Draft Goods and Services Tax Ruling

GSTR 2008/D2

Goods and services tax: general law partnerships and the margin scheme

  • Please note that the PDF version is the authorised version of this draft ruling.
    View the Erratum notice for this document.
    This document has been finalised.
    There are Compendiums for this document: GSTR 2009/2EC and GSTR 2009/1EC .

FOI status:

may be released

Contents Para
What this Ruling is about
Date of effect
Background
Ruling with explanation
Your comments
Detailed contents list

Preamble

This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way the law applies. It is not a ruling or advice for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953. You can rely on this publication to provide you with protection from interest and penalties as follows. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it.

What this Ruling is about

1. This draft Ruling explains how the margin scheme in Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to general law partnerships and its partners.

2. Unless otherwise stated, all legislative references in this draft Ruling are to the GST Act.

3. In particular, this draft Ruling addresses the following questions:

(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?

4. This Ruling does not discuss the partitioning of real property.

5. This draft Ruling does not apply to limited partnerships nor does it apply to tax law partnerships as defined in paragraph 13 of this draft Ruling.

6. This draft Ruling should be read, where applicable, together with one or more of the following Goods and Services Tax Rulings:

·
GSTR 2003/13 Goods and services tax: general law partnerships;
·
GSTR 2000/21 Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000;
·
GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000; and
·
GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000.

Date of effect

7. This draft Ruling represents the preliminary, though considered views of the Australian Taxation Office. When the final Ruling is officially released, except for the legislative amendments contained in the Tax Laws Amendment (2005 Measures No. 2) Act 2005 (2005 Amendment Act), it will explain our view of the law as it applies both before and after its date of issue.

8. The legislative amendments contained in the 2005 Amendment Act apply to supplies made on or after 17 March 2005, except for the amendments to section 75-5 of the GST Act. The amendments to section 75-5 of the GST Act apply to supplies on or after 29 June 2005[1] that are:

(a)
made under contracts entered into on or after 29 June 2005; and
(b)
are not made pursuant to rights or options granted before 29 June 2005.

9. The final Ruling will be a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953 and may be relied upon, after it is issued, by any entity to which it applies. Goods and Services Tax Ruling GSTR 1999/1 explains the GST rulings system and our view of when you can rely on our interpretation of the law in GST public and private rulings.

10. If the final public ruling conflicts with a previous private ruling that you have obtained or a previous public ruling, the final public ruling prevails. However, if you have relied on a previous ruling, you will be protected in respect of what you have done up to the date of issue of the final public ruling. This means that if you have underpaid an amount of GST, you will not be liable for the shortfall prior to the date of issue of the later ruling. Similarly, you will not be liable to repay an amount overpaid by the Commissioner as a refund.

Background

Partnerships

11. A partnership is defined in section 195-1 of the GST Act by reference to the definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states:


partnership means:

(a)
an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or
(b)
a limited partnership.

12. The first limb of paragraph (a) of the definition refers to 'an association of persons carrying on business as partners'. This reflects the general law definition of a partnership.[2] We refer to this type of partnership as a general law partnership.

13. The second limb of paragraph (a) of the definition refers to an association of persons that is not in business, but that is nevertheless in receipt of ordinary income or statutory income jointly. We refer to this type of partnership as a tax law partnership. This draft Ruling does not discuss the application of the margin scheme to tax law partnerships.

Partnership an entity separate from its partners

14. The GST Act treats a partnership as an entity separate from its partners.[3] A supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner is taken to be made by the partnership, and not by that partner or any other partner of the partnership.[4]

Interest in a general law partnership

15. Upon the formation of a general law partnership, a partner acquires an interest in the partnership, and if the partner contributes capital to the partnership, the partner also acquires an interest in the capital of the partnership. An interest in the partnership includes a right to a proportion of the surplus after the realisation of the assets and payment of the debts and other liabilities of the partnership. It also includes a partner's entitlement to a share in the capital of the partnership.[5]

16. In this draft Ruling, unless otherwise stated when reference is made to an interest in the partnership, this includes the partner's interest in the capital of the partnership.

