the council for
the subdivision.
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Example – GST not payable
Astrid and Bruno live on a large suburban block. The council has recently
changed their by-laws to allow for smaller lots in their area. They decide to
subdivide their land to allow their only child, Greta, to build a house in which to
live.
They arrange for the approval of the subdivision through the council, for the land
to be surveyed and for the title of the new block to be transferred to Greta. She
pays for all the costs of the subdivision and the cost of her new house.
Astrid and Bruno have not carried on an enterprise and are not entitled to an
ABN in respect of the subdivision. It is a subdivision without any commercial
aspects and is part of a private or domestic arrangement to provide a house for
their daughter.
GST Ruling GSTR 2009/2 states the phrase “in the course or furtherance of an
enterprise” is broad enough to cover any supplies made in connection with an
enterprise.
The ruling also has some examples. One is reproduced below.
Example
Two friends, Caroline and Shaun, purchase a block of land as tenants in
common in equal shares with the intention to subdivide the land, to construct two
houses and to take a house each.
Caroline's intention in entering into the arrangement is to use the house she
acquired as her primary residence. Caroline is not carrying on an enterprise in
these circumstances. In Caroline's case, the purpose of the arrangement is
private and domestic in nature.
Shaun's intention in entering into the arrangement is to sell the house he
acquires for a profit. Shaun is carrying on an enterprise in these circumstances
because the activities are business activities or activities in the conduct of a profit
making undertaking or scheme and therefore an adventure or concern in the
nature of trade.
Shaun and Caroline agree that Shaun will take Lot 1 which includes House 1 and
Caroline will take Lot 2 which includes House 2.
Caroline and Shaun give effect to the partition, after the completion of
construction, by Shaun transferring his interest in Lot 2 to Caroline and by
Caroline transferring her interest in Lot 1 to Shaun.
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The transfer by Caroline of her interest in Lot 1 to Shaun is not in the course or
furtherance of an enterprise she carries on. Caroline's transfer of her interest in
Lot 1 to Shaun does not have any connection with an enterprise that she carries
on.
In contrast, the transfer by Shaun of his interest in Lot 2 to Caroline is in the
course of furtherance of an enterprise he carries on. Shaun's transfer of his
interest in Lot 2 to Caroline is connected with his enterprise of selling new
residential premises for profit.
Do you have to register for GST if the sale of a capital asset
brings your turnover above the registration turnover threshold
In an ATO factsheet at https://www.ato.gov.au/Business/GST/In-detail/Rules-forspecific-transactions/Business-asset-transactions/GST-and-the-disposal-ofcapital-assets/ , the ATO states in working out your projected GST turnover, you
do not include amounts received for capital asset disposals ie. where no
enterprise is being carried on.
Thus entities that are not registered for GST and are not carrying on an
enterprise, are not required to register for GST merely because the sale
proceeds of a capital asset is $75,000 or more.
Can you deregister for GST before the sale?
GSTA TPP 070 states a party to a contract for the sale of a commercial property
who deregisters for GST before settlement is not required to pay GST. However,
the Commissioner will not cancel the party's registration unless certain
requirements are satisfied.
The details of the advice are reproduced below.
Explanation
The Commissioner must cancel an entity's registration if the entity is not required
to be registered. An entity is not required to be registered if its projected annual
turnover is at or below the turnover threshold. In calculating projected annual
turnover, section 188-25 provides that any supplies made, or likely to be made, by
way of transfer of a capital asset are disregarded.
The disposal of a single asset in an isolated transaction may amount to an
enterprise if it is an activity in the form of an adventure in the nature of trade. For
example, if a commercial property is purchased and refurbished for the purpose
of resale at a profit, the commercial property is not a capital asset.
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Commercial property is not a capital asset
If the commercial property is not a capital asset, the Commissioner is not required
to cancel the supplier's registration. The value of the supply is included in the
supplier's projected annual turnover, which is likely to exceed the registration
turnover threshold. The supplier is required to be registered. The GST payable is
attributable to the tax period where any part of the consideration is received,
which is likely to be the period in which settlement occurs. The supplier is required
to give the recipient a tax invoice if requested, unless the supplier chooses to use
the margin scheme.
Commercial property is a capital asset
If the commercial property is a capital asset, and the value of all other projected
supplies is less than the registration turnover threshold, the supplier is not
required to be registered.
The Commissioner’s view is that the requirements for a taxable supply do not
need to be tested until settlement. As the supplier is not registered or required to
be registered at settlement, no taxable supply is made. Therefore no GST is
payable and no tax invoice must be issued.
Adjustments
If the supplier issues an invoice or receives partial consideration for the supply
before cancelling its registration, the supplier must examine at that time if the
supply is a taxable supply. As the requirements of section 9-5 are satisfied at that
time, the supplier should attribute the GST payable to the period in which the
invoice issued or the payment was received.
Deregistration may be an event which has the effect of causing the supply to stop
being a taxable supply within the meaning of paragraph 19-10(1)(c). The
Commissioner views a cancellation of the supplier's registration before supply is
made as an adjustment event under paragraph 19-10(1)(c). Therefore, if the
supplier attributes GST payable on the supply to a tax period prior to deregistration, the supplier is entitled to a decreasing adjustment in its final tax
period.
Conclusion
From the above, it is clear that
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there is no GST liability unless the supply is in the course of carrying on an
enterprise
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the carrying on of an enterprise is far wider than the carrying on of a business
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Mum and Dad can be subject to GST on the sale of a block of land where the
amount received is $75,000 or more and the necessary profit-making intent is
present
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the intention of resale at a profit is necessary to catch isolated sales of land.
Therefore ensure documentation negates this if required.
TRAPS IN DETERMINING WHETHER A PROPERTY BEING SOLD
IS RESIDENTIAL PREMISES OR NOT
As mentioned, it is only where an enterprise is being carried on, and the annual
turnover is over $75,000, that GST must be remitted on any taxable supplies.
