federal property taxes update june 2017...2017/11/16 · federal property taxes update – june...

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Federal Property Taxes Update

June 2017

Tony Cahill Legal Author and Commentator

TABLE OF CONTENTS

About the author ..................................................................................... iii

Introduction .................................................................................... 1

Section 1 Foreign resident capital gains withholding payments 1

Section 2 GST ............................................................................ 7

The fundamental GST principles ................................................... 7

Rulings about entities ................................................................... 14

Rulings relating to consideration ................................................. 17

Annual turnover – GST Ruling 2001/7 17

Apportioning the consideration – GST Ruling 2001/8 17

What is meant by an “enterprise” – MT 2000/1 and MT 2006/1 . 18

Nature of the subject matter of the transaction ............................ 29

Commercial residential premises – former GSTR 2000/20 30

Residential premises – GSTR 2012/5, 2012/6, 2012/7 34

Sale of residential premises – GST Ruling 2003/3 38

What is meant by the “supply of a going concern” – GST Rulings 2001/5

and 2002/5 38

Rulings, Determinations and Cases about lease transactions ....... 43

Rulings and Determinations about sale transactions .................... 52

The margin scheme – GSTR 2000/21, GSTR 2006/7, GSTR 2006/8 52

Deposits – GSTR 2000/28, GSTD 2000/1, GSTR 2006/2 52

Is GST payable on the adjusted sale price – GSTD 2006/3 58

GST and options ........................................................................... 59

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GST and auction sales .................................................................. 59

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ABOUT THE AUTHOR

Tony Cahill was admitted to practice as a solicitor in New South Wales in

1981. After 13 years with a medium-sized city law firm, Tony commenced

practice on his own account at Chatswood. In July 2002, Tony commenced

a ‘sabbatical’ from private practice to concentrate primarily on legal

education and writing.

In 1995, Tony completed the Property Agency TAFE course which was then

the most usual educational qualification for holders of licences under the

former Property, Stock and Business Agents Act 1941.

He was a co-author with Russell Cocks and Paul Gibney of the first NSW

edition of 1001 Conveyancing Answers, and is currently the co-author with

Gary Newton of Conveyancing Service New South Wales and Annotated

Conveyancing and Real Property Legislation New South Wales, both

published by LexisNexis Butterworths.

Tony was formerly a part-time lecturer at the University of Technology,

Sydney and at the Sydney and Northern Sydney Institutes of TAFE in

various law subjects, and currently lectures in the Applied Law Program at

the College of Law, Sydney.

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Federal Property Taxes – June 2017

Tony Cahill

____________________________________________________________

Introduction

This session is designed to provide an overview of matters of significance

in federal property taxes (principally GST, but also foreign resident capital

gains withholding tax) affecting property transactions. Legislative

references in the paper are to the principal GST statute, A New Tax System

(Goods and Services Tax) Act 1999, unless indicated otherwise.

Section 1 Foreign resident capital gains withholding payments

The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill

2015 passed both Houses of the Federal Parliament on 22 February 2016.

Among other things, the amending legislation inserts a new Subdivision 14-

D into Schedule 1 of the Taxation Administration Act 1953 (Cth).

The key sections are set out below:

14-200 Certain acquisitions of taxable Australian property from foreign

residents

(1) You must pay to the Commissioner an amount if:

(a) you become the owner of a *CGT asset as a result of *acquiring

it from one or more entities under one or more transactions;

and

(b) subsection 14-210(1) (about foreign residents) applies to at

least one of those entities at the time one of those transactions

is entered into; and

(c) at that time, the CGT asset is:

(i) *taxable Australian real property; or

(ii) an *indirect Australian real property interest; or

(iii) an option or right to acquire such property or such an

interest;

unless a transaction referred to in paragraph (a) is excluded under

section 14-215.

Note: You must pay the amount on account of income tax possibly payable by the entities on their capital proceeds resulting from your acquisition of the CGT asset.

(2) You must pay the amount to the Commissioner on or before the day

you became the *CGT asset’s owner.

Federal Property Taxes Update – June 2017 Tony Cahill

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Note: There are penalties for failing to pay the amount (see Division 16).

(3) The amount to be paid to the Commissioner is:

(a) unless paragraph (b) applies—an amount equal to 10% of:

(i) the first element of the *CGT asset’s *cost base just after

the *acquisition; less

(ii) if the acquisition is the result of you exercising an

option—any payment you made, and the *market value of

any property you gave, for the option (or to renew or

extend it); or

(b) the varied amount applying under section 14-235.

(4) This section does not apply if the amount that would otherwise be

payable is nil.

14-210 Whether an entity is a relevant foreign resident

Is the entity a foreign resident at the time of the transaction?

(1) This subsection applies to an entity at the time a transaction is

entered into if, at that time:

(a) you know that the entity is a foreign resident; or

(b) you reasonably believe that the entity is a foreign resident; or

(c) you do not reasonably believe that the entity is an Australian

resident, and either:

(i) the entity has an address outside Australia (according to

any record that is in your possession, or is kept or

maintained on your behalf, about the transaction); or

(ii) you are authorised to provide a related financial benefit to

a place outside Australia (whether to the entity or to

anyone else); or

(d) the entity has a connection outside Australia of a kind specified

in the regulations; or

(e) the *CGT asset to which the transaction relates is:

(i) *taxable Australian real property; or

(ii) an *indirect Australian real property interest, the holding

of which causes a company title interest (within the

meaning of Part X of the Income Tax Assessment Act

1936) to arise.

Note: This subsection is relevant to whether you must pay an amount to the Commissioner under section 14-200.

Exception—the entity gives you a clearance certificate

(2) Despite subsection (1), that subsection does not apply to the entity in

relation to the transaction if:

(a) before you pay the Commissioner under section 14-200 in

relation to the *CGT asset to which the transaction relates, the

entity gives you a certificate about the entity that:

(i) was issued under subsection 14-220(1); and

(ii) is for a period covering the time the transaction is entered

into; and


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(b) the CGT asset is of a kind described in paragraph (1)(e) of this

section.

Exception—the entity gives you a residency or interests declaration

(3) Despite subsection (1), that subsection does not apply to the entity in

relation to the transaction if:

(a) before you pay the Commissioner under section 14-200 in

relation to the *CGT asset to which the transaction relates, the

entity gives you a declaration that:

(i) is about the entity or the CGT asset; and

(ii) was given under subsection 14-225(1) or (2); and

(iii) is for a period covering the time the transaction is entered

into; and

(b) when you are given the declaration, you do not know the

declaration to be false; and

(c) for a declaration given under subsection 14-225(1)—the CGT

asset is not of a kind described in paragraph (1)(e) of this

section.

14-215 Excluded transactions

Kinds of excluded transactions

(1) A transaction that results in the *acquisition of a *CGT asset is

excluded under this section if:

(a) just after the transaction, the CGT asset:

(i) is *taxable Australian real property; or

(ii) is an *indirect Australian real property interest, the

holding of which causes a company title interest (within

the meaning of Part X of the Income Tax Assessment Act

1936) to arise;

and the *market value of the CGT asset is less than $2 million;

or

(b) the transaction is on an *approved stock exchange; or

(c) the transaction is conducted using a crossing system (within the

meaning of the *market integrity rules); or

(d) an amount is already required to be withheld from a *withholding payment relating to the transaction; or

(e) subsection 26BC(3) of the Income Tax Assessment Act 1936

(about securities lending arrangements) applies in relation to

the transaction as a result of the transaction being covered by

subparagraph (a)(ii) of that subsection; or

(f) any of the entities to which subsection 14-210(1) (about

foreign residents) applies at the time of the transaction:

(i) is a company for which any of the conditions in

paragraph 161A(1)(a) of the Corporations Act 2001

(about insolvency and external administration) is

satisfied; or

(ii) is, under a *foreign law, in the same or a similar position

to a company covered by subparagraph (i); or


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(g) the transaction arises from any of the following:

(i) the administration of the estate of a bankrupt;

(ii) a composition or scheme of arrangement accepted under

Division 6 of Part IV of the Bankruptcy Act 1966;

(iii) a debt agreement under Part IX of that Act;

(iv) a personal insolvency agreement under Part X of that Act;

(v) circumstances that are, under a foreign law, the same or

similar to those in any of the above subparagraphs.

Note: This section is relevant to whether you must pay an amount to the Commissioner under section 14-200.

Dealing with joint ownership etc. of certain CGT assets

(2) For the purposes of paragraph (1)(a), if:

(a) the *CGT asset is an interest in real property, or an interest in a *mining, quarrying or prospecting right; and

(b) just after the transaction, there are one or more similar interests

in the same real property or right;

treat the *market value of the CGT asset just after the transaction as

including the market value of each of those similar interests.

(3) Without limiting subsection (2):

(a) treat an interest as being similar to the *CGT asset if it is

specified in regulations made for the purposes of this paragraph

in relation to CGT assets of that kind; and

(b) treat an interest as not being similar to the CGT asset if it is

specified in regulations made for the purposes of this paragraph

in relation to CGT assets of that kind.

14-220 Commissioner clearance certificates

(1) The Commissioner may certify that, based on information before the

Commissioner, there is nothing to suggest that an entity is or will be

a foreign resident during a specified period.

Note: Such a certificate could result in you not being required to pay an amount under this Subdivision (see subsection 14-210(2)).

(2) A certificate under subsection (1):

(a) may be issued on application to the Commissioner in the *approved form; and

(b) is to be in writing; and

(c) applies only for the purposes of this Subdivision.

(3) For the purposes of (but without limiting) paragraph 388-50(1)(c),

the Commissioner may require an application for a certificate under

subsection (1) to state:

(a) whether the applicant holds or will hold specified *CGT assets

on behalf of another entity during any part of the period for

which the certificate is sought; and

(b) whether the applicant knows or reasonably believes that the

other entity is or will be a foreign resident during that period.

Note: Section 388-50 sets out when an application is in the approved form.


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(4) A certificate issued under subsection (1) is not a legislative

instrument.

14-225 Entity declarations

Declaration that an entity is an Australian resident

(1) An entity may, in writing, declare that, for a specified period, the

entity is and will be an Australian resident.

Note: Such a declaration could result in you not being required to pay an amount under this Subdivision (see subsection 14-210(3)).

Declaration that asset not an indirect Australian real property

interest

(2) An entity may, in writing, declare that, for a specified period,

specified *CGT assets are *membership interests but not *indirect

Australian real property interests.

Note: Such a declaration could result in you not being required to pay an amount under this Subdivision (see subsection 14-210(3)).

Limit on the periods for which declarations have effect

(3) A period specified in a declaration under this section is of no effect

to the extent that it includes days later than 6 months after the day

the declaration is made.

Declarations are not legislative instruments

(4) A declaration under this section is not a legislative instrument.

There are administrative penalties for false or misleading declarations (s 14-

230).

The Commissioner has power to vary the amount payable under s 14-235.

This could be useful where the amount owed to a mortgagee exceeded the

amount ordinarily to be withheld.

The provisions apply in relation to acquisitions on or after 1 July 2016.

The regime applies to, among other things, any sales of direct interests of

real estate (including company title interests), subject to a threshold Initially

$2,000,000, but $750,000 as from 1 July 2017) based on the market value of

the asset (note that where the market value is precisely the threshold figure

the withholding provisions apply). The obligation to remit resides with the

purchaser (with the amount to be reconciled against any tax lability of the

vendor). The administration of the new system relies primarily on online

applications, with the implementation of a “clearance” system for

transactions involving direct property interests.


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The Law Society and the Law Council have identified a number of practical

problems with the proposal. If the value of the property exceeds the

threshold, a purchaser will have to withhold the relevant percentage (initially

10% but as from 1 July 2017 12.5%) of the price (in fact strictly speaking

not the price as defined in the contract – see s 14-200(3)(a)(i)) and remit that

to the ATO unless the vendor serves on the purchaser:

➢ A clearance certificate; or

➢ A statement from the ATO that a lesser amount is payable.

Furthermore, the legislation contemplates that the required amount generally

must be paid by electronic means and is payable on the day of completion.

The withholding obligation extends to acquistions of indirect interests in

taxable Australian real property and to options to purchase (though the

operation of these provisions rely on a vendor/grantor declaration rather than

a clearance certificate, there is no threshold and there are timing issues given

that options do not have a ‘completion date’ in the way sales and purchases

do).

The 2016 edition of the joint copyright land contract:

• Adds a clearance certificate check box to the list of documents

• Adds new definitions relevant to FRCGW to clause 1

• Amends clause 16.7 (now restructured into subclauses and ‘bullet

points’) to confirm the purchaser’s obligation to withhold the

‘remittance amount’ from the price

• Adds a new substantive provision – clause 31.

Clause 31.1 states the scope of the clause – the threshold requirements are:

• Contract made on or after 1/7/16

• Not an ‘excluded transaction’ (the most common type will be

transactions where the market value is less than $2 million)

• A clearance certificate relating to each vendor is not attached to the

contract.

Clause 31.2 sets out four key obligations of the purchaser:

Provide evidence of registration as a withholder with the ATO at

least 5 days before the date for completion.


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Produce settlement cheque for the ‘remittance amount’ at settlement

(unless PEXA is used).

Forward the cheque immediately after completion.

Serve evidence the payment has been received.

These obligations do not apply where the vendor has served a clearance

certificate in respect of each vendor.

Where the vendor serves a clearance certificate or variation certificate after

exchange the purchaser does not have to complete until at least seven days

after service (clause 31.4).

The withholding registration and payment obligations cease to apply once a

clearance certificate is served in respect of every vendor (clause 31.5).

The changes announced in the 2017 Federal budget have led to the

production of an “interim” edition of the contract, styled the “2016/17

edition”. The reference to $2,000,000 in the warning on page 4 has been

removed. The amount to be remitted is now framed in terms of an “FRCGW

percentage” of the price.