Partnership property

17. Real property becomes partnership property when the partners make an in kind capital contribution of the property to the partnership, or the real property is acquired by the partners in their capacity as partners in the partnership.[6] An in kind capital contribution of real property by a partner is a supply to the partnership for consideration, being the interest in the capital of the partnership as part of a wider interest in the partnership.[7]

18. A partnership does not have a legal personality separate from its members. This means that a partnership cannot 'hold' the legal interest in real property. The legal interest in real property is either held by the partners or held by some of the partners on trust for all the partners.[8]

19. For GST purposes, a transfer of the beneficial (and legal) interest in real property that is partnership property to a partner in its own capacity is taken to be a supply made by the partnership.[9]

20. An in specie distribution of partnership property by the partnership to a partner upon general dissolution of the partnership is a supply made in the course of the termination of the partnership enterprise.[10]

Margin scheme

21. If you make a taxable supply of real property, the GST payable under the basic rules is 1/11th of the price.[11] However, if you make a taxable supply of real property under the margin scheme, the GST payable is 1/11th of the margin.

22. Supplies can be made under the margin scheme if:

·
the supply is a taxable supply of real property that you make by:

(a)
selling a freehold interest in land; or
(b)
selling a stratum unit; or
(c)
granting or selling a long term lease,

·
the requirements in subsections 75-5(1) and 75-5(1A) are satisfied; and
·
subsection 75-5(2) does not apply.

23. If a supply is made under the margin scheme, the margin for the supply is calculated under either section 75-10 or section 75-11, taking into account section 75-13.

Subsection 75-10(2)

24. Under subsection 75-10(2), the margin for the supply of real property is the amount by which the consideration for the supply exceeds the consideration for its acquisition. Subsection 75-10(2) does not apply if subsection 75-10(3) or subsection 75-11(7) applies.

Subsection 75-10(3)

25. If the real property is acquired before 1 July 2000 and the supplier has a valuation of the real property that is in accordance with one of the Commissioner's written determinations[12] then unless subsection 75-11 applies, the margin for the supply is calculated under subsection 75-10(3).[13] The margin for the supply under subsection 75-10(3) is the amount by which the consideration for the supply exceeds the valuation of the real property at the date specified in the table in subsection 75-10(3).

Subsection 75-11(7)

26. If real property is supplied on or after 17 March 2005 and the real property was acquired from an associate,[14] then the margin for the supply is calculated under subsection 75-11(7) unless any of the other subsections in section 75-11 apply. This is because, for supplies made on or after 17 March 2005, section 75-11 takes precedence over subsections 75-10(2) and 75-10(3).

27. Under subsection 75-11(7) the margin for the supply is the amount by which the consideration for the supply exceeds:

·
an approved valuation of the real property as at 1 July 2000 - if the acquisition was made from the associate before 1 July 2000; or
·
the GST inclusive market value of the real property at the time of the acquisition - if the acquisition was made from the associate on or after 1 July 2000.[15]

Section 75-13

28. Section 75-13 applies where, on or after 17 March 2005, real property is supplied under the margin scheme and the supply is to an associate. Section 75-13 treats the consideration for the supply as if it were the same as the GST inclusive market value of the real property at the time of the supply.

Ruling with explanation

29. For simplicity, the examples contained in this draft Ruling assume that the partnership only has one asset, being the real property. In reality, partnerships (particularly general law partnerships) often have a number of assets.

(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)?

30. Yes, as long as the interest in real property, whether it is freehold or long-term leasehold, is supplied to the partnership such that it becomes partnership property.

31. The term 'selling' or 'sale' is not defined in the GST Act. Consistent with the Commissioner's view on the meaning of 'sale' for the purposes of section 40-65,[16] the Commissioner considers 'selling' or 'sale' in the context of the margin scheme is to be interpreted broadly. When real property is contributed by a partner to a partnership, and the real property becomes partnership property, the Commissioner takes the view that that is a sale for the purposes of subsection 75-5(1).

32. The fact that the real property contributed is a supply for non-monetary consideration (an interest in the partnership)[17] does not preclude the supply from being a sale for the purposes of the margin scheme. For the purposes of the margin scheme, the consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or both.[18]

33. In Commissioner of Taxation v. Reliance Carpet Co Pty Ltd[19] the High Court noted that, under section 9-15 of the GST Act, consideration includes, among other things, any payment 'in connection with' a supply of anything. The Commissioner considers that the High Court's judgment discloses a practical approach to determining whether there is a connection between consideration and a supply. In analysing the decision of the European Court of Justice in Societe thermale d'Eugenie-les-Bains v. Ministere de l'Economie, des Finances et de l'Industrie[20], the High Court gave some indication that the connection between consideration and a supply need not be direct (see paragraph 30 of the judgment), though it did not expand on what the extent of the connection needs to be.

