Issue 140, 17 November 2006

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Articles in this edition include:

• GST - sale of residential property

• One small business test to access all small business tax concessions: law to be amended

• Non-commercial loss rules deny promotion business losses

• Thomson special offers and product news

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GST - sale of residential property

My client purchased a residential property in late 2004 from an unregistered vendor, intending to redevelop the property into a block of units for resale. The residence was demolished and development approval obtained. However, due to financing problems the redevelopment did not proceed. The property has now been sold as vacant land together with the development plans. What is the position with GST on the sale price?

There are a number of issues that need to be worked through in order to determine the GST position on the sale. The precise resolution will depend upon a closer analysis of the particular facts. 

First, you need to identify the entity selling the vacant land. You state that your client is a property developer. Many property developers use special purpose vehicles (SPVs) to acquire, develop and sell particular properties. The company is then folded once the development is sold. Alternatively, your client might undertake all developments within a single entity.

Second, you need to determine whether that entity is carrying on an enterprise. If your client operates through a single entity this will almost certainly be the case. However, if the entity is an SPV it might not. The sale could be a mere realisation of a capital asset rather than a sale in the course of an enterprise. If the sale is a mere realisation of a capital asset, the SPV will not be carrying on an enterprise and thus will not be entitled or required to register for GST. Accordingly, the sale would be outside the GST net. The Tax Office discusses this issue in Draft Taxation Ruling MT 2005/D1 (see paras 248-288). It is likely that the Tax Office will consider an SPV in the circumstances outlined to be carrying on an enterprise - see Draft Taxation Ruling MT 2005/D1 at para 256.

Third, the sale of the property needs to be characterised for GST purposes. There are three possibilities. The sale might be:

• a taxable supply. This is the default position where a registered entity makes a supply for consideration in the course of its enterprise.  Although, the sale of the land will, in the case of an SPV, terminate its enterprise the sale will still be made in the course of its enterprise. GST will therefore be accountable on the sale, either at 1/11th of the sale price or under the margin scheme, if this applies. This treatment will apply unless it can be established that the supply is either an input taxed supply or a GST-free supply; 

• an input taxed supply. This might have been the case if your client hadn't demolished the existing residential premises; and

• a GST-free supply. Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 allows for the supply of a going concern to be GST-free if the supply is for consideration, the recipient is registered or required to be registered for GST and the supplier and the recipient have agreed in writing that the supply is of a going concern.

Therefore, the first factual issue to be determined (in relation to a GST-free supply) is whether both the supplier and the recipient agreed in writing for the sale to be treated as a GST-free supply.

The Tax Office considers that this mutual agreement must be made 'on or before the day of the supply' - refer to GST Ruling GSTR 2002/5 at para 182. The day on which the property is supplied is the settlement date. You will therefore need to review the sale contract and other relevant documents to determine whether this requirement has been met. The GST status of the recipient also needs to be confirmed. 

Next, you must form a view as to whether the sale is a supply of a going concern. It is not sufficient that the parties describe the sale in the sale contract as a supply of a going concern. The supply must be an actual supply of a going concern. For that to happen, the supplier must operate the enterprise up until the time of sale and supply to the recipient 'all of the things that are necessary for the continued operation of an enterprise' - section 38-325(2)(a) of the GST Act. The enterprise here is the development of land for resale. At the time of sale, the extent of the enterprise was the purchase of the property, the demolition of the existing residential premises and obtaining development approval. Provided the land was sold with the development approval, there is a strong argument that the entire enterprise was sold as a going concern. A private ruling could be sought from the Tax Office. You should check whether the development approval could be assigned, i.e. that it was not personal to the developer (this is unlikely).

Accordingly, there might be no GST on the sale. However, if the formal requirements of section 38-325 of the GST Act are not met, there will be a GST liability. 

This article recently appeared in Thomson's Tax Q&A; TaxQ&A uses actual scenarios confronted in real life to help you understand tax changes and existing tax laws.

To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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One small business test to access all small business tax concessions: law to be amended

The Treasurer and the Minister for Small Business made an announcement on 13 November 2006, stating that the Government will introduce legislation to standardise the eligibility criteria for small business tax concessions from 1 July 2007. Separate eligibility tests currently exist for GST, the Simplified Tax System, CGT, FBT and PAYG small business concessions. The announcement will mean that any business with annual turnover of less than $2 million will be able to access any of these concessions. Small businesses will only have to apply one eligibility test to access a range of small business concessions. The Treasurer said this proposal incorporates and goes beyond the package of measures to assist small businesses announced in this year's Federal Budget. 

Businesses with existing access to CGT, FBT or PAYG small business concessions will not lose out under the new arrangements. Those benefits will apply to businesses that meet the new small business definition or that meet other existing eligibility criteria. The Government will be consulting publicly on the draft legislation in early 2007. 

Source: Joint press release by Treasurer and the Minister for Small Business No 123, 13 November 2006

This article appeared in Thomson ATP's daily Latest Tax News  (Monday 13th November).  With tax fast-moving and ever changing - EVERY DAY, practitioners rely on Thomson ATP's daily Latest Tax News for quick, accurate, comprehensive information - no compromises. When you need to know what's new in tax and related news every day, there's only one place to look - LTN. To find out more, click here

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Non-commercial loss rules deny promotion business losses

In a recent decision, the Administrative Appeals Tribunal (AAT) has found that the non-commercial loss rules applied to prevent a taxpayer claiming a deduction for losses in connection with sales promotion activities undertaken by his company.

During the 2003 Rugby World Cup in Australia, the taxpayer carried on a business of promotional activities, carried out on behalf of overseas clients. The operation made substantial losses, largely a result of clients failing to pay invoiced amounts. 

As a result, the taxpayer wrote off these amounts in his personal income tax return on the basis that the company could not pay him for his consultancy services.

The Commissioner issued amended assessments denying the taxpayer the ability to write off the bad debt amounts as the taxpayer had failed to meet the criteria to write off the debt. Furthermore, the non-commercial loss provisions denied the taxpayer a deduction for the business losses.

The AAT affirmed the decision of the Commissioner in both regards, on the basis that the taxpayer had not satisfied the legislative requirements for making the original claims. 

This article appeared in Thomson's Client Alert Newsletter Service. Client Alert is a monthly newsletter that promotes your business and develops your client's awareness of upcoming tax issues.  To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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