Section 2 GST

The fundamental GST principles

1. GST will be potentially payable in any transaction where an entity

makes a taxable supply.

2. A taxable supply cannot occur unless there is a supply. The term

“supply” is defined widely (s 9-10), such that virtually any transaction

relating to rights and interests in real or personal property will be a supply

for GST purposes. Subsections (1) and (2) are in these terms:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;


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(e) a creation, grant, transfer, assignment or surrender of any

right;

(f) a *financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to

in paragraphs (a) to (g).

The concept does, however, have its limits. In mid-2000 there were a number

of decisions of State Supreme Courts about whether court judgments or

orders were “supplies” within the meaning of the GST Act. The cases were:

Interchase Corporation Ltd v A.C.N. 010 087 573 Pty Ltd & ors [2000] QSC

13, Shaw v Director of Housing and State of Tasmania (No 2) [2001]

TASSC 2 and Walter Construction Group Ltd v Walker Corporation Ltd

[2001] NSWSC 283. These cases have been analysed in detail as part of

ATO GST Ruling 2001/4.

3. The next step is to determine whether the supply is a taxable supply

– or to turn the concept around, whether the supply is outside the concept of

a “taxable supply”. The importance of identifying one (or perhaps more than

one) supply which, if the requirements of the Act are satisfied, would

constitute a taxable supply, was highlighted by the High Court decisions in

Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 68 ATR

158; [2008] HCA 22 (22 May 2008) and Commissioner of Taxation v Qantas

Airways Limited [2012] HCA 41 (2 October 2012). The former case was the

first in which consideration of the operation of the GST system reached the

High Court, and will be discussed in detail later in this paper. The latter case

held that an airline was liable to remit GST embedded in the price for air

tickets even where the flight was not taken.

4. The fundamental definition in the GST Act is contained in s 9-5

which provides:

9-5 Taxable supplies

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and


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(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is

*GST-free or *input taxed.

I am indebted to a colleague from the ATO who suggested that a useful aide

memoire for analysing GST is the SCARE model. For GST to be payable,

you look for a:

➢ Supply … for

➢ Consideration … connected with

➢ Australia …by an entity which is

➢ Registered (or Required to be) … in the course or furtherance of an

➢ Enterprise.

5. Subparagraphs (a) to (d) of the above quoted section identify the

four basic thresholds to be considered. If any one of those four paragraphs

is not satisfied, the supply can (almost) never be a taxable supply. It follows

that the most important “loopholes” to consider are (and these are listed in

order of increasing complexity):

5.1 Is the supply “connected with Australia”? (almost invariably yes in

real estate transactions, and usually yes in business transactions

which do not involve exports);

5.2 Is there consideration? (usually there will be);

5.3 Is the supplier registered or required to be registered? Section 23-15

refers to registration turnover thresholds of $50,000 and $100,000

for non-charities and charities respectively. In each case, the

amount can be increased by regulation. Figures of $75,000 and

$150,000 are prescribed in A New Tax System (Goods and

Services Tax) Regulation 1999, regs 23.15.01 and 23.15.02,

effective from 1 July 2007;

5.4 Is the supply “in the course or furtherance of an *enterprise that you

[the supplier] *carry on”? (almost always yes in sale of business or

leasing transactions; maybe or maybe not in sales of real property

– a particular problem is the “one-off” real estate activity often in

the nature of a subdivision).

Why do I say almost? Because even these basic concepts are subject to

qualification. I commend to you the Thomson Reuters version of the GST

legislation (GST Legislation Plus – the latest version available is current to

1 January 2017, with Ian Murray-Jones assuming authorship from Richard


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Krever) which usefully lists as part of its annotation process the override

provisions located elsewhere in the legislation. Two specific examples, and

of greatest relevant to property practitioners are Div 72 (dealing with

Associates) and Div 105 (headed “Supplies in satisfaction of debts”). To

give you the flavour of the overrides, the opening section of each Division

is reproduced below:

72-5 Taxable supplies without consideration

(1) The fact that a supply to your *associate is without *consideration,

does not stop the supply being a *taxable supply if:

(a) your associate is not *registered or *required to be

registered; or

(b) your associate acquires the thing supplied otherwise than

solely for a *creditable purpose.

(2) This section has effect despite paragraph 9-5(a) (which would

otherwise require a taxable supply to be for consideration).

(3) However, this section does not apply to any supply that is

constituted by an insured entity settling a claim under an

*insurance policy.

105-5 Supplies by creditors in satisfaction of debts may be taxable

supplies

(1) You make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a

third entity in or towards the satisfaction of a debt that the

debtor owes to you; and

(b) had the debtor made the supply, the supply would have been

a *taxable supply.

(2) It does not matter whether:

(a) you made the supply in the course or furtherance of an

*enterprise that you *carry on; or

(b) you are *registered, or *required to be registered.

(3) However, the supply is not a *taxable supply if:

(a) the debtor has given you a written notice stating that the

supply would not be a taxable supply if the debtor were to

make it, and stating fully the reasons why the supply would

not be a taxable supply; or

(b) if you cannot obtain such a notice—you believe on the basis

of reasonable information that the supply would not be a

taxable supply if the debtor were to make it.

(4) This section has effect despite section 9-5 (which is about what is

a taxable supply).


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6. Is the supply [of a type which can sometimes be] GST-free? The

key operative provision is Div 38. Section 38-1 provides:

This Division sets out the supplies that are GST-free. If a supply is GST-

free, then:

• no GST is payable on the supply;

• an entitlement to an input tax credit for anything acquired or imported

to make the supply is not affected.

For the basic rules about supplies that are GST-free, see sections 9-30 and

9-80.

The types of supplies which are dealt with in Div 38 can be identified by

looking at the Table of Subdivisions which is set out below:

Table of Subdivisions

38-A Food

38-B Health

38-C Education

38-D Child care

38-E Exports and other supplies that are for consumption outside the

indirect tax zone

38-F Religious services

38-G Activities of charities etc.

38-I Water and sewerage

38-J Supplies of going concerns

38-K Transport and related matters

38-L Precious metals

38-M Supplies through inwards duty free shops

38-N Grants of land by governments

38-O Farm land

38-P Cars for use by disabled people

38-Q International mail

38-R Telecommunication supplies made under arrangement for global

roaming in the indirect tax zone

38-S Eligible emissions units

38-T Inbound intangible consumer supplies

Subdivision 38-S was added by the Clean Energy (Consequential

Amendments) Act 2011. The amendment Act was assented to on 18

November 2011, and commenced on 10 May 2012. Under a new s 38-590,

a supply of an *eligible emissions unit (defined by reference to s 5 of the


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Clean Air Act 2011) is GST-free. In the light of the change of Federal

Government and the repeal of the carbon tax the ultimate fate of subdivision

38-S is uncertain.

Subdivision 38-T is the “Netflix amendment”, taking effect as from 1 July

2017.

The Subdivisions of greatest relevance to property practitioners are in bold.

7. Is the supply [of a type which can sometimes be] input taxed? The

key operative provision is Division 40. Section 40-1 provides:

This Division sets out the supplies that are input taxed. If a supply is input

taxed, then:

• no GST is payable on the supply;

• there is no entitlement to an input tax credit for anything acquired or

imported to make the supply (see sections 11-15 and 15-10).

For the basic rules about supplies that are input taxed, see sections 9-30

and 9-80.

Again, the types of supplies which are dealt with in Div 40 can be identified

by looking at the Table of Subdivisions which is set out below:

Table of Subdivisions

40-A Financial supplies

40-B Residential rent

40-C Residential premises

40-D Precious metals

40-E School tuckshops and canteens

40-F Fund-raising events conducted by charities etc.

40-G Inbound intangible consumer supplies.

Again, I have highlighted in bold the major subdivisions of interest to

property practitioners.

8. Does some other special rule apply? One other section with which

you will need to be familiar is s 37-1. This section cross-references 62 (up

from 37 in the original legislation) areas where “special rules” apply. The

seven most relevant to property practitioners will be:

➢ Deposits as security (Div 99)

➢ Distributions from deceased estates (Div 139)

➢ Insurance (Div 78)


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➢ Long-term accommodation in commercial residential premises (Div

87)

➢ Sales of freehold interests, etc. (Div 75) – the margin scheme

➢ Supplies in return for rights to develop land (Div 82)

➢ Supplies of going concerns (Div 135).

9. During the early years of the New Tax System there was a

possibility that the GST position would be complicated by a transitional

issue where the supply straddled 1 July 2000. The transitional legislation is

now effectively of historical interest to property practitioners – long-term

leases were brought within the GST regime with effect from 1 July 2005.

10. If the supply contract does not mention GST, any tax payable is

the supplier’s responsibility and as a matter of law cannot be recovered from

the recipient. If the contract evidencing the property transaction is silent

about GST, the supplier will be liable for any GST and the recipient will

escape liability (and, to add insult to injury, will probably be able to call for

a tax invoice and claim an input tax credit). If the supplier was not expecting

to remit GST out of the consideration received, the potential for a claim

against a professional adviser or the adviser’s insurer exists.

11. Practitioners acting for recipients will need to give attention to the

“mirror image” of the taxable supply – whether their recipient clients are

making a creditable acquisition. The significance will be whether or not the

recipient can claim an input tax credit.

The key legislative provision is s 11-5.

11-5 What is a creditable acquisition?

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply;

and

(d) you are *registered, or *required to be registered.

You will note this definition builds on the concept of taxable supply in that

if the supply is not a taxable supply one of the four basic requirements is not

satisfied. There are other requirements in the basic definition, principally the

concept of a “*creditable purpose” which is defined in s 11-15. (Section 11-

10 contains a predictably wide definition of “acquisition”).


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As might be expected, s 11-5 is subject to numerous overrides. Some that

may be relevant to property practitioners include:

➢ s 60-10 – pre-establishment acquisition for a company

➢ s 72-40 – consideration without acquisition from an associate

➢ s 75-20 – the margin scheme.

Rulings about entities

Another point for consideration is whether the entity making or receiving

the supply is such that there are some “special” features of the entity for GST

purposes. The definition of “entity” is in Division 184. Section 184 -1(1)

provides:

184-1 Entities

(1) Entity means any of the following:

(a) an individual;

(b) a body corporate;

(c) a corporation sole;

(d) a body politic;

(e) a *partnership;

(f) any other unincorporated association or body of persons;

(g) a trust;

(h) a *superannuation fund.

Note: The term entity is used in a number of different but related senses. It covers all kinds of legal persons. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

There are four GST Rulings exploring specified entities:

➢ GSTR 2003/13: General Law Partnerships

➢ GSTR 2004/6: Tax Law Partnerships

➢ GSTR 2008/3: Bare Trusts

➢ GSTR 2009/1: General Law Partnerships and the Margin Scheme.

Section 195-1 of the GST Act adopts the definition of a partnership from

s 995-1 of the Income Tax Assessment Act 1997, which defines a partnership

as:

An association of persons carrying on business as partners or in receipt

of ordinary income or statutory income jointly, but does not include a

company (underlining added).

The first type of “association of persons” (the solid underlining) reflects the

definition of a partnership contained in, for example, s 1(1) of the


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Partnership Act 1892 (NSW), and is the focus of Final Ruling 2003/13

(described by the ATO as a “general law partnership”).

The second type of “association of persons” (the word-only underlining)

would not constitute a partnership under partnership law – see s 2 of the

NSW Partnership Act. However, such associations are treated as

partnerships for certain purposes under the tax law – hence the description

of such an association as a “tax law partnership” by the ATO. The tax law

partnership is the focus of Final Ruling 2004/6. The most common situation

where a tax law partnership would arise is where property is acquired or

used to derive income jointly (whether as joint tenants or tenants in

common).

The ATO has issued GST Ruling 2008/3 relating to “bare trusts”. The

background to the Ruling is set out at paras [11] to [13] of the Ruling:

11. An entity (B) that carries on an enterprise may, for reasons of

convenience or anonymity, arrange for an asset which is to be used

in its enterprise to be acquired by another entity (T) to hold on trust

for B. T may hold the asset on trust for B under a bare trust – that

is, subject to an obligation to transfer legal title to the asset to B, or

to a third party if B so directs, and with no other active duties to

perform.

12. Alternatively, the trust may not strictly be a bare trust, because the

trustee has minor active duties to perform, but nevertheless the

trustee is required to act at the direction of the beneficiary in

dealing with title to the trust property. Where this Ruling refers to

‘bare trusts’ it should also be taken to refer to trusts of this kind

which may not strictly fall within accepted definitions of bare trusts

but share similar features. This would, for instance, include

situations in which the trustee is obliged to pay for minor repairs

with funds provided by the beneficiary. It is also accepted that the

trustee may execute documents relating to the trust property at the

direction of the beneficiary.

13. An example of an arrangement where a bare trust may be created

is where a partnership (B) of entities decides to acquire and develop

real property for sale. The partners may not wish to disclose their

names to the vendor of the property and so arrange for a company

(T) that they control to acquire title to the property. If there is a

large number of partners, it may also be more convenient for the

partnership to have a single company that can execute legal

documents associated with the acquisition, development and

disposal of the property. T acquires and holds the legal title to the

property on trust for B. T has no discretion regarding the use and

disposal of the trust property and deals with it solely at the direction

of B.


– 16 –

The primary focus of the Ruling is the extent to which the bare trust can be

said to be carrying on an enterprise in its own right, and the circumstances

in which the activities of the bare trust will be viewed as being undertaken

as agent for the entity standing behind the trust.