34. For real property transactions 'consideration' may be regarded as anything that 'moves' the transfer. In Navakumar v. Commissioner of State Revenue[21] Deputy President Macnamara of the Victorian Civil and Administrative Tribunal said:[22]


Consideration is a very wide concept. In Equity consideration generally denotes something of significant value, at common law something purely nominal such as $1, a peppercorn or a chocolate wrapper may constitute consideration. In revenue law the meaning of consideration is wider still, it is that which 'moves' the conveyance or transfer. See Archibald Howie Pty Ltd v. Commissioner of Stamp Duties (NSW) (1948) 77CLR 143, 152 per Dixon J.

35. Also, the fact that the contributing partner has a beneficial interest[23] in the real property that is partnership property does not mean that the real property has not been contributed to the partnership. For GST purposes, a partnership is a separate entity, and the supplies and acquisitions made by partners as partners are treated as supplies or acquisitions made by the partnership.[24] Consistent with this, the Commissioner takes the view that a partnership, through the acts of a partner in the capacity of partner, enters into transactions with the partner in its own capacity. Thus, when a partnership acquires real property contributed by a partner in its own capacity, the property becomes partnership property. The partner has contributed the real property to the partnership, for a consideration equal to the whole of the partner's interest in the partnership.

36. Similarly, the partner or partners holding legal title to the real property do so in their capacity as partners of the partnership or on trust for themselves and the other partners. The real property is treated as partnership property as the partnership is taken to have acquired the property.

37. Where a partner contributes an interest in real property to a partnership, resulting in the partner's capital account in the partnership's accounts being credited with its agreed value, the Commissioner considers that the partner has supplied its interest in the real property to the partnership and that interest in the real property has become partnership property. As stated in Lindley and Banks:[25]


Once a partner has brought in the asset and been credited with its agreed 'capital' value in the firm's books, the asset as such will cease to be his property and will thereafter belong to the firm.

Example 1: real property becomes partnership property where legal title remains with the contributing partner

38. Steve, Tony and Garry form a general law partnership to carry on a property development business. Steve and Garry each make a cash contribution of $500,000. It is agreed that Tony will contribute real property that he currently owns to the partnership. The agreed value of the land contributed by Tony is $500,000 and Tony's capital account in the partnership accounts is credited with the agreed value of $500,000.

39. With the agreement of the other partners, Tony as a partner in the partnership retains the legal title to the property. The partnership consisting of Steve, Tony and Garry has acquired the real property contributed by Tony. The supply by Tony of the real property to the partnership is a sale for the purposes of subsection 75-5(1).

40. In contrast, where a partner merely permits the partnership to have use of the real property, for example by way of a lease or licence, the land does not become partnership property and the partner will not have supplied its interest in the land by way of sale. Lord Lindley observed that:


....it by no means follows that property used by all the partners for partnership purposes is partnership property. For example, the house and land in and upon which partnership business is carried on often belongs to one of the partners only, either subject to a lease to the firm, or without any lease at all.[26]

Example 2: real property is used by the partnership but is not partnership property

41. Tania and Alex form a general law partnership to undertake a residential property development business. Tania owns a commercial office block and agrees to allow a suite in the office block to be used by the partnership in its residential property development business.

42. The office suite does not become partnership property and Tania's supply, to the partnership, of the right to use the suite in its business is not a supply by way of sale for the purposes of section 75-5(1).

Example 3: capital contribution of a tenant in common interest in real property to a partnership

43. Steven and Ron had co-owned land, in which they each held a 50% interest, as tenants in common. Steven and Ron decided to develop the land for sale. They formed a general law partnership that they registered for GST.

44. Steven and Ron each agreed to contribute their respective interests in the land to the newly formed partnership. The value of the land was $1,200,000 when the partnership was formed. The land was contributed to the partnership and Steven and Ron's capital accounts in the partnership's accounts were credited with an amount of $600,000 each.

45. Both Steven's and Ron's contribution of their respective 50% interests in the land to the partnership are sales for the purposes of section 75-5(1).

46. If a capital contribution of real property by a partner to the partnership is a taxable supply and all the other requirements in section 75-5 are met, the partner may apply the margin scheme in working out the GST on their supply of the real property to the partnership.

(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?