Section 9-5 of the GST Act provides an entity (which includes individuals) makes
a taxable supply if:




it makes a supply for consideration; and
the supply is made in the course or furtherance of an enterprise that it
carries on; and
the supply is connected with Australia; and
it is registered, or required to be registered.
Assuming an enterprise is being carried on, in the context of property sales,
taxable supplies would include:
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the sale of land
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the sale of new residential premises (discussed later below)
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the sale of commercial premises (including commercial residential premises
such as motels).
However, taxable supplies generally do not include the sale of other residential
premises as these are input taxed. The seller does not have to charge GST on
these sales. However, note that GST on expenses associated with the supply
eg. legal and accounting costs, cannot be claimed back as input tax credits. They
would be included in the cost base of the asset where CGT is applicable.
What are residential premises?
Residential premises are defined at s 195-1 as land or a building that:
(a)
is occupied as a residence or for residential accommodation; or
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(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.
Section 40-65(1) of the GST Act provides:
A sale of real property is input taxed, but only to the extent that the
property is residential premises to be used predominantly for residential
accommodation (regardless of the term of occupation). (Underline
emphasis added.)’
Purchaser’s intention not relevant
The purchaser's intention not to use premises for residential accommodation is
not relevant to the determination of whether the premises are residential
premises.
This follows the ATO’s win in the case of Sunchen Pty Ltd v FCT [2010] FCAFC
138. The Full Federal Court was required to determine whether the property, at
the time of its supply to Sunchen (as purchaser), was residential premises ‘to be
used predominantly for residential accommodation’, within the meaning of s 4065(1) of the GST Act. Sunchen had acquired a residential property that it
intended to demolish and replace with new residential units.
The property was purchased with a development application that related to the
construction of 10 units. The taxpayer claimed input tax credits in respect of the
property, which the Commissioner disallowed under s 40-65 of the GST Act.
Sunchen argued that the question of whether residential premises are to be used
predominantly for residential accommodation is to be determined principally by
reference to the subjective intentions of the purchaser.
The Commissioner argued that whether premises are ‘to be used predominantly
for residential accommodation’ should be determined objectively by reference to
the physical characteristics of the property as at the date of acquisition.
The Full Federal Court unanimously held for the Commissioner.
Since that case, the ATO has issued GST Rulings GSTR 2012/5 and GSTR
2012/6 which confirm its approach above and also the ATO’s views on what are
residential premises.
Sale of a rental property
Note that the sale of a residential rental property is regarded as a supply in the
course of an enterprise of leasing the property. However, generally it will be an
input taxed supply with no GST liability.
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Sale of the private home
The sale of a private home would not normally be regarded as in the course of
carrying on an enterprise and would therefore generally be outside the GST net.
Supplies requiring apportionment
GSTR 2012/5 states that the value of a supply of premises that includes
residential premises to be used predominantly for residential accommodation
needs to be apportioned to the extent that part of the premises is not residential
premises to be used predominantly for residential accommodation.
Example – Residential premises partly converted for business use
Shannon decides to partly modify her house to use in her profession as a doctor.
She modifies an area of the house to provide office and consulting room space,
an operating theatre, a waiting room and storage for the business. A sealed car
park is also added to the property. Significant physical modifications are made to
these areas, including the removal and alteration of walls, and the addition of
lighting, hygiene facilities and security to meet industry standards. The existing
lounge room is used as the patients' waiting room. An existing bedroom is used
for storage. No physical modifications are made to the lounge room or bedroom.
The modifications result in the part of the premises consisting of the office,
consulting room, operating theatre and car park no longer being residential
premises to be used predominantly for residential accommodation. Objectively,
part of the premises is still designed predominantly for residential
accommodation, comprising bedrooms (including the bedroom used for storage),
bathroom, kitchen, living room, lounge room and gardens.
If Shannon later sells or leases the premises, she will need to apportion the
value of the supply between the taxable and input taxed parts of the supply.
Example – No apportionment necessary
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.
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The ruling states 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.
The sale of vacant land
Vacant land cannot be residential premises
In GSTR 2012/5, the Commissioner states he regards the residential premises as
the land and the residential building on the land, ie the land and building are seen
as a ''package''.
This was disputed in the earlier case of Vidler v FCT [2010] FCAFC 59. The
taxpayer had bought a property in Ipswich in Queensland in August 2004 for $1
million and sold it in December 2004 for $2.3 million. The property consisted of
2.7 hectares of vacant land which was zoned residential low density. At the time
of sale, the property was connected to an electric power supply but was not
connected to (but was able to be connected to) gas, water and sewerage
infrastructures at the boundaries of the property.
The taxpayer sold the property in the same condition as he had acquired it
several months earlier, ie. as vacant residential land. The taxpayer argued the
supply of the land by him was an input taxed supply under the GST Act on the
basis the property was "residential premises". However he lost the case. The Full
Federal Court said that vacant land, of itself, does not provide shelter and basic
living facilities, and cannot, therefore, be occupied as a residence or for
residential accommodation.
The sale of vacant land is therefore a taxable supply when sold in the course of
carrying on an enterprise. There will generally be GST on the sale and input tax
credits available to the purchaser where the land is acquired for a creditable
purpose.
Land supplied with a building
The GST Act does not restrict the area of land that can be included in residential
premises. It is a question of fact and degree in each case whether, and to what
extent, the land forms part of the residential premises.
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The ATO states that 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 enjoyed in conjunction with the residential building.
Leasing holiday apartments
The physical characteristics of holiday houses, apartments and units indicate that
they are residential premises to be used predominantly for residential
accommodation and there would be no GST on their supply.