The Ruling adopts the definition of a bare trust proposed by Gummow J in

Herdegen v Federal Commissioner of Taxation 88 ATC 4995 at 5003:

Today the usually accepted meaning of ‘bare’ trust is a trust under which

the trustee or trustees hold property without any interest therein, other

than that existing by reason of the office and the legal title as trustee, and

without any duty or further duty to perform, except to convey it upon

demand to the beneficiary or beneficiaries or as directed by them, for

example, on sale to a third party. The beneficiary may of course hold the

equitable interest upon a sub-trust for others or himself and others: see

Halsbury’s Laws of England, 4th ed., Vol. 48, ‘Trusts’, para. 938. The

term is usually used in relation to trusts created by express declaration.

But it has been said that the assignor under an agreement for value for

assignment of so-called ‘future’ property becomes, on acquisition of the

title to the property, trustee of that property for the assignee (Palette

Shoes Pty Ltd v. Krohn (1937) 58 CLR 1 at p. 27) and this trust would

answer the description of a bare trust. Also, the term ‘bare trust’ may be

used fairly to describe the position occupied by a person holding the title

to property under a resulting trust flowing from the provision by the

beneficiary of the purchase money for the property.

On 8 April 2009, the ATO issued GST Ruling 2009/1, entitled: “Goods and

services tax: general law partnerships and the margin scheme”. The principal

issues addressed in the Ruling are set out at para 3:

(a) Can a supply of real property as a capital contribution to a general

law partnership in exchange for an interest in the partnership be a

supply by way of sale under subsection 75-5(1)?

(b) How is the margin calculated if a general law partnership supplies

before 17 March 2005 real property that was acquired from its

partners by way of capital contribution?

(c) How is the margin calculated if a general law partnership supplies

on or after 17 March 2005 real property that was acquired from its

partners by way of capital contribution?

(d) If real property is held by a general law partnership, does a

reconstitution of the partnership give rise to a supply or acquisition

of the property?

(e) Can a distribution of real property by a general law partnership to

a partner as a result of general dissolution be a supply by way of

sale for the purposes of subsection 75-5(1)?

(f) How is the margin calculated if a former partner in a general law

partnership supplies real property that was acquired as a result of

the partnership’s general dissolution?


– 17 –

The Ruling explicitly does not apply to tax law partnerships, nor to limited

partnerships (para 5).

Rulings relating to consideration

Annual turnover – GST Ruling 2001/7

Section 188-25 is in these terms:

188-25 Transfer of capital assets, and termination etc. of

enterprise, to be disregarded

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer

of ownership of a capital asset of yours; 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

an enterprise.

This Ruling will be of significance where a client who would otherwise not

be within a particular GST threshold is, for example, disposing of a capital

asset by way of a taxable supply.

Apportioning the consideration – GST Ruling 2001/8

Ruling 2001/8 is useful in relation to issues about whether and how

consideration is to be apportioned in relation to mixed supplies (where the

taxable and non-taxable components need to be unbundled) or composite

supplies (to be treated as the supply of a single thing). The distinction

between these two concepts is discussed at paras 16 to 81 of the Ruling.

Paragraph 70 makes it plain that a lease of a building to a tenant who

operates a business from the commercial premises and lives in the residential

premises is a mixed supply.

The Ruling also discusses what will be reasonable methods of

apportionment where a mixed supply is made (paras 92 to 119). Each case

depends on its own facts (para 93). In a particular case, apportionment by

direct (e.g. comparative price of each part; time to perform; relative floor

area while taking into account the relative price of different types of floor

space) or indirect (e.g. based on the cost and profit margin of each part of

the supply) method may be appropriate.


– 18 –

A method based on cost to the supplier without taking supplier markups into

account will (generally) not be appropriate, nor, in some cases, will methods

using “historical cost” and “residual value” (para 113).

In documenting such a transaction, it is prudent either to address the

mechanics of apportionment in an appropriate special condition (as is done,

for example, in the contract for sale of land in NSW), or to use two separate

but interdependent contracts.

What is meant by an “enterprise” – MT 2000/1 and MT 2006/1

One of the recurring issues raised by practitioners in GST seminars is

whether or not a (hypothetical?) client was, in a given transaction, within the

scope of carrying on an enterprise. The above two pronouncements from the

Tax Office provide some guidance. The second of the Rulings issued in

December 2006 is an expanded version of the 2000 Ruling (incorporating

the 2000 Ruling to the extent that it still represents the view of the

Commissioner). For the sake of completeness, I should mention that there

were two draft rulings intended to replace MT 2000/1, issued in December

2004 and December 2005, and in some key respects different from the 2000

and 2006 Final Rulings. One issue of particular concern to property

practitioners is whether a “one-off” transaction (for example, a subdivision)

falls within the definition of “carrying on an enterprise”.

I reproduce para 262 to 302 of MT 2006/1 below:

262. The question of whether an entity is carrying on an enterprise often

arises where there are ‘one-offs’ or isolated real property

transactions.

263. The issue to be decided is whether the activities are an enterprise

in that they are of a revenue nature as they are considered to be

activities of carrying on a business or an adventure or concern in

the nature of trade (profit making undertaking or scheme) as

opposed to the mere realisation of a capital asset. (In an income tax

context a number of public rulings have issued outlining relevant

factors and principles from judicial decisions. See, for example, TR

92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD

92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation

(Statham) and Casimaty v. FC of T (Casimaty) provide some

guidance on when activities to subdivide land amount to a business

or a profit-making undertaking or scheme. In these cases, farm land

was subdivided and sold. Minimal development work was

undertaken to meet council requirements and to improve the

presentation of certain allotments. On the particular facts of these


– 19 –

cases the courts held that the sales were a mere realisation of a

capital asset.

265. From the Statham and Casimaty cases a list of factors can be

ascertained that provide assistance in determining whether

activities are a business or an adventure or concern in the nature of

trade (a profit-making undertaking or scheme being the Australian

equivalent, see paragraphs 233 to 242 of this Ruling). If several of

these factors are present it may be an indication that a business or

an adventure or concern in the nature of trade is being carried on.

These factors are as follows:

• there is a change of purpose for which the land is held;

• additional land is acquired to be added to the original

parcel of land;

• the parcel of land is brought into account as a business

asset;

• there is a coherent plan for the subdivision of the land;

• there is a business organisation - for example a manager,

office and letterhead;

• borrowed funds financed the acquisition or subdivision;

• interest on money borrowed to defray subdivisional costs

was claimed as a business expense;

• there is a level of development of the land beyond that

necessary to secure council approval for the subdivision;

and

• buildings have been erected on the land.

266. In determining whether activities relating to isolated transactions

are an enterprise or are the mere realisation of a capital asset, it is

necessary to examine the facts and circumstances of each particular

case. This may require a consideration of the factors outlined

above, however there may also be other relevant factors that need

to be weighed up as part of the process of reaching an overall

conclusion. No single factor will be determinative rather it will be

a combination of factors that will lead to a conclusion as to the

character of the activities.

267. No two cases are likely to be exactly the same. For instance, while

the conclusions reached in the Statham and Casimaty cases were

similar, different facts and factors were considered to reach the

respective conclusions.

268. The case of Marson (H M Inspector of Taxes) v. Morton and Others

describes the process of reaching a conclusion in cases involving

isolated transactions. After listing the factors that have been taken

into account by courts in other cases, including the badges of trade,

Sir Nicolas Browne-Wilkinson V-C stated

I emphasise again that the matters I have mentioned are not

a comprehensive list and no single item is in any way

decisive. I believe that in order to reach a proper factual


– 20 –

assessment in each case it is necessary to stand back, having

looked at those matters, and look at the whole picture and

ask the question – and for this purpose it is no bad thing to

go back to the words of the statute - was this an adventure

in the nature of trade?

Similarly, Foster J in AB v. FC of T observed:

It is clear in my view, that before the label ‘adventure in the

nature of trade’ can be applied it is necessary to isolate with

clarity the particular matters which are the subject of its

application...Accepting as I do, that the phrase means ‘an

isolated business venture’ questions must be asked as to

what was the venture and what gave it its commercial

character.

269. The Commissioner recognises that in some cases practical

difficulties may arise in deciding whether the activities involved in

a particular subdivision amount to an enterprise. The question is

necessarily one of fact and degree. As outlined above, it requires a

careful weighing of the various factors and exercising judgment in

the light of decided case law and commercial experience. If an

entity is experiencing practical difficulty reaching a decision they

can seek guidance from the Tax Office.

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with

the intention of resale at a profit (which would be ordinary income)

the Commissioner 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. An enterprise

would be carried on in this situation 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.

Examples of subdivisions of land that are enterprises

Example 28

271. Stefan and Krysia discover that the local council has recently

changed its by-laws 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.

272. Stefan and Krysia are entitled to an ABN in respect of the

subdivision on the basis that 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 29

273. 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


– 21 –

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.

274. 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.

275. Tobias is entitled to an ABN. His intentions and activities have the

appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see

paragraphs 378 to 405 of this Ruling) as his plan has enabled him

to be able to keep and live in one of the units.

Example 30

277. Steven buys a 100 hectare property. He believes that the property

may be suitable to be developed as a resort. After investigation he

decides that it would be more profitable to subdivide and sell the

property. He decides to subdivide the property into one hectare lots

and sell these.

278. He engages a town planner and a surveyor to survey the 100 hectare

property and to establish how many hectare lots it can be

subdivided into. Steven then approaches the local shire council and

is advised that he may subdivide his property into 65 one hectare

lots.

279. However, Steven must satisfy various shire council conditions if he

wishes to obtain development approval. They are:

• the making of new sealed roads with kerbing and

channelling within the subdivision;

• the provision of water, electricity and telephone services to

the new lots;

• the provision of culverts and other storm water drainage

works; and

• the transfer of certain areas of land to the shire council for

parks, environmental and other public purposes.

280. Steven consults his accountant and legal advisers. Together they

prepare a comprehensive business plan for the project. They

approach a commercial lender to arrange a substantial loan, secured

by the property, to cover all development costs and related

expenses.

281. After gaining development approval from the council, Steven then

engages a project manager who arranges for all the survey and

subdivisional works to be carried out. Contractors are engaged to

put in the roads, complete all the necessary drainage works and

install the water, electricity and telephone services.

282. Steven also investigates a marketing strategy that will provide the

best return for his project. Sales agents are retained to carry out the


– 22 –

marketing program which involves a comprehensive advertising

campaign using a promotional estate name, ‘Bush Turkey Hill’.

283. Steven is entitled to an ABN on the basis that the subdivision is an

enterprise and it is more than a mere realisation of a capital asset.

Significant factors that are relevant which lead to this conclusion

are as follows:

• there is a change of purpose for which the whole property is

held;

• there is a comprehensive plan for the development of the

property;

• the subdivision is developed in a businesslike manner for

example there is a project manager, significant development

costs, a comprehensive marketing campaign including an

estate name for the land; and

• a substantial loan has been taken out to finance the

development.

Example 31

284. 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.

285. 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.

286. 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.

287. Prakash and Indira carry out their plan and make a profit. They are

entitled to an ABN in respect of the subdivision on the basis that

their activities go beyond the minimal activities needed to sell the

subdivided land. 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.


– 23 –

Examples of subdivisions of land that are not enterprises

Example 32

288. 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.

289. 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.

290. 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.

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned

for 30 years.

292. 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.

293. 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 34

294. 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.

295. 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 boundary

and has some existing services such as electricity. Only minimal

activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not

considered to be an enterprise and is the mere realisation of a

capital asset.

Example 35

297. 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.


– 24 –

298. 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.

299. 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.

300. 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.

301. Over the years involved Oliver and Eloise have subdivided 30 %

of Flat Out. They continue to live on the remaining part of their

property.

302. Oliver and Eloise are not entitled to an ABN as they 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.

We are starting to see case law testing the boundaries of when a taxpayer

can be said to be carrying on an enterprise. In Alexander Drysdale v

Commissioner of Taxation [2008] AATA 393; 2008 ATC 10-027 the

taxpayer claimed input tax credits for the acquisition of a yacht and

accessories. The taxpayer also entered into what he described as a “sub-

dealer” agreement with the vendor of the boat, by which he would receive a

commission of $5000 for each boat of the same type sold in Victoria during

the term of the agreement. No yacht of that type was sold during the period

of the agreement.


– 25 –

The Commissioner denied the claim for an input tax credit on the basis that

the yacht was not a creditable acquisition. The AAT upheld the

Commissioner’s view.

The Tribunal distinguished two earlier Tribunal decisions which considered

successful claims by taxpayers arising out of the acquisition of a yacht:

Peerless Marine Pty Ltd and Commissioner of Taxation [2006] AATA 765

(Peerless Marine) and Hostess Marine Pty Ltd v Commissioner of Taxation

[2006] FCA 1651. The Tribunal distinguished those two cases in finding

against the taxpayer (at [20] to [27]).

By contrast, the taxpayer successfully appealed the Commissioner’s

determination that it was not carrying on an “artworks” enterprise in Federal

Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402; 72

ATR 120. The applicant was a wholly owned subsidiary of an individual

who controlled a successful and substantial property development business.

The applicant's only activity since 1997 had been the acquisition of paintings

and antiques. From 1997 to November 2005 approximately $4.8 million had

been spent. This comprised 225 antique items and 87 paintings.

No sales occurred until Nov 2002. Only 3 items were sold in the period 1997

to Nov 2005 (total sales were of the order of $100,000). Most artworks were

kept at either of two private residences which were owned by the group. A

small number were on display at the group's business premises.

The applicant had no written business plan but evidence was given that:

• the purpose and intention of acquiring artworks had always

been based on the view that the artworks were to have an

inherent appreciating value;

• the investment may be turned to account when it was

appropriate to do so at a profit;

• artwork was not purchased as a hobby or recreational pursuit;

• the Swansea Collection has been built up as a sound financial

investment, all the works in which were for sale at the right

price;

• the applicant was striving to improve the quality of the

collection to museum quality; and


– 26 –

• as better quality paintings came on the market, the Applicant

would sell the B grade paintings in order continually to raise the

quality of the collection as a whole. This was to be done by way

of off-market transactions or by way of purchase at auctions.