47. This depends on whether subsection 75-10(2) or 75-10(3) applies. If subsection 75-10(2) applies, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition.[27]

48. If subsection 75-10(3) applies, the margin for the supply is the amount by which the consideration for the supply exceeds a valuation of the interest, unit or lease at the valuation date prescribed in that subsection.

49. In applying subsection 75-10(2), if the consideration for the acquisition of the real property by the partnership from the partner is an interest in the partnership (that is, non-monetary consideration), the value of that interest will be determined by the value of the real property reflected in the partnership's books of accounts at the time of acquisition by the partnership.

Example 4: partnership supplies before 17 March 2005 real property that was acquired from a partner on or after 1 July 2000

50. On 1 December 1998, Steve inherited a block of land. At the time, the land was valued at $400,000. In August 2001, Steve and his spouse decided to develop the land into residential units to sell. They formed a general law partnership that they registered for GST. Steve contributed the land and his spouse contributed cash into the partnership, in exchange for an interest in the partnership. At the time, the land was valued at $600,000 and this was reflected in the capital accounts of the partnership. The contribution of the land Steve made to the partnership is not a taxable supply, as it is not a supply made in the course or furtherance of an enterprise carried on by Steve.

51. In March 2002, the partnership sold the land for $820,000 and used the margin scheme to calculate the GST payable.

52. Under subsection 75-10(2), the partnership's consideration for the acquisition of the land is $600,000, being the value of the non-monetary consideration provided by the partnership (the interest in the partnership) for the land when the partnership acquired it from Steve.

53. The margin for the supply is $220,000, being the difference between the consideration for the supply ($820,000) and the consideration for the acquisition by the partnership ($600,000).

54. The GST payable by the partnership on this supply is $20,000, being 1/11th of the margin of $220,000.

Example 5: partnership supplies before 17 March 2005 real property that was acquired from a partner before 1 July 2000

55. On 30 December 1999, Jim and John formed a general law partnership to carry out a land development business. Jim contributed land valued at $300,000 to the partnership while John contributed cash. The contribution of the land is not a taxable supply as it was made before 1 July 2000. In January 2001, the partnership sold the land for $820,000 and used the margin scheme to calculate the GST on the supply.

56. As the partnership acquired the land before 1 July 2000, it can calculate the margin for the supply under subsection 75-10(3) if it obtained a valuation of the land that was in accordance with one of the Commissioner's written determinations. The partnership obtained a valuation which states that on 1 July 2000, the market value of the land was $490,000.

57. Under subsection 75-10(3), the margin for the supply is $330,000, being the difference between the consideration for the supply and the market value of the land at 1 July 2000 as per the valuation held by the partnership (that is, $820,000 less $490,000).

58. The GST payable by the partnership on this supply is $30,000, being 1/11th of $330,000.

(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?

59. If, on or after 17 March 2005, the partnership supplies real property under the margin scheme that was acquired from a partner or its partners by way of capital contribution, the margin for the supply is calculated under subsection 75-11(7), unless the other provisions in section 75-11 apply. Subsection 75-11(7) applies because a partnership and its partners are associates.[28]

60. As section 75-11 takes precedence, subsections 75-10(2) and 75-10(3) do not apply.

61. Under subsection 75-11(7) the margin for the supply is the amount by which the consideration for the supply exceeds:

·
an approved valuation of the real property as at 1 July 2000 - if the acquisition was made before 1 July 2000; or
·
the GST inclusive market value of the real property at the time of its acquisition - if the acquisition was made on or after 1 July 2000.

Example 6: partnership supplies on or after 17 March 2005 real property that was acquired from a partner as a capital contribution

62. On 1 December 2002, Graham and Lynette, who were not carrying on an enterprise, purchased a block of land as tenants in-common for $400,000, with each having a 50% interest in the property. On 1 August 2004, they formed a general law partnership and contributed the land to the partnership for the purpose of carrying on a business of land development. The contribution of the land to the partnership was not a taxable supply. The partnership was registered for GST. When the land was contributed to the partnership, its GST inclusive market value was $600,000.

63. On 1 May 2005, the partnership sold the land to Murray for $710,000 and used the margin scheme to calculate the GST payable.

64. When the partnership acquired the land, the partnership and its partners were associates of each other. As the partnership acquired the land from associates and then supplied it on or after 17 March 2005, the margin for the supply is calculated under subsection 75-11(7).