Issue of a call option
The ATO has issued IDS on the GST treatment of the issue of a call option. The
facts are the entity is a supplier of real property and is registered for GST. The
entity grants the purchaser a call option to purchase a property for a specific
amount up until a specified date. The supply of the call option is connected with
Australia and is made in the course or furtherance of the entity's enterprise.
The purchaser paid 5% of the purchase price of the property to enter into the call
option. The purchaser may sell the call option to another entity.
ATO ID 2005/182 states the entity makes a taxable supply when it grants a call
option that entitles the grantee to purchase real property, the supply of which
would be a taxable supply.
ATO ID 2005/183 states the entity makes an input taxed financial supply when it
grants a call option that entitles the grantee to purchase real property, the supply
of which would be an input taxed supply of residential premises.
ATO ID 2005/184 states the entity makes a GST-free supply when it grants a call
option that entitles the grantee to purchase real property, the supply of which
would be a GST-free supply eg. a GST free supply of farmland under section 38480 of the GST Act.
TRAPS WITH THE SALE OF NEW RESIDENTIAL UNITS – THE
CHANGE OF USE RULES
The sale of new residential premises by a registered entity (such as a builder or
developer) in the course or furtherance of an enterprise it carries on will be a
taxable supply.
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New residential premises
Residential premises are ''new residential premises'' if they:
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have not previously been sold as residential premises and have not previously
been the subject of a long-term lease
-
have been created through ''substantial renovations'' of a building ( a
renovation in which all, or substantially all, of the building is removed or
replaced); or
-
have been built, or contain a building that has been built, to replace
demolished premises on the same land.
However, where the residential premises are sold after five or more years of
having been rented continuously, they are not regarded as new residential
premises and the sale is an input taxed supply.
Strata titling
A building may comprise units for which no separate title exists. GSTR 2012/5
states that the process of strata titling of apartment blocks, where the land with
the apartment block has previously been sold as residential premises or been the
subject of a long-term lease, by itself, does not create new residential premises.
In these circumstances, when the newly strata titled units are subsequently sold
they are not regarded as sales of new residential premises.
Sale of new residential premises and changes in creditable
purposes
The sale of new residential premises is a taxable supply whereas the renting out
of residential premises is an input taxed supply, as is the sale of residential
premises which are not 'new'. Consequently input tax credits are available where
residential premises are constructed for the purpose of sale but not where they
are constructed for the purpose of renting.
Where residential premises built for sale are subsequently rented out, there is a
change in creditable purpose. Changes in the extent of creditable purpose may
lead to adjustments under Division 129 of the GST Act.
Division 129 provides for adjustments in relation to things in tax periods that are
adjustment periods. The number of adjustment periods that relate to a thing are
determined by the GST-exclusive value of the acquisition.
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The number of adjustment periods for acquisitions (that do not relate to business
finance) are set out in the following table.
GST-exclusive value of the
acquisition
Adjustment periods
$5,000 or less
Two
$5,001 to $499,999
Five
$500,000 or more
Ten
GSTR 2009/4 explains the Commissioner's view of when adjustments arise. The
ruling states the Commissioner accepts there can be a dual purpose where new
residential premises are rented out at the same time they are available for sale.
How the change of use adjustment works
The Commissioner in GSTR 2009/4 accepts that a thing may be applied partly to
a creditable purpose and partly to a non-creditable purpose.
The Commissioner accepts that developers constructing residential premises may
have a dual planned use for the premises - that is, they may intend to lease the
property for some time before sale. In addition, their plans may change over time
due to factors such as market conditions. The premises can be applied to
creditable and non-creditable purposes at the same time.
The ruling states an entity may apply new residential premises for the creditable
purpose of sale where the premises are being held for sale as part of the entity's
enterprise, whilst concurrently applying the new residential premises for the noncreditable purpose of making input taxed supplies of residential premises by way
of lease under section 40-35.
Example – premises held for purposes of sale and rental at same time
The ruling states for example, an entity may construct new residential premises
for the purpose of sale. The premises may continue to be held for sale as part of
the entity's enterprise of constructing new residential premises for sale. However,
due to a downturn in the property market, the entity may also make the premises
available for lease for a period until the market conditions improve. This will be a
dual application of the premises during the relevant period being the period of
time between acquisition of the thing and the end of the adjustment period.
The ruling states an apportionment between the different applications will be
necessary to determine the extent to which the new residential premises have
been applied for a creditable purpose during the period of time that is relevant for
step 1 of the method statement in subsection 129-40(1).
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Proof of dual purpose
The Commissioner’s view is that where there is a dual purpose, input tax credits
may be available to the extent they relate to the planned taxable supply of the
premises.
However, the ATO must be satisfied of this dual purpose and it is up to the
taxpayer to prove it to the ATO. If the dual purpose cannot be proved, an
adjustment will have to be made to return all input tax credits claimed in relation to
the premises being leased out.
Change of use adjustments
If an entity is required to apportion its creditable purpose it must do so by applying
a method that is fair and reasonable in the circumstances of each case.
Example – Partly input taxed and partly creditable planned use
Kim is a property developer. Kim recognises that the market for selling new
residential premises has slowed significantly but is expected to pick-up in
approximately two years. She decides to build new residential premises for sale
as part of her property development enterprise but makes a decision to lease the
premises until the market improves. An objective assessment of the facts and
circumstances supports this dual planned use. In particular, Kim's business plan
at the time of making the acquisition and the loan application documents reflect
this intended use of the premises.
The acquisitions Kim makes in constructing the new residential premises are for
two purposes - being the making of an input taxed supply of residential premises
by way of lease and a taxable supply of new residential premises.
Kim's acquisitions are made in carrying on her enterprise and are for a creditable
purpose except to the extent they relate to the making of the input taxed
supplies. That is, the acquisitions are partly creditable. Kim will need to
determine the extent of creditable purpose using a fair and reasonable method of
apportionment.
