GST and increasing adjustment for the purchase of a block of residential flats with leases intact as a going concern

Does the entity, a recipient that purchases a block of residential flats with leases intact as a GST-free supply of a going concern, have an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it intends to lease those residential flats after settlement?

Yes, the entity has an increasing adjustment under Division 135 of the GST Act, when it intends to lease those residential flats after settlement.

The entity is a recipient that purchases a block of residential flats, with leases intact, as a GST-free supply of a going concern under section 38-325 of the GST Act. The entity intends to continue to lease those residential flats after settlement.

The entity is registered for goods and services tax (GST).

Subsection 135-5(1) of the GST Act provides that an entity has an increasing adjustment where: (a) it is the recipient of a supply of a going concern; and (b) it intends that some or all of the supplies to be made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

The entity purchases a block of residential flats, with leases intact, as a GST-free supply of a going concern under section 38-325 of the GST Act. Therefore, the entity is the recipient of a supply of a going concern and paragraph 135-5(1)(a) of the GST Act is satisfied.

The entity intends to continue to lease those residential flats after settlement. The lease of residential premises is an input taxed supply under section 40-35 of the GST Act. Therefore, the entity intends that all supplies made through the enterprise of leasing the residential flats, are supplies that are neither taxable supplies nor GST-free supplies and paragraph 135-5(1)(b) of the GST Act is satisfied.

Therefore, the entity has an increasing adjustment under Division 135 of the GST Act, when it intends to lease those residential flats after settlement. [Note 1: Subsection 135-5(2) of the GST Act provides that the amount of an increasing adjustment under subsection 135-5(1) of the GST Act is: 1/10 x supply price x proportion of non-creditable use where: supply price means the price of the supply in relation to which the increasing adjustment arises and proportion of non-creditable use is the proportion of all the supplies made through the enterprise that the entity intends will be supplies that are neither taxable supplies nor GST - free supplies, expressed as a percentage worked out on the basis of the price of those supplies In this case, the proportion of non-creditable use is the proportion of all the supplies to be made through the residential flats purchased that the entity intends will be supplies that are input taxed (that is, the lease of residential premises). If this percentage is 100%, the increasing adjustment is equal to 1/10 of the price of the residential flats. The adjustment increases the entity's net amount by an amount equal to the GST the entity would bear on the acquisition if it had been a taxable supply to it. The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit that the entity would have been entitled to for the acquisition if the supply had been a taxable supply. Note 2: This ATO ID should be read in conjunction with ATO ID 2002/709.]