65. The margin for the supply is $110,000 being the difference between the consideration for the supply and the GST inclusive market value of the land at the time of acquisition (that is, $710,000 less $600,000).

66. The GST payable by the partnership on this supply is $10,000, being 1/11th of the margin of $110,000.

(d) If real property is held by a general law partnership, does a reconstitution[29] of the partnership give rise to a supply or acquisition of the property?

67. No. A reconstitution of the partnership does not give rise to a supply or acquisition of the real property from one partnership to another partnership because any property held by the partnership prior to its reconstitution is retained by the reconstituted partnership. Therefore, there is no supply to which the margin scheme can apply.

Example 7: reconstitution of a general law partnership

68. Jessica, Lauren, and Sarah formed a general law partnership to carry on a business of land development. In August 2003, it acquired a large piece of land from an unregistered unrelated party for $600,000.

69. When the partnership was formed the written partnership agreement included a continuity clause in the event of a change in the membership of the partnership.

70. In November 2004, Jessica, Lauren and Sarah invited Thomas into the partnership. At that time the market value of the land was $800,000. The partnership supplied an interest in the partnership to Thomas in exchange for his capital contribution of $200,000.

71. When Thomas became a partner, there was no winding up of the original partnership because of the continuity clause in the partnership agreement. The partnership reconstituted, and no supply or acquisition of the land occurred as a result. If the partnership uses the margin scheme when it later sells the land and calculates the margin under subsection 75-10(2), the consideration for the acquisition of the land is $600,000.

(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)?[30]

72. Yes, as long as the real property is supplied to the partner such that it becomes the property of the partner and is no longer partnership property.

73. Real property distributed by a partnership to a partner is a supply for consideration. The consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or a combination of both.[31]

What is the consideration for the in specie distribution?

74. The capital contributed by a partner to the partnership entitles the partner to an interest in the partnership, and gives rise to an entitlement to a distribution of any surplus remaining on dissolution of the partnership (after payment of partnership debts and other liabilities and after return of capital to the partners). The right to an in-specie distribution is as a consequence of an entity being a partner. The reduction in the value of the partner's interest in the partnership reflecting the value of the property distributed is the consideration for an in-specie distribution. This reduction in value may be represented by:

(a)
an amount debited to the capital account of the partner;
(b)
an amount debited to the current account of the partner, or
(c)
a combination of amounts debited to both the partner's capital account and current account.

75. Where the value of the in specie distribution is greater than the total credit standing to the partner, as reflected by the combined balance of the partner's capital and current account, the consideration for the in-specie distribution is:

·
the combination of amounts debited to both the partner's capital account and current account, plus
·
the entry into an obligation, or the promise to pay the partnership an amount in respect of the partnership property.[32]

76. If the distribution of the real property to the partner is a taxable supply and all the other requirements in section 75-5 are met, the partnership may apply the margin scheme in working out the GST on the supply.

Alternative view

77. A distribution of real property to a partner of a general law partnership as a result of general dissolution is not a 'sale', as it is a supply made for no consideration.[33] This means the margin scheme cannot apply even if the distribution of the property to the partner is a taxable supply under Division 72.[34]

78. If the distribution of the property to the partner is a taxable supply under Division 72, the partner also cannot use the margin scheme when it later makes a taxable supply of that property. This is because the partner had acquired the property through a supply that was ineligible for the margin scheme. A supply is ineligible for the margin scheme if was a taxable supply on which the GST was worked out without applying the margin scheme.[35]

79. However, for the reasons stated in paragraphs 72 to 74 of this draft Ruling, the Commissioner considers that the distribution of real property to a partner of a general law partnership as a result of general dissolution is a supply made for consideration.

(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?

80. Depending on when the property was acquired and supplied by the partner, the margin is calculated as follows.

Date partner supplies property Date partner acquired the property Calculation of margin
Before 17 March 2005 On or after 1 July 2000 Under subsection 75-10(2). Margin = supply consideration less acquisition consideration (refer to paragraph 24 of this draft Ruling). The consideration for the acquisition may be monetary, non-monetary or a combination of both. See paragraphs 72 to 74 for what that consideration may be.
Before 17 March 2005 Before 1 July 2000 Under subsection 75-10(3). Margin = supply consideration less approved valuation of the real property (refer to paragraph 25 of this draft Ruling).
On or after 17 March 2005 On or after 1 July 2000 Under subsection 75-11(7), as a partnership and its partners are associates. Margin = supply consideration less the GST inclusive market value of the real property at the time of its acquisition (refer to paragraphs 26 to 27 of this draft Ruling).
On or after 17 March 2005 Before 1 July 2000 Under subsection 75-11(7), as a partnership and its partners are associates. Margin = supply consideration less an approved valuation of the real property as at 1 July 2000 (refer to paragraphs 26 to 27 of this Ruling).