Formula in ruling
A formula provided in the Ruling is
"Consideration for the taxable supply of the premises" divided by
"consideration for the taxable supply of the premises plus consideration for
the input taxed supplies of residential premises by way of lease"
19
Example – Partly input taxed and partly creditable planned use
Jane is registered for GST and constructed new residential premises for sale and
was entitled to full input tax credits on her acquisitions. However, because the
market for new premises was slow Jane leased the premises for six months
before the premises were finally sold. Jane received $15,000 in rent over the six
months. The premises were sold for $500,000. There had been no private or
domestic use of the premises.
At the end of the next adjustment period following the sale, Jane calculates the
extent of creditable purpose using the formula above as follows:
$500,000
$500,000 + $15,000
= 97.09%
Jane has an increasing adjustment of 100% - 97.09% = 2.91%.
The change of use rules were considered in AAT Case [2009] AATA 569, Re
GXCX and FCT where the AAT accepted the taxpayer held two concurrent
intentions with respect to 22 rented apartments. In the short term the taxpayer
intended to rent the apartments but in the medium to long term the intention was
to sell the apartments. The time at which the apartments would be sold was not
set but would be determined by market conditions. The apartments would be sold
when the market provided the opportunity for the holding company to realise the
anticipated substantial capital growth in the future.
The AAT held however that an intention to sell in the future did not amount to an
"actual application" for the purposes of the method statement in section 129-40 of
the GST Act.
The Tribunal found the application of the acquisitions during the relevant period
was entirely for a non-creditable purpose.
The ATO said the decision is consistent with its view in GSTR 2009/4 that an
intention to sell new residential premises in the future, on its own, does not mean
that the new residential premises are being held for the purpose of sale and will
not constitute an application of the new residential premises for the creditable
purpose of sale, for the purposes of Division 129 of the GST Act.
Record keeping and evidentiary requirements
Where there is a dual purpose, input tax credits may be available to the extent
they relate to the planned taxable supply of the premises.
20
It can be seen however that GSTR 2009/4 and the GXCX case highlight how
important it is to evidence a dual purpose where one is claimed for Division 129
purposes.
At paragraph 45 of GSTR 2009/4, it is stated that although any one factor may not
be sufficient on its own, the following are some examples of objective facts and
circumstances that the Commissioner would expect to be present to conclude that
premises are being held for the purposes of sale (where they are also being
rented out).
In any particular case, the Commissioner would expect a preponderance of the
following factors to support a conclusion that premises are being held for the
purposes of sale:
-
marketing of the premises for sale, such as, listing the premises for sale
with a real estate agent or agents, advertising the premises for sale in
relevant publications or via Internet advertising websites for real property,
arranging 'open for inspection' times, and showing prospective buyers
through the premises;
-
income tax treatment of the development as trading stock rather than as a
capital asset (since treatment as a capital asset would imply that the
premises are being held for investment or leasing purposes);
-
finance documents including loan applications and documentation provided
as part of the loan application process supporting the planned sale of the
premises;
-
business plans, feasibility studies or minutes of meetings supporting the
holding of the premises for sale;
-
accounting reports and financial statements supporting the holding of the
premises for sale;
-
past activities of the entity in carrying on the enterprise of selling new
residential premises; and
-
in the case of a building or complex made up of multiple stratum units,
actual arm's length sales of some of the listed units (although, in some
cases this may be countered by evidence that the entity only intended to
sell some of the premises while intending to lease others).
Similarly, evidence that the premises has been applied, to some extent, in relation
to making input taxed supplies includes, for instance:
-
business plans, feasibility studies or minutes of meetings demonstrating
that the entity has determined to use the premises for lease;
-
finance documents including loan applications and documentation provided
as part of the loan application process supporting the intention to lease the
premises;
21
-
periods of actual leasing of the premises; and
-
marketing of the premises for lease.
The ruling states it is considered that the period of time for which premises remain
unsold or for which the premises are intended to be held by the entity is a relevant
factor in determining whether the premises are being held for the purpose of sale.
In particular, if the premises are intended to be sold within a short timeframe the
ruling states this supports a finding that the premises are being held for the
purpose of sale.
Alternatively, if the premises are intended to be held for a substantial period of
time or in fact remain unsold for an extended period of time this may suggest that
the entity is holding the premises as an investment asset or for some other
purpose. This is a question of fact in each case and must be weighed up with the
other available evidence.
TRAPS WHEN SELLING PROPERTY AT AN AUCTION AND
COMPLETING THE CONTRACT
Sometimes mistakes are made when a contract for sale is drafted especially
where there are misunderstandings about whether a sale price is GST inclusive or
not. The two cases below concerned sale at an auction.
Sale at an auction - was the purchase price in the contract GSTinclusive or not
In Ashton & Anor v Monteleone & Ors [2010] NSWSC 258 the NSW Supreme
Court was asked to determine whether the vendors were entitled to rectify a
contract of sale for a property by adding GST to the sale price.
Joseph Monteleone was the successful bidder at an auction of a commercial
residential property. His successful bid was $1,060,000.
The sale was supposed to be GST inclusive ie. the $1,060,000 + GST. However
the vendors’ solicitor thought that the $1,060,000 already included the GST and
this is the figure he put in the contract. He did not include any special condition
overriding cl 13.2 of the standard terms which provided:
“Normally, if a party must pay the price or any other amount to the other party
under this contract, GST is not to be added to the price or amount.”
22
The purchaser argued that he thought the amount he paid included GST and that
he did not have to pay an additional amount for GST.
On the evidence presented, the NSW Supreme Court was satisfied that the
auctioneer had made it clear that the bid price would be plus GST. The Court
ordered that the contract be rectified to accord with the vendors' intention.