The applicant wanted to build one of the finest collections of art in Australia

and that the strategy included an expectation that items would double in

value every 7 years. If they failed that test, they would be disposed of and

replaced with better quality items. However, except in the case of the few

specific items actually sold, no active steps had been taken to market or sell

any artwork.

The applicant did not have any employees and did not have a bank account

but comprehensive accounting records were maintained by employees of the

corporate group. Until 2004, the applicant's purchases were funded by

interest free loans from the Applicant's director and the group. In that year,

those borrowings were supplemented by a $1 million commercial bill

facility secured by the group.

Some other cases which raised the issue of carrying on an enterprise (all

decided in favour of the Commissioner) include:

• Criterion Prestige Pty Ltd and FCT [2015] AATA 468: The taxpayer

claimed to be carrying on the enterprise of subdividing and selling

land but no land had been purchased and no finance was available to

fund a purchase.

• Dotrac Pty Ltd and FCT [2014] AATA 336 The taxpayer built a

residential building on rural land with the intention of providing

short term holiday letting – held this was merely preparatory to

commencing an enterprise intended for the future and is not an

activity of an enterprise.

• Naidoo and FCT [2013] AATA 443: A partnership which had no

employees, no business plan, no strategy to expand and whose

principal was already fully occupied with work for another entity;

• The Married Couple and FCT [2013] AATA 888: The Married

Couple bought a rural property in 2006, constructed a residential

building on the property and also did some other works, including

clearing of some of the land. They intended to make the building

available for short-term holiday letting. They also intended to grow


– 27 –

olive trees on the property for production of table olives and olive

oil. At one stage, Mr and Mrs C also intended to farm goats. In or

about early October 2009, Mr and Mrs C executed a partnership

agreement and became registered for GST purposes, initially with a

date of effect of 29 September 2009. However, the partnership’s

registration was subsequently backdated by the Commissioner of

Taxation, at the request of the Married Couple’s accountant, to 1

January 2007. The Commissioner audited the couple shortly after the

decision to backdate, and concluded the couple was not a partnership

and was not carrying on an enterprise. Even if the Married Couple

had been carrying on an enterprise during the Relevant Period, the

Commissioner stated that the acquisitions were not made in the

course of carrying on an enterprise or even if they were, they were

excluded from being acquired for a creditable purpose because they

related to making supplies that would be input taxed supplies of

residential premises. In addition, the Commissioner stated that the

acquisitions were of a private or domestic nature or some

acquisitions were otherwise not creditable because they were

entertainment expenses. Those views were affirmed in the Tribunal;

at best, the couple’s activities could be viewed as activity preparatory

to carrying on an enterprise intended for the future.

• Confidential and FCT [2013] AATA 701: The Applicant’s evidence

(described by the Tribunal as “imprecise” and “uncorroborated by

any evidence by any other person [n]or was it corroborated by any

contemporaneous documents”) was in these terms (at [13]):

a) before she was required to serve a term of imprisonment, she

tried to start a services business that involved use of a motor

vehicle. The attempts straddled her term of imprisonment

and did not succeed;

b) the steps that she took in attempting to start the business

entailed buying two motor vehicles, a computer, printer, fax,

desk, filing cabinet and business cards and promotional

material for distribution, distributing that material, and

making phone calls and door knocks;


– 28 –

c) when attempting to start her business she had a disabled child

who caused her problems, another infant who, at the time,

required hospitalisation and intensive care (as a result of

being born premature), and a disruptive or dysfunctional

relationship with her now ex-partner who had an addictive

behavioural problem;

d) from November 2009 until approximately May 2011 she

served a sentence that entailed approximately 12 months

imprisonment and six months home detention;

e) her ex-partner ransacked her house twice and any records she

had of the purchases she had made for her business were lost

or destroyed. This made it impossible for her to produce

them to the Commissioner or to the Tribunal;

f) she reported the second ransacking to the police between

May 2011 and August 2012. She was unsure of the date

because it was a stressful time for her;

g) the $41,400 total purchases reported in the 31 March 2009

BAS would have been for a motor vehicle;

h) one of the $41,400 contended to have been spent on

purchases reported in the 31 March and 30 June 2009 BASs

was probably a mistaken duplication;

i) the $14,540 total purchases reported in the 31 March 2011

BAS would have been for furniture or for a motor vehicle.

She purchased two Mazda motor vehicles for the business;

j) she possibly had registration papers for the vehicles at her

home that would prove ownership and purchase of these

vehicles. They had not been produced to the Tribunal

because she had not been asked to do so;


– 29 –

k) she undertook a small number of jobs during the Review

Periods but was either not paid for them at all or was paid in

cash;

l) the $600,000 total purchases reported in the 31 March 2011

BAS was for a house purchased to live in. The Applicant

claims to have had a tax invoice for the purchase and to have

been advised that she could claim the ITCs if she ran her

business from her home. The Applicant also asserted that she

had not produced the documentation in relation to the house

purchase because she had not been asked for it by the

Commissioner’s officers or Tribunal staff;

m) the printing business from which she had purchased the

business cards and promotional material for distribution had

closed and she could not locate the owners to obtain records

of the purchase;

n) the items purchased for the business were either kept in

storage or given away to needy people after the Applicant’s

business attempts were abandoned; and

o) she had not sought to lead any corroborating evidence from

family members, (for example a sibling) because there were

intra family problems and bad relations over management of

one of her parent’s affairs that had led to a litigious process

that was hoped would regularise those affairs.

Nature of the subject matter of the transaction

Having considered the nature of the entity, the practitioner needs to consider

the subject matter of the transaction. The GST act contains a number of

exemptions and concessions applying to certain classes of property. The key

issues to be addressed are:

➢ Is the property “residential premises”?


– 30 –

➢ If so, is the property “commercial residential premises” or “new

residential premises”?

➢ Is the property “farm land”? (not the subject of an ATO Ruling or Draft

Ruling. Note that the proposal in the Treasury discussion paper issued

on May 2009 which, if implemented, would remove the GST-free

status of farm land, and replace it with a “reverse charge” mechanism

was abandoned in May 2015).

➢ Is the property situated in a retirement village? (GST Ruling 2011/1,

issued on 27 April 2011 and entitled “Goods and services tax:

development, lease and disposal of a retirement village tenanted under

a 'loan-lease' arrangement”. The Ruling considers the relevance of

ingoing contributions in determining the consideration for the supply

by sale of a retirement village to a purchaser; and the extent to which

input tax credits are available for creditable acquisitions or

importations made by the developer to construct or develop the

village). On 11 July 2012 the ATO issued GST Ruling 2012/3, which

deals with the GST treatment of care services and accommodation in

retirement villages and privately funded nursing homes and hostels. On

15 August 2012, the ATO issued GST Ruling 2012/4, which discussed

the GST treatment of residents’ exit fees from retirement villages

operated on a leasehold or licence basis.

Commercial residential premises – former GSTR 2000/20

This ruling was primarily concerned with the identification of what premises

constitute commercial residential premises for the purposes of, for example,

Subdivision 40-C, and if that were the only matter covered the Ruling may

be of interest to relatively few practitioners. However, almost in passing, the

Ruling states the Commissioner’s views on the wider issue of what

constitutes residential premises.

The key legislative provisions are:

40-65 Sales of residential premises

(1) 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).

(2) However, the sale is not input taxed to the extent that the

*residential premises are:

(a) *commercial residential premises; or


– 31 –

(b) new residential premises other than those used for

residential accommodation (regardless of the term of

occupation) before 2 December 1998 {emphasis added}.

(The rider to the end of para (b) was inserted to allay concerns that a

residential property built 20 years ago by a professional builder and self-

occupied may have constituted a taxable supply when sold).

40-75 Meaning of new residential premises

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises and

have not previously been the subject of a *long-term lease;

or

(b) have been created through *substantial renovations of a

building; or

(c) have been built, or contain a building that has been built, to

replace demolished premises on the same land.

(2) However, the premises are not new residential premises if, for the

period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b)

nor (1)(c) applies) – the premises first became *residential

premises; or

(b) if paragraph (1)(b) applies – the premises were last

*substantially renovated; or

(c) paragraph (1)(c) applies – the premises were last built;

the premises have only been used for making supplies that are

*input taxed because of paragraph 40-35(1)(a).

To avoid doubt, if the residential premises are *new residential premises

because of paragraph 1(b) or (c) of this definition, the new residential

premises include land of which the new residential premises are a part.

{This definition replaced the former definition of *new residential

premises in the Dictionary, with effect from 21 December 2000.}

Extracts from section 195-1

residential premises means land or a building that:

(a) is occupied as a residence; or

(b) is intended to be occupied, and is capable of being occupied, as a

residence;

(regardless of the term of the occupation or intended occupation) and

includes a floating home.

commercial residential premises means:

(a) a hotel, motel, inn, hostel or boarding house; or


– 32 –

(b) premises used to provide accommodation in connection with a

school; or

(c) a ship that is mainly let out on hire in the ordinary course of a

business of letting ships out on hire; or

(d) a ship that is mainly used for entertainment or transport in the

ordinary course of a business of providing ships for entertainment

or transport; or

(e) a caravan park or a camping ground; or

(f) anything similar to *residential premises described in paragraphs

(a) to (e).

However, it does not include premises to the extent that they are used to

provide accommodation to students in connection with an *education

institution that is not a *school.

The references to residential premises being residential premises (regardless

of the term of occupation or intended occupation) were introduced in the Tax

Laws Amendment (2006 Measures No. 3) Act 2006. Those amendments were

intended to clarify what constitutes residential property (and counteracting

the interpretation contemplated by the Full Court of the Federal Court in

Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 57 ATR 521;

[2004] FCAFC 307, and embraced by the Supreme Court in Toyama Pty Ltd

v Landmark Building Developments Pty Ltd (2006) 62 ATR 73; [2006]

NSWSC 83). It is notable that these 2006 amendments are expressed to

apply as from 1 July 2000.

The Ruling expands on these definitions in a way which seems to some

commentators to be not entirely consistent with the wording of the

legislation. An area of particular concern is whether vacant land can ever be

residential premises. The Draft Ruling contemplated that vacant land with

services of a type associated with residential use (for example, water and

sewerage) might constitute residential premises. The final version of the

Ruling takes a different approach. I reproduce selections from the Ruling

below, which deal with the vacant land issue (see paras 24 to 27), and also

a vexing question of the status of arrangements in the nature of professional

consulting rooms (at paras 21 to 23):

21. Some examples will indicate the differences that need to be

understood in this context. If a building consists of a shop below

and a flat above, the physical characteristics indicate that only part

of the building is residential premises, that is, the flat. The shop is

not residential premises and is taxable in the normal way when

leased or sold.


– 33 –

22. The function of paragraph 40-35(2)(a) and subsection 40-65(2) is

to differentiate the GST treatment of any portions of residential

premises that are commercial. This would apply, for example, to a

house that has been partly converted for use as a doctor’s surgery.

Several parts of the house may still be used predominantly for

residential accommodation, such as bedrooms, bathroom, kitchen,

living rooms and gardens, while other areas are not, being turned

over to office and consulting room space, and storage for the

surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(2)

operate to exclude these commercial parts from the input-taxed

treatment of the rest of the property.

23. Whether or not a particular room or part of a house or apartment is

to be used predominantly for residential accommodation, as

opposed to commercial purposes, is a question of fact and degree.

A home office in a house will not generally be sufficiently separate

from the rest of the residential premises to distinguish its use and

its predominant use will still be residential accommodation.

Characteristics of residential premises

24. The definition of ‘residential premises’ in section 195-1 refers to

land or a building that is occupied as a residence or is intended and

capable of being occupied as a residence.

25. The definition requires that land must have a building affixed to it

and that the building must have the physical characteristics that

enable it to be occupied or be capable of occupation as a residence.

Vacant land of itself can never have sufficient physical

characteristics to mark it out as being able to be or intended to be

occupied as a residence.

26. The physical characteristics common to residential premises that

provide accommodation are:

(i) The premises provide the occupants with sleeping

accommodation and at least some basic facilities for day to

day living.

(ii) The premises may be in any form, including detached

buildings, semidetached buildings, strata-title apartments,

single rooms or suites of rooms within larger premises.

27. In addition to the physical characteristics, there are other factors

which may be of use in determining whether premises are to be

used for residential accommodation or accommodation of another

kind. These characteristics would usually be present in residential

premises that have the physical characteristics given in paragraph

26. These often, but not always, include:

(i) The purpose or context of the premises’ use is for personal

accommodation, rather than another purpose, such as for a

business.

(ii) The tasks of day to day living, such as, preparing food,

cleaning and laundering, are performed by the occupant, or

by others under private arrangements.


– 34 –

(iii) The status of the occupant is most commonly that of owner,

tenant or lessee.2 Any boarders, lodgers or guests occupy the

premises by private arrangement with the owner, tenant or

lessee.

(iv) The premises will be in an area zoned by Council or Shire

regulations as suitable for human habitation.

The view expressed in the Ruling that vacant land can never be residential

premises was confirmed by the Federal Court in Vidler v FCT [2009] FCA

1426. Despite the residential zoning of the land, the absence of any

structures to provide shelter and basis living facilities means the sale of the

property could not be input taxed residential premises. The decision of Stone

J at first instance was affirmed on appeal: Vidler v Commissioner of Taxation

[2010] FCAFC 59; 2010 ATC 20-186.

Residential premises – GSTR 2012/5, 2012/6, 2012/7

On 22 June 2011 the ATO issued GST Draft Ruling 2011/D2, which

explained in greater detail than the then current ruling 2000/20 the meaning

of “residential premises” and “commercial residential premises”. That Draft

Ruling was itself superseded by GST Draft Ruling 2012/D1, issued on 22

February 2012. The intention was that when the draft ruling was finalised it

would replace the 2000 Ruling. Appendix 2 of each of the Draft Rulings

contained a very useful comparative table between Ruling 2000/20 and the

Draft (although that Appendix was not intended to form part of the finalised

ruling).