Example 8: property acquired by partner upon dissolution on or after 1 July 2000 and subsequently supplied before 17 March 2005

81. In July 2000, Artie and Bertie who were not registered nor required to be registered for GST, contributed $350,000 each to form a general law partnership to carry on a business of land development. The partnership acquired land for $700,000 in August 2000.

82. In December 2001, the land was valued at $1,200,000. Artie decided to retire from the partnership and sold his interest in the partnership to Bertie for $600,000. This increased the value of Bertie's interest in the capital of the partnership to $1,200,000. At that time, Bertie registered for GST as he wanted to carry on the land development business. The partnership was dissolved because of Bertie acquiring Artie's interest in the partnership and Bertie acquired the land as a distribution from the partnership.

83. The distribution of the land to Bertie was for consideration being the amount of $1,200,000 debited to his capital account. At the time, the land was valued at $1,200,000 and this was reflected in the capital account of the partnership. The distribution of the land to Bertie was a taxable supply made by the partnership under the margin scheme. The margin for the supply calculated under subsection 75-10(2) was $500,000, being the difference between the consideration for the supply and the consideration for the acquisition by the partnership (that is, $1,200,000 less $700,000). The GST payable by the partnership on this supply was $45,455, being 1/11th of the margin of $500,000.

84. In March 2002, Bertie sold the land to Robert for $1,420,000 and applied the margin scheme. Under subsection 75-10(2), Bertie's consideration for the acquisition of the land is $1,200,000, being the value of his interest in the partnership at that time. The margin for the supply is $220,000, being the difference between the consideration for the supply and the consideration for the acquisition by Bertie (that is, $1,420,000 less $1,200,000).

85. The GST payable is $20,000, being 1/11th of the margin of $220,000.

Example 9: property acquired upon dissolution before 1 July 2000 and subsequently supplied before 17 March 2005

86. Jo and Wendy were in a partnership. The partnership property consisted of land for development. On 14 October 1999, Wendy sold her interest in the partnership to Jo resulting in the partnership being dissolved. The land was distributed to Jo.

87. Jo registered for GST as from 1 July 2000. She obtained a valuation of the land as at 1 July 2000 that valued the real property at $370,000. The valuation was in accordance with the Commissioner's written determinations. On 15 December 2001, Jo sold the land for $590,000 and used the margin scheme to calculate the GST on the supply.

88. Jo calculated the margin for the supply under subsection 75-10(3). The margin is $220,000, being the difference between the consideration for the supply and the valuation (that is, $590,000 less $370,000). The GST payable is $20,000, being 1/11th of the margin of $220,000.

Example 10: property acquired upon dissolution and subsequently supplied after 17 March 2005

89. George and Jerry contributed $350,000 each on the formation of a general law partnership. The partnership acquired land in July 2000 for $700,000. In December 2004, the land was valued at $1,200,000. In December 2004, George retired from the partnership and sold his interest in the partnership to Jerry for $600,000. This increased the value of Jerry's interest in the capital of the partnership to $1,200,000.

90. At this time Jerry registered for GST as she intended to carry on an enterprise of land development in relation to the real property. The partnership was dissolved and the land was distributed to Jerry. The distribution of the land to Jerry was for consideration being the amount of $1,200,000 debited to her capital account.

91. The distribution of the land to Jerry was a taxable supply made by the partnership, which used the margin scheme to calculate the GST payable. The margin for the supply calculated under subsection 75-10(2) is $500,000, being the difference between the consideration for the supply and the consideration for the acquisition by the partnership (that is, $1,200,000 less $700,000). The GST payable by the partnership on this supply is $45,455, being 1/11th of the margin of $500,000.

92. In July 2005, Jerry sold the land to Tom for $1,530,000. The sale to Tom was a taxable supply and Jerry used the margin scheme to calculate the GST on the supply.

93. As the land was acquired by Jerry from an associate (the partnership), subsection 75-11(7) applies. The margin for the supply is $330,000, being the difference between the consideration for the supply and the GST inclusive market value of the real property at the time of acquisition (that is, $1,530,000 less $1,200,000).

