1 Will the sale of the vacant residential land be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
1 Yes. The sale of the vacant residential land will be a taxable supply under section 9-5, if the company is registered for GST at the time of settlement, as the company will satisfy the GST requirements of paragraph 9-5(d) of the GST Act. However, the sale of the vacant residential land will not be a taxable supply under section 9-5 of the GST Act, if the company cancels its GST registration prior to settlement, as the company will not satisfy the GST requirements of paragraph 9-5(d) of the GST Act. Question 2 Is the company required to be registered for GST under section 23-5 of the GST Act, and will any GST need to be refunded for the credits claimed for the demolition costs of the commercial property if the GST registration is cancelled? Answer 2 No. The company is not required to be registered for GST under section 23-5 of the GST Act, and no GST will need to be refunded for the credits claimed for the demolition costs of the commercial property if the GST registration is cancelled. This ruling applies for the following periods : 1 July 20YY to 30 June 20YY The scheme commenced on: The date this ruling is issued
The company acquired vacant residential land on DD MM 20YY, for $XXXX with settlement occurring on DD MM 20YY, which was prior to the introduction of GST. The land size of the vacant residential land is xxx square metres and has a xx-metre-wide frontage. The vacant residential land has never been rezoned and is not suitable for subdivision. The vacant residential land was held for long term investment. No improvements have been done on the vacant residential land other than weed control. The vacant residential land has always been a vacant single residential block. As the vacant residential land was purchased pre-GST, you believe the margin scheme is not applicable on the sale. The vacant residential land is currently advertised for sale, but your director has declined offers pending the outcome of your private ruling application. Your director has not entered into any contracts to sell the residential vacant land and will consider a sale price once you know if GST is applicable on the sale. The company did not claim any input tax credits in relation to the residential vacant land, as it was just rates and land tax.
The company have not claimed deductions for these expenses on the income tax returns. The company also acquired a commercial property under the margin scheme, with settlement occurring on DD MM 20YY. As the income the company received from leasing the commercial property was over the GST turnover threshold of $75,000pa, the company registered for an Australian Business Number (ABN) and Goods and Services Tax (GST) backdating to an effective start date of DD MM 20YY. On DD MM 20YY, your director stated that he believed the commercial property was leased until approximately 20YY - 20YY and could we not see this on your BAS, however this could not be verified with your accountant. According to our records, GST payable on sales was reported at Label 1A in your annual GST return for the year ending DD MM 20YY. Your director has been open to offers to sell the commercial property once tenants started to leave and the xx-year-old building started to crack and sink. The road widening prejudiced the footings and there were other problems, but there is no market for it at the moment.
Due to the old building becoming dangerous, structurally, the commercial property building was demolished around MM 20YY. The commercial property had demolition costs of $xxxx and input tax credits were claimed in the GST annual return ending DD MM 20YY totalling $xxxx. The Council has made mention of acquiring the commercial property for a mini park, but nothing has come of that. Your director never thought about de-registering for GST once you ceased leasing the commercial property. Your director does not believe that the passive rental was carrying on a business. The commercial property remains unused residential vacant land which is zoned office and residential. The company has not been involved in any previous subdivisions or property developments. Your director does consider the company has been carrying on an enterprise since the commercial property became vacant. Your director has a medical condition, and the company is looking at selling the vacant residential land, and sorting out your affairs as soon as possible, such as pay capital gains tax and pay some franked dividends to your director's spouse and children.
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 25-50 A New Tax System (Goods and Services Tax) Act 1999 Section 25-55(1) A New Tax System (Goods and Services Tax) Act 1999 Section 25-55(2) A New Tax System (Goods and Services Tax) Act 1999 Section 25-60 A New Tax System (Goods and Services Tax) Act 1999 Section 188-10(1) 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 138-5 Question 1
Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with Australia; and (d) you are registered, or required to be registered, for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5. In your this case, you will satisfy paragraphs 9-5(a), 9-5(c) and 9(d) as you will make a supply for consideration, it is connected with Australia, and you are registered for GST. In addition, the GST-free and input-taxed provisions do not apply in your circumstances. Therefore, in this case, what needs to be determined is: • whether the sale of the residential vacant land is made in the course or furtherance of an enterprise that the company carries on under paragraph 9-5(b); and • as the company is registered for GST, whether you are required to be registered under paragraph 9-5(d). Are you carrying on an Enterprise
The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise. Section 9-20 defines 'enterprise' to include, amongst other things, an activity or series of activities done: • in the form of a business; • in the form of an adventure or concern in the nature of trade; • on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Miscellaneous Taxation ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides our view on the meaning of 'enterprise' for the purposes of entitlement to an ABN. Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 , provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on the GST purposes.
Paragraphs 303 to 322 of MT 2006/1 discusses activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents. The company purchased the commercial property, with settlement occurring on DD MM 20YY. The company registered for GST as the income received from leasing the commercial property was over the GST turnover threshold of $75,000. In the private ruling application, your director stated that you believed the property was leased until approximately 20YY-20YY and could confirm this in your lodged BAS, although this could not be confirmed with your accountant.