The Court was satisfied that rectification could be ordered, as it was established
that both sides knew, when they entered into the contract, that their common
intention was to provide for a price consisting of the successful bid amount plus
GST.
This case is however to be contrasted with Tam v Mannall & Ors [2010] NSWSC
250 which had similar facts but this time it could not be proved that the auctioneer
had made it clear that the bid price would be plus GST.
The NSW Supreme Court held for the purchaser that the purchase price was
GST-inclusive. The Court stated that for rectification to be ordered, it must be
established that both sides knew, when they entered into the contract, that their
common intention was to provide for a price consisting of the successful bid
amount plus GST. Having regard to the evidence, the Court held the vendors
failed to prove this common intention existed.
TREATMENT OF FORFEITED DEPOSITS
Division 99 of the GST Act provides that GST does not apply to the taking of a
deposit as security for the performance of an obligation (unless the deposit is
forfeited or is applied as consideration). If the deposit is forfeited or is applied
towards the consideration for the supply, GST is paid on the amount of the
deposit. The GST is attributed to the tax period in which the deposit is forfeited or
is applied towards the consideration.
In GSTR 2000/28, the Commissioner states that Division 99 applies to a deposit
paid under a standard land contract.
Treatment of forfeited deposits
In GSTR 2000/28 at para 95, the ATO states if a vendor defaults under a
standard land contract and the deposit is refunded to the purchaser, there are no
GST consequences. There is no taxable supply as neither the purchaser nor the
vendor has made a supply for consideration, as required by paragraph 9-5(a). Nor
is there a creditable acquisition under section 11-5.
However, where the purchaser defaults and the vendor is paid the deposit, the
vendor is regarded as having made a supply for consideration.
23
If that supply is a taxable supply having regard to all the other requirements of
section 9-5 and is not otherwise GST-free or input taxed, the vendor is required to
attribute the GST payable to the tax period during which the deposit is forfeited –
see the High Court decision in Federal Commissioner of Taxation v. Reliance
Carpet Co Pty Ltd [2008] HCA 22.
Example – forfeited deposit
Chuck enters into a standard land contract for the sale of residential property to
Tanya. The property is not new residential property and the sale will be treated
as an input taxed supply. Pursuant to the terms of the contract Tanya pays a
deposit of 10% of the agreed purchase price.
Subsequently, Tanya defaults and the deposit is forfeited to Chuck. Upon
forfeiture, the deposit is treated under section 99-5 as consideration for Chuck's
earlier supply of a right to receive a supply of residential premises.
As the forfeited deposit is consideration for a supply of a right to receive a supply
of residential premises that would have been input taxed, paragraph 9-30(2)(b)
operates to ensure that the supply of rights made by Chuck upon entry into the
contract is also input taxed.
PART PAYMENTS
A part payment is quite different to a deposit
In GSTR 2006/2, it is stated that in analysing contracts, the courts have
commonly described a deposit as an 'earnest' that is paid 'to bind the bargain'.
A payment made as an earnest has been said to be 'a portion of something, given
or done in advance as a pledge of the remainder'.
This can be distinguished from paying the first instalment of the total price in a
purchase contract, which is to be paid over a period of time, that is, an initial
instalment payment, or a part payment.
GST treatment of part payments
The GST attribution rules will apply to part payments. Therefore if the entity
returns on a cash basis, it will remit GST on each part payment received. If it
returns on an accruals basis, it will remit GST on the full consideration as soon as
the first part payment is received.
24
In ATO ID 2004/181, the ATO considered the GST and attribution rules on a
taxable supply of land where consideration was received on an instalment basis.
The entity was a property developer. The entity was registered for GST and
accounted for GST on an accruals basis. The entity made a taxable supply of
land to a purchaser. The entity and the purchaser signed a contract and under the
terms of the contract, the purchaser agreed to pay the purchase price by making
several equal, monthly instalments over an extended period of time.
The ID states the property developer was required to attribute all the GST payable
on its taxable supply of land to the tax period in which it received the first
instalment payment from the purchaser.
Division 99 of the GST Act does not apply to change the attribution rules in this
case as the first instalment is not a deposit taken as security for the performance
of the obligations under the contract.
Supplies and acquisitions made on a progressive or periodic
basis
Part payments must be distinguished from supplies and acquisitions made on a
progressive or periodic basis. These are attributed in accordance with Division
156.
Division 156 applies where a taxable supply or creditable acquisition is made for a
period; or on a progressive basis and, in either case, consideration is made:
-
on a progressive basis; or
-
on a periodic basis.
An example would be payments under a three year lease.
TRAPS WITH VENDOR FINANCE
The case of AAT Case [2013] AATA 496, Re Rod Mathiesen Truck Hire Pty
Ltd as trustee for the Mathiesen Family Trust highlights a trap with the
provision of vendor finance.
The Trust returned on a cash basis. It was selling vacant land for $3.177m plus
GST. At some time after entering into the contract, the purchaser notified the
Trust that it was unable to pay the whole amount of the purchase price at
settlement.
25
On settlement on 16 May 2008, the Trust and the purchaser entered into a
Settlement Balance Facility Agreement and the Trust received from the purchaser
just over $2m. Under the Agreement, the Trust agreed to lend the purchaser
some $1.498m by way of an adjustment on settlement. The transfer instrument
recorded the consideration of $3.495m.
The Trust did not receive any amount of the balance owing or accrued interest
from the purchaser by 30 June 2008 as required under the Settlement Balance
Facility Agreement.
On 23 February 2009, the Trust and the purchaser entered into a Deed of
Variation - Settlement Balance whereby both parties agreed that in place of the
purchaser's obligations contained in clauses of the Settlement Balance Facility
Agreement, the purchaser would pay the Trust $500,000 within 21 days and
transfer to the Trust 3 developed lots. The purchaser paid $500,000 to the Trust
by cheque on 23 February 2009. The Trust was notified by letter dated
12 May 2011 that Westpac was exercising its power of sale as mortgagee in
possession over the property. The Trust was notified by letter dated 18 May 2012
that there would be insufficient funds available from the sale of the property to
distribute any amount to the Trust. The Trust did not receive any developed lots
from the purchaser.