That Appendix was ultimately not as useful as it first appeared because of a

change of tack by the ATO. The 2000 ruling on commercial residential

premises has now been replaced by not one but three rulings: GSTR 2012/5

(which discusses residential premises in general), GSTR 2012/6

(considering commercial residential premises) and GSTR 2012/7 (dealing

with the GST consequences of supplies of long-term accommodation in

commercial residential premises – dealing principally with Division 87 of

the GST Act). The rulings all issued, and commenced, on 19 December

2012, and incorporate an analysis of the body of case law which has

considered the meaning of “residential premises” and “commercial

residential premises”. For example, GSTR 2012/6 analyses in considerable

detail the decision of Nicholas J in ECC Southbank Pty Ltd as trustee for

Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795.

That case considered whether supplies associated with premises at Urbanest


– 35 –

Southbank in Brisbane were taxable supplies of commercial residential

premises (as contended by the taxpayer) or input taxed supplies (the

Commissioner’s view). The building was certified as a BCA Class 3

building: a residential building, other than a building of Class 1 or 2, which

is a common place of long term or transient living for a number of

unrelated persons, including:

(a) a boarding-house, guest house, hostel, lodging-house or

backpackers accommodation; or

(b) a residential part of a hotel or motel; or

(c) a residential part of a school; or

(d) accommodation for the aged, children or people with

disabilities; or

(e) a residential part of a health-care building which

accommodates members of staff; or

(f) a residential part of a detention centre.

The Queensland Government leased the premises to the first applicant

(NSUT). The permitted use was: the operation and/or sale (including sale of strata subdivided lots)

of the Building for student accommodation and/or serviced

apartment purposes.

NSUT granted a sublease to the second applicant (NSLT). The permitted use

under the sublease was: managed residential accommodation including the ancillary

provision and operation of vending machine facilities, laundrette

facilities, internet services, bicycle storage and car parking

facilities.

The second applicant entered into numerous “Rooming Accommodation

Agreements” and “Studio Accommodation Agreements” with assorted

named “residents” or “customers”. The distinction appears to be due to the

divergence of approach in statutory regulation of each type of

accommodation under the Residential Tenancies and Rooming

Accommodation Act 2008 (Qld).

The controversy is neatly encapsulated in the judgment at [37] to [40]:

37 As I have mentioned, the proceeding concerns four

specific supplies of what the parties agree are residential

premises for the purposes of the GST Act. The parties disagree


– 36 –

as to whether these residential premises also constitute

commercial residential premises or accommodation in

commercial residential premises for the purposes of the GST

Act.

The first supply

38 The first of the relevant supplies involves the sub-lease of

the Urbanest premises by NSUT to USLT. The applicants say

that the whole of the premises the subject of that supply are

commercial residential premises and that it was thus a taxable

supply under the GST Act. In the alternative, the applicants

contend that the whole of the premises, except for those parts

that consist of studio apartments, are commercial residential

premises the supply of which by NSUT to USLT was a taxable

supply.

The second and third supplies

39 The second and third of the relevant supplies concerns

the provision of accommodation to Mr O’Leary and Ms Guiloff

respectively pursuant to Rooming Accommodation

Agreements which each of them entered into with USLT. Mr

O’Leary’s agreement was for a fixed term of approximately

four months starting on 1 March 2010. Ms Guiloff’s

agreement was for a fixed term of approximately three months

beginning 24 September 2010. Again, the applicants say that

each of these supplies was a taxable supply.

The fourth supply

40 The fourth supply relates to the supply of the premium

studio apartment to Mr Chairatna pursuant to the Studio

Accommodation Agreement previously referred to. The term

of the agreement was for six months, beginning on 28 February

2010. The applicants say that this also was a taxable supply.


– 37 –

The Court found some similarities, but several significant differences,

between the premises and a “hotel or motel” (at [51] to [64]). The Court also

formed the view that the premises were not similar to an “inn or boarding

house” (at [68]). However, the taxpayers succeeded under the “hostel”

heading (at [65] to [67]):

65 According to the Macquarie Dictionary, a hostel is a

supervised place of accommodation usually supplying board

and lodging provided at a comparatively low cost particularly

to students.

66 In my view, the Urbanest premises bears a much closer

resemblance to a hostel than a hotel. The accommodation

available at the Urbanest premises is intended to be (at least

in the case of the shared apartments) comparatively low in

cost and is obviously configured with the needs of students

seeking low cost accommodation in mind. The

accommodation provided at the Urbanest premises is

supervised in the sense that the reception desk is manned 24

hours a day. I infer that residents may lodge complaints with

management through the reception desk about the behaviour

of other residents or visitors including in relation to excessive

noise, failures to maintain the cleanliness of shared

apartments and like matters dealt with in the House Rules.

67 It is true that meals are not provided to residents or

customers of the Urbanest premises as they might usually be

in the case of a more traditional hostel. However, that does

not mean that the Urbanest premises may not be fairly

described as a hostel or, at least, as being similar to a hostel.

In my opinion, if the Urbanest premises is not a hostel, it is very

similar to a hostel.


– 38 –

Sale of residential premises – GST Ruling 2003/3

This Ruling, like the ruling on commercial residential premises, raises some

incidental issues which are of practical importance to practitioners. For

example, the GST consequences of subdivision by strata title is discussed at

paras 42 to 43, reproduced below:

Subdivision of apartments by strata title

42. A building may comprise flats or units for which no separate title

exists. The title refers to the registered ownership of the relevant

land and improvements as a whole. The owner of the apartments

may decide to obtain permission for a strata title subdivision so that

each flat or unit can be sold separately. Approval for the

subdivision may be subject to building works being undertaken.

For example, approval may be conditional on the construction of a

firewall or modifications to the entrance and exit of the building.

43. The process of strata titling an apartment block does not, by itself,

create new residential premises under paragraph 40-75(1)(a),

When the newly strata titled units are subsequently sold the

supplies of those units are not sales of new residential premises, if

the land and the building together have previously been sold as

residential premises, or been the subject of a long-term lease.

Physically, the combination of land and the building as residential

premises remains basically the same. It is only the nature of the

legal interest which has changed. If the process of strata titling is

accompanied by works on the building, it is then a question of

whether the works constitute substantial renovations (see

discussion at paragraphs 53 to 83).

The ruling also discusses the consequences of conversion from company

title to strata title (paras 44 to 49), the relocation of a residential building on

the same land (paras 38 to 40) and a detailed discussion (with examples) of

what is meant by substantial renovations (paras 53 to 83).

What is meant by the “supply of a going concern” – GST Rulings

2001/5 and 2002/5

GST Ruling 2002/5 was the second Ruling dealing with going concerns, and

applies as and from 16 October 2002.

Any practitioner acting on a sale of business where it is contemplated that

the going concern exemption will be used should consider the complete

terms of the relevant Ruling carefully. What follows is a necessarily brief

summary of the main points to note in the Ruling [with parenthetic

references to the relevant paragraphs of the Ruling].


– 39 –

➢ The going concern provisions are to be considered from the perspective

of the supplier [3].

➢ The Ruling introduces the concept of an “identified enterprise” [21, 29,

for example]. The phrase does not appear in the GST Act, but is

embraced by the Ruling. As is suggested below, I believe the use of

this phrase in the Ruling results in a much narrower interpretation of

the exemption than would follow from a literal reading of the

legislation.

➢ The sale of a fully tenanted shopping centre can be the supply of a

going concern if all the requirements of the section are satisfied [24].

➢ Where the thing supplied is not capable of operating as an independent

enterprise, but is merely an asset used in an activity carried on in an

enterprise, that cannot fall within the exemption [25].

➢ A sale of realty with a lease back to the vendor cannot be the supply of

a going concern [26 to 28].

➢ A sale of an internal division of an enterprise might be, but will

probably not be, the supply of a going concern where the internal

division does not make supplies to external clients [30 to 40].

➢ The exemption will, as a general principle, not be available where there

is more than one supplier or more than one recipient [42-45]. The ATO

takes this view on the basis that s 38-325 evidences a contrary intention

so as to displace s 23 of the Acts Interpretation Act 1901 (the “gender

and number” provision). The GST grouping provisions are not relevant

for the purposes of applicability of the going concern exemption,

although a member of a GST group may individually make a “supply

of a going concern” [48]. This approach will severely restrict the

availability of the exemption. Having said that, the Ruling recognises

some limited exceptions to this general principle – see the discussion

of paras 131 to 140 below.

➢ Where one of the things necessary for the continued operation of the

enterprise cannot be supplied by the supplier (the example the Ruling

uses is a logging licence which must be surrendered and re-issued), a

narrow or technical approach would mean the exemption would never

apply [48 to 49]. The ATO took a (slightly) less restrictive approach in

the Ruling.

➢ The Ruling contains a discussion of the treatment of chattel leases [71].


– 40 –

➢ On the question of supplying all of the things that are necessary for the

continued operation of an enterprise, the Ruling suggests a number of

tests. Would the enterprise be incapable of operation by the recipient

in the absence of the thing [73]? Is the recipient in a position to carry

on the same enterprise if it chooses [74, 78]? With respect, this

approach works from the assumption that what is required to satisfy the

section is all things that are necessary for the continued operation of

the enterprise rather than an enterprise. So, for example, the sale of a

mobile mechanic business would not be the supply of a going concern

if the vendor retained its specially equipped van [87 to 89].

➢ In general, the premises from which a business is conducted (or the

right to occupy those premises) will be a thing necessary for the

continued operation of the enterprise [90 to 99].

➢ Statutory licences, permits, quotas or similar statutory authorisations

will likewise be necessary [103 to 107]. If a licence does not issue to

the purchaser that cannot be the supply of a going concern [107].

➢ A sale of leased premises to the lessee cannot be the supply of a going

concern because the lessor cannot supply the benefit of the covenants

under the lease – the New Zealand decision of Pine v CIR (1998) NZTC

13,570 is distinguished [108 to 109].

➢ Where goodwill is relevant (which will be the case where the enterprise

is a business) the Ruling distinguishes between non-transferable

goodwill (“goodwill which emanates from the personality, reputation,

skills or attributes of an individual” [112 to 114]) and goodwill

emanating from other sources, which is capable of being supplied.

➢ Staff are not “things” and so are not of themselves “things necessary”

[122]. One point which is emphasised in the Ruling ([122 to 128]) is

that the skills and knowledge of a key employee may be a “thing

necessary”. It may be necessary for vendors of businesses with key

employees to consider an appropriate mechanism for transmission of

such skills and knowledge – not necessarily “golden handcuffs”, but

perhaps a training period during which such skills and knowledge are

passed on, or the preparation of a permanent record of the employee’s

skill and knowledge, such as a training manual [122 to 126].

➢ The supply must be carried on until the day of the supply [141 to 148].

➢ A sale of a partly tenanted building can constitute the supply of a going

concern if the vacancies are due to, for example, refurbishment, or if


– 41 –

the vacant floors are being actively marketed [151-158]. The final

ruling also states that “the activity of leasing commences when at least

one tenant enters into an agreement to lease or occupies the building”

[151]. There is also one example in the Ruling which was not included

in the Draft Ruling which is a cautionary tale of the risks of using the

exemption for mixed use properties. Paragraphs 157 and 158 state:

Example: some of the building that is not part of the enterprise

of leasing

157 Breakeven Distributors Pty Ltd (‘Breakeven’) owns a large

commercial property on a single title. The building has five

levels. Breakeven conducts a discount retail business from

the ground and first floors of the building, and leases the

upper three floors as professional offices. Breakeven enters

into a contract to sell the building and the agreement states

that it will be the ‘supply of a going concern’. At the time of

contract, two levels are leased and the other is being

advertised for lease. An office on the first floor is being used

as the building manager’s office from which the enterprise

of leasing the building is conducted. The remaining floor

space on this floor is used in the discount retailing business

and has never been available for lease.

158 The identified enterprise is the leasing of commercial

premises. The portion of the building in which an enterprise

of leasing is being conducted is the upper three floors and

the area occupied by the building manager’s office.

Provided the conditions in subsection 38-325(2) are

satisfied, the supply of this portion of the building will be

the ‘supply of a going concern’.

➢ The day of supply will be “the date on which the recipient assumes

effective control and possession of the enterprise which is carried on

by the supplier” [161 to 165].

➢ The “agreement in writing” requirement must be satisfied on or before

the time of the supply [182].

➢ Admission of new partners into a partnership, or a sale of a partnership

interest, cannot be the supply of a going concern [190 to 194].

Likewise, a supply of a corporate enterprise by the sale of the shares in

the company cannot fall within the exemption [196 to 197].

For a consideration of how the requirement of writing in s 38-325(1)(c) of

the Act can be satisfied, see:

➢ Midford v DFC of T [2005] AATA 623; 2005 ATC 2189 (sale of strata

unit subject to commercial lease; contract for sale did not expressly

mention sale is a going concern; lease mentioned liability for GST as


– 42 –

between landlord and tenant; taxpayer unsuccessfully argued that the

contract and lease together sufficient to satisfy ss38-325(1)(c)); and

➢ Debonne Holdings Pty Ltd v FC of T [2006] AATA 886; 2006 ATC

2467 (sale of suburban hotel in Perth; two standard form contracts

entered into – one for the realty, the other for the business; each

contract contained an interdependency special provision; land contract

did not address whether supply was the supply of a going concern;

business contract expressly stated the sale was the supply of a going

concern; contracts simultaneously exchanged and settled; buyer sought

to claim input tax credits on the land component – ATO rejected the

claim. The AAT affirmed the ATO’s decision – the whole of the

transaction was GST-free).