We conducted a review of your annual GST returns, and according to our records, you reported GST payable on sales at Label 1A in your annual GST return for the year ended DD MM 20YY. On this basis, we consider that the commercial property continued to be leased or otherwise used in a manner that generated taxable supplies and that the company was carrying on a leasing enterprise for the purposes of section 9-20 at least until that time. For GST purposes, the definition of the term carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. Furthermore, where there is an enterprise registered for GST purposes, the supply of investment assets or non-trading assets in the course or furtherance of an enterprise would still form part of the enterprise activities under section 9-20. In this case: • The company acquired a commercial property in 20YY • The commercial property was used as part of your commercial leasing enterprise until 20YY • Due to structural problems, the commercial property building was demolished in 20YY
• The company still holds the commercial property as commercial vacant land • The company acquired the residential vacant land in 20YY • The company have held the residential vacant land as long term investment • The company is selling only the residential vacant land • There is no evidence of a property development business • The residential vacant land was not acquired with an intention to resell for profit in a trading business We consider the activities outlined above, meet the definition an 'enterprise' as defined for GST purposes. These activities demonstrate a regular and continuous course of conduct undertaken in a business-like manner and are therefore within the scope of an enterprise that you carry on. Accordingly, the sale of the residential vacant land will be made in the course or furtherance of the enterprise that the company is carrying on for the purposes of section 9-20. In addition, for the sale of the residential vacant land to be a taxable supply under section 9-5, all of the requirements in that section must be satisfied. These requirements are:
1. the supply is made for consideration (paragraph 9-5(a)); 2. the supply is made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b)); 3. the supply is connected with Australia (paragraph 9-5(c)); and 4. you are registered, or required to be registered, for GST (paragraph 9-5(d)). Only when all four elements are met will the sale of the residential vacant land be a taxable supply for GST purposes. As the company is currently registered for GST, we now need to determine if it's required to be registered for GST under section 23-5. Question 2 Is the company required to be registered for GST under section 23-5, and will any GST need to be refunded for the credits claimed for the demolition costs of the commercial property if the GST registration is cancelled? Summary No. The company is not required to be registered for GST under section 23-5, and no GST will need to be refunded for the credits claimed for the demolition costs of the commercial property if the GST registration is cancelled. Reasons for decision Section 23-5 provides that you are required to be registered for GST if:
(a) you are carrying on an enterprise, and (b) your GST turnover meets the GST registration turnover threshold, which is currently $75,000 for entities The company's activities of holding residential vacant land and leasing commercial property satisfy the definition of an enterprise for the purposes of section 9-20. Therefore, we will need to consider whether the company's GST turnover meets the GST registration turnover threshold. Under subsection 188-10(1) an entity's GST turnover meets a particular turnover threshold when: (a) the entity's current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the turnover threshold; or (b) the entity's projected GST turnover is at or above the turnover threshold. Section 188-15 defines 'current GST turnover' and that, subject to certain exclusions, the current GST turnover at any time during a particular month is the sum of the values of all the supplies that an entity made, or are likely to make, during the current month and the preceding 11 months.
Section 188-20 defines 'projected GST turnover' and, subject to certain exclusions, the projected GST turnover at a time during a particular month is the sum of the values of all the supplies that an entity made, or are likely to make, during that month and the next 11 months. Section 188-25 provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you: (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset; and (b) any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an enterprise; or (ii) substantially and permanently reducing the size or scale of your enterprise. Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue. In particular, at paragraphs 46 to 47 of GSTR 2001/7 it states: Isolated Transactions 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example
, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. 47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7: Meaning of 'capital assets'
31. The GST Act does not define the term 'capital assets'. 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'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. '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'.
35. 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. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling. 36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. Based on the facts provided, we consider that the sale of the residential vacant land would constitute the transfer of a capital asset for the purposes of section 188-25. As such, the sale is disregarded when calculating the company's projected GST turnover.
The company does not carry on any other enterprises. You director has no intention of selling the commercial property and does not intend to make any further supplies. As a result, the company's projected GST turnover remains below $75,000. Under section 188-25, any future sale of the commercial property would also be disregarded from projected GST turnover, as it too would represent the transfer of a capital asset. Accordingly, the company's GST turnover does not meet the $75,000 GST registration turnover threshold, and the company is not required to be registered for GST under section 23-5. The company may therefore apply to cancel its GST registration under section 25-50. If the company remains registered for GST at the time of settlement, it will satisfy the requirements of section 9-5(d), and as a result, the sale of the vacant residential landwill be a taxable supply under section 9-5. Cancelling your registration
Under subsection 25-50, where you are registered for GST and not carrying on an enterprise, you must apply to the Commissioner for the cancellation of its registration. The application must be made in the approved form and lodged within 21 days after the day on which the entity ceased to be carrying on any enterprise. An entity ceases carrying on an enterprise when it concludes doing everything in the course of terminating its enterprise. However, the company is still entitled to be registered for GST (as the company is carrying on an enterprise) but are not required to be registered for GST. You will need to specify a desired date of effect of cancellation. Under subsection 25-55(1) Commissioner must cancel registration if: a) you have applied for cancellation of registration in the approved form and b) at the time you applied for cancellation of registration, you have been registered for at least 12 months; and c) the Commissioner is satisfied that you are not required to be registered.
Under section 25-60, the Commissioner must decide the date on which the cancellation of your registration takes effect. The date may be any day occurring before, on or after the day on which the Commissioner makes the decision. The cancellation date for your GST registration cannot be earlier than the last day of the reporting period for your most recently finalised BAS. As the company is also registered for Pay as You Go Instalments (PAYGI), it will continue to be required to lodge activity statements unless you are eligible to cancel the PAYGI role. If the PAYGI role remains active, activity statements will continue to issue even if the GST registration is cancelled. Increasing Adjustments Increasing adjustments as a result of cancellation of GST registration is covered under Division 138 of the GST Act. When a business cancels their GST registration, they may still have assets acquired for its enterprise it has claimed or was entitled to claim, input tax credits. As there are no assets for which the company was entitled to claim input tax credits for immediately prior to cancellation, no increasing adjustment will arise under Division 138.