The Commissioner assessed the Trust on the basis that it received full
consideration on the transfer of the Property in the 2008 tax year in part through
the vendor finance agreement.
The Trust argued that it was only liable for GST to the extent of 2 payments (of
$2m and $1.4m) actually received for the property, made in the 2008 and 2009
tax periods, and amounting to less than the full consideration.
The AAT held that, for the purposes of the GST Act, all of the consideration in
relation to the sale of a property was received by the taxpayer at the time of
settlement on 16 May 2008.
The AAT considered that the Agreement clearly provided for a loan from the Trust
to the purchaser. The AAT stated the dealings between the Trust and the
Purchaser were not unusual. They consisted of a contract for the sale of land (in a
usual REIQ form), a loan agreement whereby the vendor advanced money to the
purchaser (commonly referred to as vendor finance), and a mortgage over the
subject property to secure repayment of the loan. Each was a distinct dealing and
there was no reason, from a business perspective or otherwise, not to recognise
them as such.
The ATO in its Decision Impact Statement said the findings made by the Tribunal
were consistent with the principles set out in its Rulings that:

for a taxpayer that accounts on a cash basis, attribution of GST or an input
tax credit is determined by the meaning of "consideration" and whether
"consideration" was received or provided and not by reference to the
ordinary meaning of "cash";
26

in a vendor financing arrangement, consideration is received by a supplier
on set-off of the loan against amounts owing to the supplier by the
purchaser;

the postponement of payment of a debt does not constitute a loan where
the recipient remains obliged to pay for the supply under the original supply
contract.
SOME TRAPS IN USING THE MARGIN SCHEME
Introduction
Those registered for GST and making taxable supplies can reduce their GST
liability by choosing to calculate GST on the supply of real property on the margin
of that supply. Under the margin scheme, GST is calculated on the supply as
1/11 of the margin on the sale.
The margin scheme is only available on a taxable supply of real property made
by:
-
selling a freehold interest in land
-
selling a stratum unit, or
-
granting or selling a long-term lease,
Generally, the margin is the tax inclusive sale price less the original purchase
price. However, if the property was held at 1 July 2000, the margin is the GST
inclusive sale price less the value of the property at 1 July 2000 (a valuation of the
property at that date is necessary).
Example
Don, a property developer, is registered for GST. This year, he bought land for
$200 000. The supply of the land to him was not a taxable supply.
He sold the land six months later for $288,000. He chose to apply the margin
scheme to his sale of the land.
Under the margin scheme, the margin for the supply of the land is $88,000
($288,000 – $200,000). The GST payable on the margin is $8,000 (1/11 of
$88,000).
27
Restriction on use of the margin scheme
The margin scheme cannot be used if the entire freehold interest, stratum unit or
long-term lease was acquired through a supply that was ineligible for the margin
scheme.
“Ineligible for the margin scheme” means a taxable supply on which the GST was
worked out without applying the margin scheme – s 75-5(3).
This requirement means effectively that the margin scheme can only be used
where no GST was charged when the real property was acquired ie when the
property was:
-
acquired from a supplier who used the margin scheme
-
acquired from an entity that was not registered or required to be registered
-
supplied in a GST-free supply
-
supplied in an input taxed supply; or
-
acquired through inheritance and certain conditions are satisfied.
Note also that with effect from 9 December 2008, the rules:

ensure that a supply that is ineligible for the margin scheme continues to be
ineligible for the margin scheme after it is supplied as part of a GST-free sale
of a going concern, as GST-free farmland, or it is supplied to a registered
associate for no consideration. This is achieved by specifying that a supply is
ineligible for the margin scheme if the previous supplier acquired the entire
interest through a taxable supply on which the GST was worked out without
applying the margin scheme

provide that where real property is acquired GST-free as part of a going
concern, GST-free farmland, or from a registered associate for no
consideration, the calculation of GST on the subsequent sale of that property
under the margin scheme should also account for the value added by the
previous owner.
Need for agreement in writing
The supplier and the recipient of a taxable supply of real property need to agree
in writing to apply the margin scheme.
The written agreement must be made:
-
on or before the making of the supply (usually settlement); or
-
within such further period as the Commissioner allows.
28
No input tax credits for purchasers
Purchasers of real property and premises where GST on the supply was
calculated on the margin cannot claim input tax credits on the acquisition –
section 75-20.
Calculating the margin
The margin for the supply is not:
-
the profit margin. Unlike an accounting profit margin, the margin for the supply
for GST purposes does not take into account costs incurred in constructing a
building or subdividing land
-
the consideration for the sale less the valuation of the real property. A
valuation can normally only be used to calculate the margin where the
property was acquired before 1 July 2000, or
-
calculated in the same manner as a capital gain under the Income Tax
Assessment Act 1997. This means that it is possible for there to be GST
payable under the margin scheme when there is no capital gain for income tax
purposes.
The consideration for the acquisition does not include:
-
costs incurred by the supplier in developing the real property
-
legal fees, stamp duty, registration fees and transfer costs or any other related
purchase expenses (instead, the supplier will be entitled to input tax credits if
the acquisitions relating to improvements (such as subcontractors’ charges)
and the acquisition of legal services are creditable acquisitions. There is no
entitlement to input tax credits on stamp duty). ATO IDs 2002/31 and
2002/490 state that the fees do not represent consideration for the entity’s
acquisition of the interest in the property but represent the consideration for
the entity’s acquisition of a separate supply of legal or administrative services
-
a call option fee where real property is acquired following the exercise of a call
option - GSTD Determination GSTD 2014/2
Example – Calculating the margin
Martin is registered for GST and for a fee of $22,000 he grants a call option to
SlamRock Constructions (SlamRock) to purchase vacant land for $660,000
(exclusive of the call option fee).