➢ YXFP and FCT: [2009] AATA 805 (merely providing in the written

contract that the parties acknowledge that GST is not payable on the

supply will not satisfy the requirement for an agreement in writing).

➢ Brookdale Investnments Pty Ltd and FCT [2013] AATA 154: Statutory

declarations made after a sale will not suffice to satisfy the requirement

in s 38-325(1)(c).

➢ SDI Group Pty Ltd and FCT [2012] AATA 763: The written agreement

does not need to be in the contract for sale / supply but can be derived

other documents – for example, a tax invoice together with a Goods

Statutory Declaration. The taxpayer succeeded before the Tribunal.

➢ Aurora Developments Pty Ltd v FCT [2011] FCA 232 (a sale of land

en globo by a property developer was held not to be the supply of a

going concern where development work ceased after the date of

exchange and the continuing work was only that which was necessary

to bring the land to the state required by the contract; the case also

confirms the proposition that a supply occurs at the date of settlement,

not the date of exchange).

In May 2009 the Treasury issued a discussion paper entitled

“Implementation of the recommendations of the Board of Taxation’s review

of the legal framework for the administration of the GST”. Chapter 2.8 of

the paper is entitled: “Reverse charge mechanism, GST free farm land

supplied for farming”. The proposal is, in essence, that the GST law be

amended to remove the GST free concessions for the supply of going

concerns and farm land supplied for farming, and replace the concessions

with a reverse charge mechanism (if the parties agree). The reverse charge


– 43 –

mechanism would also be available for a wider range of supplies of going

concerns (by broadening and clarifying the concept of a going concern).

The concept of a “reverse charge mechanism” already exists in the GST Act

– see section 83-1 of the GST Act:

83-1 What this Division is about

The GST on taxable supplies made by non-residents can, with the

agreement of the recipients, be “reverse charged” to the recipients.

The proposal to remove the GST-free status of supplies of going concern

and farmland was abandoned in May 2015. Unfortunately the suggestion

that what constitutes a going concern be broadened and clarified also

appears to have slipped off the radar.

Rulings, Determinations and Cases about lease transactions

GST Ruling 2003/16, entitled “Inducements to enter into a lease of

commercial premises” issued on 17 December 2003, and states the ATO

view of the law as at 1 July 2000.

Some examples of categories of inducements considered in the Ruling

include:

➢ a reimbursement of expenses;

➢ a contribution to the whole or part of the tenant’s costs of fitting out

the premises;

➢ a payment for removal expenses;

➢ a landlord paying a tenant’s rental under an existing lease;

➢ building works (e.g. fit-outs) to adapt the premises to the particular

requirements of the tenant;

➢ income guarantees;

➢ the provision of plant, computer equipment, motor vehicles, holidays,

art work, etc;

➢ rent-free (rent holiday) and rent discount periods;

➢ payment of a premium from the tenant to the landlord.

Where the arrangement is such that there is a separate supply of the entry,

or agreement to enter, into a lease, and the inducement is consideration for

that supply, then it is necessary to consider if the supply may have a different

GST treatment to the supply of the premises. Effectively a lease of

commercial premises in relation to which an inducement is agreed may


– 44 –

involve not one but three taxable supplies, each of which may have GST

consequences.

To borrow an example from the Ruling (at [38] to [41]):

Example 1 – non-monetary consideration and separate supplies

38. The terms of an agreement for lease provide that a landlord will

supply commercial premises for a specified monthly rental. The

terms of the agreement also provide that the landlord will supply a

motor vehicle to the tenant as consideration for the tenant agreeing

to enter into the lease agreement. The agreement makes clear that

the motor vehicle is provided specifically as consideration for the

tenant’s agreement to enter into the lease. The only consideration

for the landlord’s supply of the commercial premises is the rent to

be paid under the lease. There is no provision for return of the

vehicle in the event that the lease does not proceed or is terminated

early. There are no relevant circumstances to suggest that the

parties’ bargain is not as documented in the agreement for lease

(see Appendix A for a diagram which illustrates the supplies in this

case).

39. The tenant makes a supply by agreeing to enter into the lease

(subparagraph 9-10(2)(g)(i)).

40. The landlord is making two supplies, being the supply of the

vehicle and the supply of the premises. The consideration for the

supply of the vehicle is the agreement by the tenant to enter into

the lease and the consideration for the supply of the premises is the

rent. We accept in this case that the GST inclusive market value of

the agreement to enter into the lease would be the same as the GST

inclusive market value of the vehicle. However, other reasonable

methods can be adopted to determine the GST inclusive market

value of the consideration.

41. Based on Appendix A, the GST payable and input tax credits

arising from the above described transactions are:

(a) Supply of the agreement to enter into the lease by the tenant:

(i) Consideration provided by the landlord is the motor

vehicle (GST inclusive market value $33,000);

(ii) GST payable by the tenant $3,000; and

(iii) Input tax credit to the landlord $3,000.

(b) Supply of the motor vehicle by the landlord:

(i) Consideration provided by the tenant is the tenant’s

agreement to enter into the lease (GST inclusive

market value $33,000);

(ii) GST payable by the landlord $3,000; and

(iii) Input tax credit to the tenant $3,000.

(c) Supply of premises by the landlord:


– 45 –

(i) Consideration provided by the tenant is the lease

payments ($1,100 per month);

(ii) GST payable by the landlord $100 per month; and

(iii) Input tax credit to the tenant $100 per month.

The second half of the Ruling considers some of the more common types of

lease inducements in more detail.

On 12 November 2014 the ATO issued GST draft ruling 2014/D5 dealing

with development lease arrangements with government agencies. The draft

ruling was finalized as GSTR 2015/2 Goods and services tax: development

lease arrangements with government agencies, issued on 3 June 2015.

Paragraphs 1 and 2 of the ruling provide a useful summary of its scope:

1. This Ruling explains the goods and services tax (GST) treatment of particular transactions arising in the context of development lease arrangements entered into between government agencies1 and private developers. These arrangements typically have the following features:

• the private developer (developer) undertaking a development on land owned by

a government agency in accordance with the terms of a written agreement between

the developer and the government agency, and

• the government agency supplying the land by way of freehold or grant of a long-

term lease 2 to the developer subject to the developer undertaking the

development in accordance with the terms of the written agreement. That is, the

developer becomes entitled to transfer of the freehold or grant of a long-term lease

when the development is completed.

2. In particular, this Ruling considers:

• the relevant principles for identifying and characterising the various supplies that

are made for consideration3 under a development lease arrangement, including:

- whether the grant of a short-term lease or licence (development lease) by

the government agency to allow the developer to undertake the

development on the land is a supply for consideration

- whether, in completing the works on land owned by the government

agency, the developer makes a supply of development services 4 to the

government agency for consideration, and

- whether the sale of the freehold or grant of the long-term lease of the land

by the government agency is a supply for consideration, and whether any

consideration the developer provides for supply of the land includes

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undertaking of the development works on land owned by the government

agency.

• the extent to which the consideration for particular supplies made under a

development lease arrangement includes consideration that is not expressed as an

amount of money, that is, non-monetary consideration

• how the value of any non-monetary consideration provided for supplies made in

the context of a development lease arrangement may be determined,5 and

• the attribution, under Division 29 of the GST Act, of the GST liabilities and input

tax credit entitlements that may arise under development lease arrangements.

A difficulty with the GST treatment of leased premises where the premises

were sold after the grant of the lease was identified in the decision of South

Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155; 2009

ATC 20-145 per Finn, Emmett and Edmonds JJ. South Steyne purchased a

substantial building (the Sebel Complex at Manly), which was subsequently

converted to strata title. In late September 2006, South Steyne sold the

Management Lot (reception area, offices and car parking spaces) to one

Mirvac subsidiary (MHL), and leased each apartment to another Mirvac

subsidiary (MML) as part of a serviced apartment business. Some of the

apartments were sold (subject to the existing lease) to, among others, MBI.

The case considered the GST treatment of:

1. The lease from South Steyne to MML

2. The sale to MBI

3. The continuation of the lease once MBI purchased the building

4. Accommodation in one of the rooms for a two-day stay

At first instance ((2009) ATC 20-090; [2009] FCA 13), Stone J held the first

and third supplies were input taxed, and the second and fourth supplies were

taxable.

The taxpayer was partially successful on appeal. In the Full Court’s view:

1. The first supply was input taxed

2. The second supply was GST-free (a result favourable to the

taxpayer)

3. The third supply was in fact not a supply from the purchaser of the

building to the tenant at all. The supply under the continuing lease

was made by the former owner of the building, not the holder of the



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reversion. The benefit and burden of the lease covenants ran with the

land due to the operation of conveyancing legislation, not because of

a distinct supply agreement or arrangement.

4. The fourth supply was taxable.

The analysis of the Full Court on the third supply is problematic. It suggests

that when a building is sold subject to existing tenancies which are taxable

supplies the vendor, rather than the purchaser, will be liable to remit GST

on the rent post-settlement.

The ATO issued a Decision Impact Statement on 30 November 2009. The

DIS relevantly provides:

Pending further consideration of the decision, the Tax Office

will apply the GST Act in the following way in relation to leases:

1. The purchaser of a reversion is liable for GST relating to the

lease for the remaining period of the continuing lease to be

attributed in accordance with the attribution rules.

2. There is some tension in the conclusion that the purchaser of

a reversion does not make a new or further supply by way of

lease, but that there is a continuing supply by way of lease, and

the requirement for the supplier of a taxable supply to issue a tax

invoice. Noting the conclusion in Westley Nominees that a

reversionary owner makes a supply by way of entering into an

obligation to honour the terms of the lease, the Tax Office will

treat a document issued by the current owner of leased premises

as a tax invoice if it otherwise qualifies as a tax invoice,

including where the lease was granted by a previous owner.

3. If the premises are residential premises, the continuing supply

remains input taxed in accordance with s 40-35. Further, s 11-

15(2)(a) denies input tax credits on acquisitions by the current

owner that relate to the continuing supply by way of lease,

including where the lease was granted by a previous owner. The

Full Court's decision does not directly address this issue.

Paragraph 11-15(2)(a) ordinarily applies only if the acquirer

makes input taxed supplies. However, in the particular context

of reversionary owners, where lease covenants run with the land

and having regard to the evident policy in respect of leases of

residential premises, the Tax Office view is that input tax credits


– 48 –

are not available to lessors of residential premises to the extent

that the continuing lease of the premises is an input taxed supply.

4. The Tax Office will continue to administer the GST Act in

relation to strata titled hotel developments in accordance with

the principles set out in GSTR 2000/20. While the decision

indicates that there is no new or further supply by way of lease

by an investor who purchases a unit that is leased to an operator,

it also indicates that there is a continuation of the original supply

by way of lease upon the grant of the lease. The investor, even

if registered, is not entitled to input tax credits on acquisition of

the unit or associated acquisitions, such as legal services,

insurance, cleaning, maintenance and commissions.

5. If a supply of a reversion is GST-free, either because the

parties agree that it is a supply of a going concern or because

section 38-480 applies, the recipient of the supply has an

increasing adjustment under Division 135, where the continuing

lease of the premises is to any extent an input taxed supply.

The taxpayer’s application for special leave to appeal to the High Court was

dismissed on 23 April 2010.

The Commissioner issued an assessment based on the reasoning in South

Steyne. The reasons for this assessment and the subsequent litigation are set

out in the High Court judgment in Commissioner of Taxation v MBI

Properties Pty Ltd [2014] HCA 49 at [22] to [25]:

22 The Full Court having held in South Steyne that the sale of

each apartment lot by South Steyne to MBI subject to an

apartment lease was a GST-free supply of a going concern, and

that the lots were residential premises, the Commissioner

assessed MBI to GST on the basis of MBI having an increasing

adjustment under s 135-5. On disallowance of MBI's objection

to that assessment, MBI appealed to the Federal Court. MBI's

appeal was dismissed at first instance[MBI Properties Pty Ltd v

Federal Commissioner of Taxation 2013 ATC 20-372], but

allowed on further appeal to the Full Court[MBI Properties Pty

Ltd v Federal Commissioner of Taxation [2013] FCAFC 112;

(2013) 215 FCR 65]. The Full Court set aside the objection

decision and allowed MBI's objection to the assessment.

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23 At neither stage of the proceedings on MBI's appeal to the

Federal Court from the disallowance of its objection to the

assessment did the Commissioner challenge the earlier holding

of the Full Court in South Steyne that the continuation of each

apartment lease after the sale of the corresponding apartment lot

by South Steyne to MBI did not result in a supply by MBI to

MML. The Commissioner at each stage argued instead that

continuation of the apartment lease resulted in a continuation of

an input taxed supply of residential premises by way of lease

from South Steyne to MML.

24 The Commissioner's argument was accepted by Griffiths J at

first instance, but was rejected by the Full Court. Edmonds J,

with whom Farrell and Davies JJ agreed, said:

"The lease is the subject of the supply, not the 'supply'; the

'supply' is the grant of the lease: see s 9-10(2)(d) of the

GST Act. The act of grant does not continue for the term

of the lease; the 'supply' is complete on the lease coming

into existence. The 'supply' constituted by the grant of the

lease did not continue beyond the grant; the fact that the

lease continued was solely a function of the terms of the

grant, not a continuing supply by the grantor."

"If the 'supply' constituted by the grant of the lease did not

survive the grant", Edmonds J continued, "it certainly did

not survive the sale of the reversion from South Steyne to

MBI"[25]. That result, Edmonds J said, was "totally

consistent" with South Steyne[26].

25 The Full Court's conclusion that there was no supply at all in

respect of each lease following the sale of each apartment lot by

South Steyne to MBI meant that there was no input taxed supply

which MBI could have intended would be made through any

enterprise it acquired from South Steyne as a going concern.

That meant in turn that the conditions for the operation of s 135-

5 were not met, and that there was accordingly no increasing

adjustment.