SlamRock exercises the call option and pays $660,000 for the purchase of the
land. Martin and SlamRock agree in writing that the margin scheme is to apply to
the supply of the vacant land.
29
The supply of the call option and the supply of the vacant land are two separate
taxable supplies and as a consequence of subsection 9-17(1), the consideration
for the supply of the vacant land is limited to any consideration provided in
addition to the call option fee. This means that the consideration for the supply of
the call option is the fee of $22,000 and the consideration for the vacant land is
$660,000.
SlamRock constructs six strata titled residential units on the vacant land. Once
the development is complete, SlamRock makes taxable supplies of the six new
residential premises to various third party purchasers who agree that the amount
of GST is to be worked out under the margin scheme. One of these units is
purchased by Sandy for $550,000.
In order to work out the amount of GST on the supply to Sandy, section 75-10
states that the amount of GST on the supply is 1/11th of the margin, which is the
amount by which the consideration for the supply exceeds the consideration for
the acquisition of the interest, unit or lease.
Under paragraph 75-15(2)(a), the consideration for the acquisition is the
corresponding proportion of the consideration provided to Martin by SlamRock
for the purchase of the vacant land that is applicable to the sale of the unit to
Sandy. As there are six residential units, SlamRock decides that it is reasonable
that the relevant proportion of the consideration for the acquisition will be
$110,000.
Therefore the calculation for the amount of GST on the supply to Sandy is as
follows: $550,000 - $110000 = $440,000 x 1/11 = $40,000
Under section 75-20, SlamRock is not entitled to input tax credits relating to the
acquisition of the land as it was acquired under the margin scheme. SlamRock is
however entitled to an input tax credit of $2000 relating to the acquisition of the
call option.
TRAPS WHEN SELLING PROPERTY AND AGREEING THE
SUPPLY IS A GOING CONCERN
If a supply is GST-free, no GST is payable on the supply but the entity is entitled
to an input tax credit on any creditable acquisitions that relate to the supply.
The supply of a going concern is GST-free. This instantly results in stamp duty
savings. It also means that the purchaser does not have to obtain additional
funds to cover the GST that would otherwise be included in the price of a going
concern if the section did not apply. GST on the expenses associated with the
sale may still be claimed back as input tax credits by the vendor.
30
However, the vendor needs to be very wary as if a sale is not accepted as the
supply of a going concern by the ATO, then the vendor, not the purchaser, will
have the liability for the GST. An indemnity clause should be inserted in the
contract to enable the vendor to be indemnified by the purchaser should this
happen. Such a clause was upheld in the 1999 New Zealand High Court case of
Hawkins Construction Ltd v Chan.
Requirements have to be satisfied before a going concern will be regarded as
disposed of and these are looked at below.
Conditions to be satisfied
Section 38-325(1) provides a supply of a going concern is GST-free where all the
following conditions are met:
-
the supply is for consideration;
-
the recipient of the supply is registered (or required to be registered); and
-
both parties have agreed in writing prior to the sale that the supply is of a
going concern.
A supply of a going concern is defined at section 38-325(2) as a supply under an
arrangement under which:
-
the supplier supplies to the recipient all of the things that are necessary for the
continued operation of an enterprise; and
-
the supplier carries on the enterprise until the day of the supply.
The ATO has issued GST Ruling GSTR 2002/5 on its interpretation of section
38-325.
Make sure both parties agree in writing
The agreement in writing must be obtained on or before the day of the supply. It
cannot be entered into after the supply has occurred. Otherwise the sale will not
be regarded as a supply of a going concern and the vendor will be regarded as
having charged GST on the supply.
Carrying on an enterprise
As already noted, the meaning of the term ‘enterprise’ is wider than the meaning
of the term ‘business’. For example, the activity of leasing is an enterprise which
can be the subject of the ‘supply of a going concern’ even where a business is not
being carried on.
31
The activity of leasing a building which has previously been leased to a tenant
remains an ‘enterprise’ of leasing 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.
Example – Enterprise of leasing
Bearish Pty Ltd enters into a contract to sell a large commercial building which it
has leased out for a number of years. At the time of sale, the building has no
tenants. A number of floors are available for lease and the company has
engaged a leasing agent to secure tenants for those floors. The remaining floors
are being refurbished and these floors are neither tenanted nor actively
marketed.
The ruling states the company is carrying on an enterprise of leasing the building
as it is carrying on leasing activities on a regular or continuous basis.
All things necessary must be supplied
All of the things necessary to continue the operation of an enterprise as an
independent enterprise must be supplied by the same single supplier to a single
recipient.
The ruling states that the ability of the recipient to provide some of the things
necessary for the continued operation of the enterprise is not a relevant
consideration.
A ‘thing’ is necessary for the continued operation of an ‘identified enterprise’ if the
enterprise could not be operated by the recipient in the absence of the thing. For
example, a boat may be essential to the conduct of the businesses of a
professional fisherman, a water-ski instructor, a deep-sea diving instructor or a
repairer of underwater structures because, in most instances, the relevant
business could not be conducted at all without a boat. The supplier must supply
the boat for the continued operation of the enterprise.
GSTR 2002/25 states that the owner of an enterprise which consists solely of the
leasing of real property cannot make a supply of a going concern when supplying
that real property to the lessee. This is because all of the things that are
necessary for the continued operation of the enterprise includes the supply of the
property and the lease covenants. The owner is not able to supply to the lessee
the benefit of the covenants which are necessary for the continued operation of
the existing enterprise of leasing the property.
32
Supplier needs to carry on the enterprise until the day of the
supply
A supply under an arrangement will only be the ‘supply of a going concern’ where
the enterprise is carried on by the supplier until the day of the supply. All of the
activities of the enterprise must be active and operating on the day of the supply.
The activities must be capable of continuing after the transfer to new ownership.
The vendor does not need to make sure the business actually continues after the
sale.
A supply will not be a ‘supply of a going concern’ where, on the day of the supply,
the activity carried on by the enterprise has ceased.
Example
An operating motel is sold but under the contractual agreement, the sale is
subject to vacant possession and the land, building and chattels only are
transferred to the purchaser. At settlement, the motel is closed down and there
are no future bookings. The premises start operating as a motel again several
weeks after settlement.
The supply will not be a supply of a going concern because, at the time of the
supply, the motel business was not operating.
However, GSTR 2002/5 states that a supplier, who temporarily ceases some
activities of an enterprise for a short period, for example, for cleaning and
maintenance purposes, to facilitate the supply under the arrangement, has not
ceased to carry on the enterprise.
GSTA TPP 104 states that the day of supply of a going concern that constitutes a
property development enterprise is the day on which the supplier satisfies all of
the obligations under the arrangement that are relevant to the identified enterprise
supplied, and the recipient assumes effective control and possession of all the
things necessary for the continued operation of the enterprise eg when off the
plan sales, titles and planning permits are supplied.
Be wary of a ‘supply of a going concern’ which would otherwise
be input taxed
Input tax credits relating to a supply, which would have otherwise been input
taxed but is GST-free because there is a supply of a going concern, are available
to the extent that they relate to the supply under the arrangement.
However, Division 135 requires purchasers to make an increasing adjustment
where they have acquired a GST-free going concern but then use the enterprise
for input taxed or private purposes.
33
Section 135-5 provides that the adjustment is 1/10 x supply price x proportion of
non-creditable use.
Proportion of non-creditable use is the proportion of all the supplies made through
the enterprise intended to be supplies that are neither taxable supplies nor GSTfee supplies, expressed as a percentage worked out on the basis of the prices of
those supplies.
Supply price means the price of the supply in relation to which the increasing
adjustment arises.
Example – GST payable
A going concern is sold for $500,000. The purchaser intends to have 100% noncreditable use. The increasing adjustment will be 1/10 x $500,000 = $50,000.
ATO ID 2007/72 states the increasing adjustment arising under section 135-5 is
attributable to the tax period in which the entity acquired the GST-free supply of
the going concern.
This was a major issue in the fairly recent case of MBI Properties Pty Limited v
FCT [2013] FCAFC 112 where the taxpayer and also Mum and Dad investors
bought residential apartments which were subject to leases to a company that
used all the apartments together as part of a serviced apartment business. The
apartments were sold as going concerns which meant the purchasers registered
for GST.
The Commissioner issued GST assessments which included increasing
adjustments under Division 135 as the apartments were now being used for input
taxed supplies.
The Full Federal Court unanimously found that a Div 135 adjustment did not arise
as there was no continuing supply in terms of s 135-5(1).
The ATO has appealed this case to the High Court. In its Interim Decision Impact
Statement, it stated that subject to the application for special leave to appeal, the
Full Federal Court's decision means that purchasers of leased residential
premises as a going concern may not be liable for an increasing adjustment
under Div 135.
However this position will change if the ATO wins the case at the High Court and
investors need to be very wary of agreeing that the sale of a leased residential
property to them is the sale of a going concern.
34
CESSATION OF REGISTRATION
Section 25-50 requires that if you are registered and are not carrying on an
enterprise, you must apply to the ATO on the approved form for cancellation of
registration. This must be lodged within 21 days after the day on which the
enterprise ceased to be carried on.
However beware Division 138 which provides that an entity has an increasing
adjustment if its registration is cancelled and, immediately before the cancellation,
its assets include anything for which it was, or is, entitled to input tax credits.
For each of the things acquired (for which input tax credits were claimed and the
last adjustment period has not ended), the adjustment is calculated using the
formula in section 138-5 = 1/11 x actual application of the thing x applicable
value.
The applicable value is the lesser of
-
the GST –inclusive value market value of the thing immediately before the
cancellation takes effect; and
-
if the entity is, or was, entitled to an input tax credit for acquiring the thing –
the amount of the consideration that it provided, or was liable to provide,
for its acquisition of the thing.
The number of adjustment periods that relate to a thing are determined by the
GST-exclusive value of the acquisition. The number of adjustment periods for
acquisitions (that do not relate to business finance) are set out in the following
table.
GST-exclusive value of the
acquisition
Adjustment periods
$5,000 or less
Two
$5,001 to $499,999
Five
$500,000 or more
Ten
35
Example from EM
Bill and Ben run a business. They wind up the business and cancel their
registration. The only asset left when they cease to be registered is the truck.
They acquired the truck for $55,000. The truck was used solely for a creditable
purpose. They had no adjustments in relation to the truck. The total input tax
credit in respect of the truck is $5,000.
The GST inclusive market value of the truck at cessation is $33,000.
The amount of the adjustment is 1/11 of actual application (here 100%)
multiplied by the applicable value (here $33,000), which equals $3,000.
They had previously received $5,000 input tax credit. The adjustment takes back
$3,000 of this, leaving them with $2,000.
GST TPP 096 states that if an entity carrying on a farming business undertakes
improvements to its farm land and subsequently cancels its GST registration, Div
138 applies in determining the amount of the increasing adjustment for each
improvement to the property.
If a going concern has been supplied, and in so doing the taxpayer is no longer
required to be registered and the registration is cancelled, the taxpayer will supply
the assets of the going concern before he ceases to be registered. However, the
taxpayer may have an increasing adjustment under Division 138 in relation to the
assets not supplied as part of the going concern but kept.