The critical issue in the High Court was whether the purchaser of the

reversion was making a supply for GST purposes. In a single judgment the

High Court answered in the affirmative (at [33] to [41]):

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33. Federal Commissioner of Taxation v Qantas Airways Ltd

shows that it is wrong to consider that one transaction must always

involve the making of just one supply. It is similarly wrong to

consider that the making of a supply must always involve the

taking of some action on the part of the supplier.

34. The concept of supply as employed in the GST Act is of

wide import. Absent modification of the general operation of the

GST Act through application of a special rule, there is a supply

whenever one entity (the supplier) provides something of value to

another entity (the recipient). Section 9-10(1), the amplitude of

which is highlighted by ss 9-10(2) and 9-10(3), serves to emphasise

that the something can be anything and can be provided by any

means. The expansive language of ss 9-10(2)(g) and 9-10(3) serves

in addition to emphasise that the thing provided can be provided by

means of the supplier refraining from acting, or by means of the

supplier tolerating some act or situation, just as it can be provided

by means of the supplier doing some act.

35. A transaction which involves a supplier entering into and

performing an executory contract will in general involve the

supplier making at least two supplies: a supply which occurs at the

time of entering into the contract, in the form of both the creation

of a contractual right to performance and the corresponding

entering into of a contractual obligation to perform; and a supply

which occurs at the time of contractual performance, even if

contractual performance involves nothing more than the supplier

observing a contractual obligation to refrain from taking some

action or to tolerate some situation during a contractually defined

period.

36. That general observation applies as much to a lease as to

another executory contract. There will in general be a supply which

occurs at the time of entering into the lease. That supply will

involve a grant within the scope of s 9-10(2)(d) combined (as

contemplated by s 9-10(2)(h)) with the creation of contractual

rights within the scope of s 9-10(2)(e) and with the entry into

contractual obligations within the scope of s 9-10(2)(g). There will

then be at least one further supply which occurs progressively

throughout the term of the lease. That supply will occur by means

of the lessor observing and continuing to observe the express or

implied covenant of quiet enjoyment under the lease. The thing of

value which the lessee thereby receives is continuing use and

occupation of the leased premises. The special attribution rule in s

156-5, made applicable to a supply by way of lease by s 156-22,

does not alter those aspects of the general operation of the GST

Act.

37. In observing and continuing to observe the express or

implied covenant of quiet enjoyment under the lease, the lessor is

appropriately characterised, for the purposes of the GST Act, as

engaging in an "activity" done "on a regular or continuous basis, in

the form of a lease". The result is that, whether or not the lessor


– 51 –

might also be engaged in some other form of enterprise, the lessor

makes the supply of use and occupation of the leased premises in

the course of the lessor carrying on an enterprise as defined in s 9-

20(1)(c).

38. Once the general operation of the GST Act is understood in

that way, it is apparent that there is no warrant in the text or policy

of the GST Act for reading the reference in the special rule in s 40-

35 to a supply of "residential premises" that is a supply "by way of

lease" as referring to the supply which occurs at the time of

entering into the lease but not as referring to the further supply

which occurs by means of the lessor observing and continuing to

observe the express or implied covenant of quiet enjoyment under

the lease. The reference encompasses both, and both are therefore

input taxed.

39. The text of s 40-35 supports the view that the Full Court

was wrong to focus exclusively on the grant of the lease as the

relevant supply. Section 40-35(1) describes the circumstances in

which "[a] supply of premises that is by way of lease, hire or

licence" is input taxed. A lease (which operates as a grant of an

estate) and a hiring and a licence (which do not) are all treated by s

40-35 as species of supply. That treatment suggests that the

circumstance that a lease characteristically operates as a grant of an

estate (as well as an executory contract) is no reason to deny that

observation of obligations to provide the use of premises over time

is a supply of the premises.

40. In the circumstances which gave rise to the present appeal,

there was an input taxed supply of residential premises by way of

lease which occurred at the time of the grant of each apartment

lease by South Steyne to MML. There was then a further input

taxed supply of residential premises by way of lease which

occurred by means of South Steyne observing its express obligation

under the lease to provide MML with use and occupation of the

leased premises. MBI's assumption of that express obligation by

operation of law on its purchase of the premises from South Steyne

resulted in MBI becoming obliged to continue to make the same

further input taxed supply of residential premises by way of lease to

MML throughout the remaining term of the lease. MBI intended at

the time of purchase to observe that ongoing obligation. MBI

intended to do so through an enterprise which was the same

enterprise as that in which South Steyne had previously engaged

and which MBI, by purchasing the premises subject to the lease,

had acquired from South Steyne as a going concern.

41. The Full Court in the present case was wrong to reason that

the only relevant supply was on the grant of the lease by South

Steyne to MML, and the Full Court in South Steyne was wrong to

conclude that MBI made no supply to MML.

The High Court upheld the Commissioner’s appeal.


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Rulings and Determinations about sale transactions

The margin scheme – GSTR 2000/21, GSTR 2006/7, GSTR 2006/8

Seminars discussing GST and property transactions frequently features

questions and discussions about the application of the margin scheme to

sales. There are three fundamental issues which should be addressed at the

outset:

(a) The margin scheme is not simply a transitional issue. The

provisions are in the principal legislation, and are capable of being

applicable into the future, to supplies beyond those of property held

as at 1 July 2000.

(b) The margin scheme has the effect of reducing the amount of GST

payable in relation to a supply, and so it is tempting to regard the

use of the margin schemes as invariably a “good thing”.

Practitioners should consider the possible applicability of the

scheme bearing in mind that use of the scheme disentitles the

recipient to any input tax credit on the transaction (s 75-20), and

not using the scheme where there is a taxable supply precludes the

recipient from choosing to use the scheme on a future supply (s 75-

5(2)). To some (many?) purchasers, these issues will be totally

irrelevant, but practitioners cannot assume that the issues are

irrelevant without inquiry.

(c) Absent any contractual provision the purchaser originally had no

control over whether or not the vendor has used or will use the

margin scheme. The purchaser was “empowered” in that regard by

significant legislative amendments in 2005.

There were further significant amendments to the margin scheme provisions

in 2008 (largely taking effect from 8 December 2008). A 2009 Treasury

Discussion paper foreshadowed fundamental legislative amendment to the

margin scheme, which has not to date seen the light of day.

Deposits – GSTR 2000/28, GSTD 2000/1, GSTR 2006/2

One concern raised during seminars in the early days of the GST was the

effect of a release of deposit on the attribution of GST. In summary, Ruling

2000/28 provides:

(a) payment of a deposit under a “standard land contract” (including,

for example, the joint copyright form in various jurisdictions) will


– 53 –

not generally trigger GST liability by virtue of Division 99 of the

GST Act (paras 10 to 13).

(b) Victorian legislative provisions regulating the release of deposit

will not trigger an early GST liability (paras 28 and 86).

(c) The Ruling is tantalisingly silent about the position of a non-

standard contract for sale of land (which in a sense is what inquiring

minds were most interested in).

(d) The “Executive Summary” of the Commissioner’s ruling is at para

37 of the Ruling, reproduced below:

37. A sale of land under a standard land contract usually

involves the following stages:

• the parties enter into a standard land contract either by

the exchange of contracts or by both parties signing one

contract;

• a deposit is paid to the stakeholder by the purchaser at

the time of entering into the contract;

• the deposit is held by a stakeholder until it is applied to

the vendor’s benefit at settlement;

• the vendor will execute a transfer in favour of the

purchaser;

• at settlement the transfer in the purchaser’s favour and

certificate of title are exchanged for the purchase price;

and

• the purchaser (or purchaser’s mortgagee) registers the

transfer upon the certificate of title.

The ATO revisited the issue of the operation of Div 99 of the GST Act in

2005. Draft GST Ruling 2005/d1 issued on 3 August 2005, and has been

finalised as GSTR 2006/2. The Draft Ruling was not intended to replace

GST Ruling 2000/28. Interestingly, the Draft Ruling was expressed to affect

the GST Determination on deposits with effect from 3 August 2005 (not

from the date of a finalised Ruling as might be expected).

A key statement relevant to release of deposits is at paras [21] to [24] of the

Final Ruling:

21. For Division 99 to apply, the deposit must be ‘held’ as security for

the performance of an obligation. However, the GST Act does not

explain the concept of a deposit that is ‘held’.

22. A deposit is ‘held’ when it is paid to a person in the capacity of

stakeholder. Normally, in commercial situations, the supplier will

be the holder of the security deposit. It makes no difference who


– 54 –

holds the deposit, provided it is ‘held’ for the benefit of the supplier

to secure the recipient’s obligations.

23. An amount ceases to be a security deposit when that amount is

applied as consideration, or forfeited, regardless of whether it is

held by the supplier or a third party at that time. However, there are

occasions where a deposit may be released without it being

considered to be applied.

24. The accounting treatment may be evidence that a deposit has been

either forfeited or applied as consideration for a supply. For

example, a deposit that is recognised as revenue because it is no

longer refundable is indicative of a deposit that is no longer held as

security because it has been applied as consideration for a supply.

The final ruling as originally issued also addresses a number of other issues

of significance:

➢ A pre-contract deposit (for example, an expression of interest deposit

by a prospective purchaser) is not a security deposit, although it may

in due course become part of a security deposit (at [40] to [50].

➢ If the parties do not have a mutual intention that the deposit be subject

to forfeiture (for instance, if there is an agreement that, despite what

may be in the written contract, the deposit will be returned to the

purchaser if the sale does not proceed), the deposit cannot be a security

deposit (at [51] to [64]).

➢ If the deposit is set too high, the courts exercising equitable jurisdiction

will regard the payment as a penalty rather than a deposit (at [65] to

[66]). If a deposit in a sale of land exceeded 10 per cent of the price,

the ATO will require evidence of ‘special circumstances’ for the

amount to be considered as a security deposit (at [77]).

➢ When a deposit is forfeited, the deposit will be subject to GST, even if

the supply to be made under the forfeited contract was GST-free or

input taxed, on the basis that the forfeited deposit is consideration for

a (separate) supply (at [121] to [126]; note the example at [127] to

[128]).

➢ The amount forfeited to a vendor where a purchaser exercises a

statutory cooling off right will in some circumstances be subject to

GST (at [167] to [169]).

The interpretation of Div 99 where a deposit is forfeited due to the

purchaser’s default is not without difficulties. Central to the liability to pay

GST is the identification of a supply, which supply will be taxable if the

elements in s 9-5 of the 1999 GST Act are present. Where a sale of real estate


– 55 –

proceeds to completion, there is no difficulty in identifying what is being

supplied. The ATO has expressed the view in the 2006 Ruling that where a

vendor terminates a contract for sale of land, the forfeited deposit is

consideration for an actual supply of legal rights and obligations of the

vendor under the contract, or, alternatively, a “notional” or “deemed” supply

because of the wording of Div 99 itself. That reasoning has been expressly

rejected by the Full Court of the Federal Court of Australia, but subsequently

accepted in part by the High Court of Australia (as to the “actual supply”;

the “deemed supply” argument was not relied on in the High Court) in the

Reliance Carpet case: Commissioner of Taxation v Reliance Carpet Co Pty

Ltd (2008) 68 ATR 158; [2008] HCA 22. The decision of the High Court

was unanimous, and all five justices joined in a single judgment. The facts

appear at [16] to [20] (omitting footnotes):

16 Upon exchange of instruments dated 10 January 2002, the taxpayer

entered into a written contract (“the Contract”) to sell real estate at

Camberwell in Victoria where it conducted its business (“the

property”). The premises were not sold as part of a going concern.

Nothing turns on the identity of the purchaser, 699 Burke Road Pty

Ltd (“the purchaser”). The Contract incorporated the standard form

provisions set out in Table A of Sched 7 to the Transfer of Land

Act 1958 (Vic). The Contract fixed the purchase price at

$2,975,000 and stated that the deposit of $297,500 (or 10 per cent)

had been paid “[u]pon the exercise of the option contained in the

Option Agreement dated 3 December 2001 between the parties”.

17 By written option agreement dated 3 December 2001 (“the Option

Agreement”) and in consideration of an option fee of $25,000 paid

by the purchaser before execution of the Option Agreement the

taxpayer had granted to the purchaser an option to purchase the

property upon the terms of the annexed contract. Clause 2 of the

Option Agreement provided for the exercise of the option by

written notice together with the payment of $297,500, “being the

deposit payable under the Contract”. Clause 5 of the Option

Agreement stipulated that upon receipt by the taxpayer of the

written notice of exercise and the payment of the deposit, “the

[taxpayer] will be bound to sell and the [purchaser] will be bound

to purchase the property on the terms and conditions set out in the

[annexed Contract]” and that the Contract was to be treated as

having been entered into upon the day the option was exercised. In

the events which followed execution of the Option Agreement, the

parties agreed to extend the time for the exercise of the option until

10 January 2002 (which became the date of the Contract) and to

defer payment of the deposit until 31 January 2002.

18 The deposit (with interest and legal costs) was paid on 5 February

2002 and the Contract subsequently was executed and exchanged


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between the parties; it specified as its date the earlier date of

10 January 2002.

19 The Contract provided that the balance of $2,677,500 was to be

paid on settlement. The Special Conditions in the Contract

indicated that the purchase price did not include GST (cl 7).

Settlement was to take place on or before 10 January 2003, but the

taxpayer had the right to defer settlement for a period of six months

if required to relocate its business. On 27 February 2002, the

taxpayer’s solicitors, acting pursuant to s 27 of the Sale of Land Act

1962 (Vic) (“the Sale of Land Act”), released the deposit to the

taxpayer. The taxpayer later exercised its option to defer the date

of settlement by six months, to 10 July 2003.

20 The purchaser failed to complete on 10 July 2003 and did not

remedy that default within the period of the 14 day notice to

complete (headed “Rescission Notice”) given by the taxpayer on

11 July 2003. On or about 26 July 2003, the taxpayer rescinded the

Contract and forfeited the deposit. By notice dated 9 November

2004, the Commissioner assessed the taxpayer as liable to pay GST

in respect of the forfeited deposit for the three month tax period

which had ended on 30 September 2003.

The Full Court of the Federal Court (Reliance Carpet Co Pty Ltd v

Commissioner of Taxation (2007) 160 FCR 433; [2007] FCAFC 99) had

held that upon completion of a contract for sale of land there is a single

“supply” within the meaning of s 9-10 of the GST Act, namely the supply

of the real property. Where a contract is terminated for default by the

purchaser, the Full Court’s view was that there would be no supply by the

vendor for which the forfeited deposit paid by the purchaser could be

consideration, and so Div 99 has no work to do (at [18]). The Full Court was

not prepared to “… stretch the language of s 9-10(2) to give a strained

construction to terms which are themselves an extension” (at [33]).

At [13] the High Court quoted, and disapproved of, the following

observation of the Full Court:

When the [taxpayer] entered into the contract for sale with the

purchaser it entered into a contract for the supply of real property;

nothing more and nothing less ... That supply did not take place

because the contract was rescinded.

Several points should be made here. The circumstance that the contract

did not proceed to completion does not necessarily prevent there having

been a “supply” when the contract was entered into; the ultimate issue is

whether there was “a taxable supply” to which GST was attributed for the

relevant tax period. The contract was executory in nature and was never

“rescinded” in the sense of being set aside for some vitiating factor

attending its formation. Further, the use of the phrase “nothing more and

nothing less” appears to give insufficient weight both to the definition of

“real property” in the Act, and to the identity of the subject matter of the


– 57 –

contract, in accordance with ordinary principles of conveyancing, as the

title or estate of the vendor in a parcel of land rather than merely the parcel

itself in a geographical sense.

The High Court analysed the nature of a deposit in a conveyancing

transaction, and noted that the deposit fulfilled a number of functions,

serving as:

➢ part of the price (at [23]);

➢ an amount amenable to the Court’s jurisdiction under, to take the New

South Wales provision, s 55(2A) Conveyancing Act 1919 (at [23]);

➢ an amount to be “brought into account in any assessment of damages

if an action were pursued against the purchaser” where the vendor has

terminated for breach. However, the deposit is not in itself “in the

nature of damages” as contended by the taxpayer (because, in general,

the deposit is retained by the vendor even if no damage is suffered) (at

[24]);

➢ an earnest to bind the bargain (at [25]);

➢ a form of security for performance of the obligations of the purchaser

(at [26]).

The taxpayer had focused on the third of these aspects to argue that the

deposit was not related to a (taxable) supply. The High Court observed (at

[28]):

The circumstance that the deposit forfeited to the taxpayer had various

characteristics does not mean that the taxpayer may fix upon such one or

more of these characteristics as it selects to demonstrate that there was no

taxable supply. It is sufficient for the Commissioner’s case that the

presence of one or more of these characteristics satisfies the criterion of

“consideration” for the application of the GST provisions respecting a

“taxable supply”. One of the characteristics of the deposit was that upon

its payment on 5 February 2002 it operated as a security for the

performance of the obligation of the purchaser to complete the Contract

and was liable to forfeiture on that failure. That is sufficient for the

Commissioner’s case.

The High Court also noted that the Full Court had erred in categorising the

contract for sale as imposing the obligation to transfer title and “nothing

more, nothing less”. The High Court referred (at [37]) with approval to the

following observation at first instance:

The ultimate obligation was of course to transfer title to the purchaser

upon payment of the balance of purchase price. But there were other

obligations, such as maintaining the property in its present condition

(special condition 2.1), to pay all rates, taxes, assessments, fire insurance


– 58 –

premiums and other outgoings in respect of the land (Table A, cl 9) and

to hold the existing policy of fire insurance for itself and in trust for the

purchaser to the extent of their respective interests (Table A, cl 10). In

the circumstances it may fairly be said that upon execution of the contract

the applicant made a supply in that, in terms of s 9-10(2)(g) of [the Act],

it ‘entered into an obligation’ to do the things it was bound to do under

the contract ...”.

Upon forfeiture to the taxpayer of the deposit, by reason of the failure by the

purchaser to complete the Contract, the “supply” represented by the making

of the Contract became “a taxable supply” (at [40]).

The reasons of the High Court should prompt careful consideration of the

nature of GST supplies and taxable supplies. Some commentators have

suggested that deposits collected at formation of contracts to make taxable

supplies should be 11 per cent rather than 10 per cent of the price. Such a

practice would, it is suggested, raise the spectre of the deposit not truly being

a deposit, but rather a penalty.

The ATO has issued a Decision Impact Statement (“DIS”) on the Reliance

Carpet litigation. That DIS has been updated to take into account the High

Court decision. The Statement welcomed the interpretation of the High

Court as broadly reflecting the ATO’s views.

Is GST payable on the adjusted sale price – GSTD 2006/3

GST Determination GSTD 2006/3, issued on 26 April 2006, is entitled “Are

settlement adjustments taken into account to determine the consideration for

the supply or acquisition of real property?”. The short answer (see para 1 of

the Determination) is “Yes”.

GST Ruling 2001/8: Apportioning the consideration for a supply that

includes taxable and non-taxable parts.

This Ruling will be useful in relation to issues about whether and how

consideration is to be apportioned in relation to mixed supplies (where the

taxable and non-taxable components need to be unbundled) or composite

supplies (to be treated as the supply of a single thing). The distinction

between these two concepts is discussed at paras 16 to 81 of the Ruling.

Paragraph 70 makes it plain that a lease of a building to a tenant who

operates a business from the commercial premises and lives in the residential

premises is a mixed supply.


– 59 –

The Ruling also discusses what will be reasonable methods of

apportionment where a mixed supply is made (paras 92 to 119). Each case

depends on its own facts (para 93). In a particular case, apportionment by

direct (e.g. comparative price of each part; time to perform; relative floor

area while taking into account the relative price of different types of floor

space) or indirect (e.g. based on the cost and profit margin of each part of

the supply) method may be appropriate.

GST and options

The definition of a “supply” in the Act is sufficiently wide that the grant of

an option is a “supply”. In particular, s 9-10(2)(e) says that a supply includes

“a creation, grant, transfer, assignment or surrender of any right”.

The option will, it seems, “take on” the characteristic of the supply

contemplated (for example, GST-free or input taxed) if the option is

exercised. That approach appears consistent with the reasoning of the High

Court in the Reliance Carpets case, discussed earlier in the paper.

It is also worth noting that the supply of rights at the grant of the option is a

separate supply from the supply which may eventuate if the option is

exercised. In Trustee for the Whitby Trust and Commissioner of

Taxation [2017] AATA 343 the practical effect was that a $2 million dollar

option fee could not form part of the acquisition cost for the purposes of the

margin scheme when the option was exercised (despite the documentation

for the transaction explicitly stating that the option fee formed part of the

$28 million price under the contract).

One point to note: where the subject matter of the option is to be the supply

of a GST-free going concern, it would be prudent for the “agreement in

writing” required under s 38-325 to be in both the option and in the

agreement generated pursuant to the exercise of the option.

GST and auction sales

Two recent decisions of the Supreme Court of New South Wales considered

the availability of rectification of a contract formed at an auction of

commercial property which was (to some extent at least) a taxable supply.

Tam v Mannall [2010] NSWSC 250; BC201001888 (1/4/10 per Barrett J)


– 60 –

and Ashton v Monteleone [2010] NSWSC 258; BC201002117 (8/4/10 per

Gzell J) shared a number of common features:

• each contract was prepared in anticipation of an auction on a GST-

inclusive basis (in Ashton following the making of a

recommendation to that effect by the vendor’s solicitor and in

accordance with the vendor’s instructions);

• the auctioneer (and the listing agent) believed it appropriate for the

bidding at the auction to be on a “plus GST” or “GST on top” basis;

• this approach was confirmed by the vendors prior to the

commencement of bidding;

• the property was knocked down and the bid price was filled in on

page 1 of the printed form without amendment to clause 13 or

inclusion of a special condition;

• the purchaser denied that the bid was placed (and therefore when

accepted that the contract was formed) on a plus-GST basis;

• the vendor sought rectification of the contract to reflect the common

intention of the parties that the bidding was “plus GST”.

Both Judges agreed on the legal principles involved. To quote from Barrett

J in Tam (at [17] to [22]):

17 …The basic principle was stated by Campbell JA in Franklins Pty Ltd v

Metcash Trading Ltd [2009] NSWCA 407 at [444]:

“In considering whether to grant rectification of a written contract, equity

does not use any of its own principles to decide what the terms of the

contract are, or how they are construed – those matters are decided solely

by the common law. Rather, equity focuses on what it is unconscientious

for a party to assert about the contract. The rationale is that it is

unconscientious for a party to a contract to seek to apply the contract

inconsistently with what he or she knows to be the common intention of

the parties at the time that the written contract was entered. In other

words, when a plaintiff succeeds in a claim for rectification, the plaintiff

is found to have been justified in in effect saying to the defendant ‘you

and I both knew, when we entered this contract, what our intention was

concerning it, and you cannot in conscience now try to enforce the


– 61 –

contract in accordance with its terms in a way that is inconsistent with

our common intention’.”

18 His Honour also said (at [446]):

“The remedy that is granted is, as with all equity’s remedies, one that will

seek to undo, so far as is in practice possible, the departure, that the

litigation has shown to exist, from equity’s standards of conscientious

behaviour. The way this is achieved, when a remedy of rectification is

granted, is by rewriting the contract so that it is no longer departs from

the common intention of the parties. The rewriting is done in a quite

literal sense – the proper form of order identifies the precise words of the

contract that are to be struck out, the precise words that are to be inserted,

and where those words are to be inserted: Seton’s Judgments and Orders,

7th ed (1912) vol 2, p 1638–43.”

19 Campbell JA added (at [447]):

“That this is the type of remedy that is granted has an effect on the sort

of ‘common intention’ that is relevant for rectification. The common

intention of the parties has to relate to what the mutual rights and

obligations of the parties will be, and has to be sufficiently well-defined

and clear to be able to be stated in words that can be incorporated in a

contract.”

20 Authoritative guidance as to the correct approach to a rectification claim

of this kind is provided by members of the High Court in Pukallus v Cameron

[1982] HCA 63; (1982) 180 CLR 447. Wilson J said (at 452):

"The case raises no issue as to the principles which govern the

rectification of a contract. Those principles are not in dispute. There need

not be a concluded antecedent contract, but there must be an intention

common to both parties at the time of contract to include in their bargain

a term which by mutual mistake is omitted therefrom: Crane v Hegeman-

Harris Co Inc [1939] 1 All ER 662 at p.664; Slee v Warke (1949) 86 CLR

271 at p.280; Joscelyne v Nissen [1970] 2 QB 86, at p.98; Maralinga Pty

Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, at p.350. So long

as there is a continuing common intention of the parties, it may not be

necessary to show that the accord found outward expression,

notwithstanding the views expressed to the contrary in Joscelyne at p.98,

and Maralinga at p.350. The opposing view is argued by Mr Bromley QC

in an article in the Law Quarterly Review vol 887 (1987) p.532. It is


– 62 –

unnecessary to pursue the distinction in the present case because the

representation of the respondent and its acceptance by the appellants

plainly established such an accord.

The second principle governing the rectification of a contract which is

material to this case is that which requires the plaintiff to advance

‘convincing proof’ that the written contract does not embody the final

intention of the parties. The omitted ingredient must be capable of such

proof in clear and precise terms. The Court must not assume for itself the

task of making the contract for the parties.”

21 Brennan J said (at 456):

“Although the remedy of rectification is no longer held to depend upon

proof of an antecedent concluded contract, Slee at p.280; Maralinga at

p.336, it is necessary to show a concurrent intention of the parties,

existing at the time when the written contract is executed, as to a term

which would have been embodied in the contract if the parties had not

made a mistake in expressing their intention. Proof of such an intention

is necessary to 'displace the hypothesis arising from execution of the

written instrument, namely, that it is the true agreement of the parties'

Maralinga at p.351.”

22 To these observations may be added that of Mason J in Maralinga Pty

Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 at 350:

"What is of importance is that the purpose of the remedy is to make the

instrument conform to the true agreement of the parties where the writing

by common mistake fails to express that agreement accurately. And there

has been a firm insistence on the requirement that the mistake as to the

writing must be common to the parties and not merely unilateral, except

in cases of a special class to which I shall later refer. It is now settled that

the existence of an antecedent agreement is not essential to the grant of

relief by way of rectification. It may be granted in cases in which the

instrument sought to be rectified constitutes the only agreement between

the parties, but does not reflect their common intention (Shipley Urban

District Council v. Bradford Corporation [1936] Ch 375; Slee v. Warke

(1949) 86 CLR 271). But this circumstance does not affect what I have

already said."


– 63 –

On the facts the claim for rectification failed in Tam, but succeeded in

Ashton. The different results primarily occurred because of the vendor’s

inability in Tam to satisfy the Court that it was made clear to the auction

room that bids were to be on a “GST on top” basis (the various persons in

the auction room has inconsistent recollections of who said what about GST

– summarised at [48]). In Ashton Gzell J found the evidence of the purchaser

of what was said at the auction was “marked by implausibility” (at [52])

whereas the evidence on behalf of the vendor was consistent. In Ashton the

manner of rectification was by substituting for the price “$1,060,000+GST”,

with a requirement that the vendor apply for an ATO Ruling so as to quantify

the amount of GST. The tax ruling ironically determined that no GST was

in fact payable; the costs implications were considered in Ashton v

Monteleone (No 2) [2010] NSWSC 745.

* * * * *

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