94. The GST payable is $30,000, being 1/11th of the margin of $330,000.

Your comments

95. We invite you to comment on this draft Goods and Services Tax Ruling. Please forward your comments to the contact officer(s) by the due date. (Note: the Tax office prepares a compendium of comments for the consideration of the relevant Rulings Panel. The Tax Office may use a sanitised version (names and identifying information removed) of the compendium in providing its responses to persons providing comments. Please advise if you do not want your comments included in a sanitised compendium.)

Due date: 25 July 2008
Contact officer details have been removed following publication of the final ruling.

Detailed contents list

96. Below is a detailed contents list for this draft Goods and Services Tax Ruling:

Paragraph
What this Ruling is about 1
Date of effect 7
Background 11
Partnerships 11
Partnership an entity separate from its partners 14
Interests in a general law partnership 15
Partnership property 17
Margin scheme 21
Subsection 75-10(2) 24
Subsection 75-10(3) 25
Subsection 75-11(7) 26
Section 75-13 28
Ruling with explanation 29
(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)? 30
Example 1: real property becomes partnership property where legal title remains with the contributing partner. 38
Example 2: real property is used by the partnership but is not partnership property. 41
Example 3: capital contribution of a tenant in common interest in real property to a partnership. 43
(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? 47
Example 4: partnership supplies before 17 March 2005 real property that was acquired from a partner on or after 1 July 2000 50
Example 5: partnership supplies before 17 March 2005 real property that was acquired from a partner before 1 July 2000 55
(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? 59
Example 6: partnership supplies on or after 17 March 2005 real property that was acquired from a partner as a capital contribution. 62
(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? 67
Example 7: reconstitution of a general law partnership 68
(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)? 72
What is the consideration for the in specie distribution 74
Alternative view 77
(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? 80
Example 8: property acquired upon dissolution on or after 1 July 200 and subsequently supplied before 17 March 2005 81
Example 9: property acquired upon dissolution before 1 July 2000 and subsequently supplied before 17 March 2005. 86
Example 10: property acquired upon dissolution and subsequently supplied after 17 March 2005 89
Your comments 95
Detailed contents list 96

Commissioner of Taxation
11 June 2008

Footnotes


The date of Royal Assent of the 2005 Amendment Act.


The general law definition is set out in the Partnership Act of each State and Territory as follows: subsection 7(1) WA; subsection 5(1) Qld; subsection 5(1) Vic; subsection 1(1) SA; subsection 1(1) NSW; subsection 6(1) ACT; subsection 6(1) Tas; subsection 5(1) NT. This definition is adopted from the common law.


Section 184-1.


Subsection 184-5(1).


See the discussion at paragraphs 33 to 35 of GSTR 2003/13.


In determining whether real property has become partnership property it is necessary to look at the intentions of the partners. This involves an examination of the partnership agreement and any relevant conduct of the partners.


GSTR 2003/13 at paragraphs 65 to 70.


Land may be vested at law in one partner only and also be partnership property: Re Rayleigh Weir Stadium [1954] 2 All ER 283; [1954] 1 WLR 786 (Rayleigh). In such a case, other partners have an equitable right to their own share and thus a right to a share of the proceeds of sale of the land: Rayleigh [1954] 2 All ER 283 at page 286; [1954] 1 WLR 786 at page 791.


Pursuant to paragraph 184-5(1)(a), a supply or acquisition made by or on behalf of a partner in their capacity as a partner of the partnership is taken to be made by the partnership.


See paragraph 135 of GSTR 2003/13 as amended by draft Addendum to GSTR 2003/13 issued on 11 June 2008.


Sections 9-70 and 9-75.


A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 1) 2000; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 2) 2000; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/1; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MS 2005/2; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3.


In limited circumstances, subsection 75-10(3) can also apply where real property was acquired on or after 1 July 2000.


The term 'associate' is defined in section 195-1 of the GST Act by reference to section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). The definition is very wide. Under the definition, partners in a partnership are associates of each other and the partnership. Associates of a partnership also include spouses and children of a partner of the partnership.


The Government has announced proposed amendments in relation to section 75-11 and the application of the margin scheme to the supply of real property acquired from an associate. The final Ruling will take these proposed changes into account if the relevant legislation is enacted before the date of issue of the final Ruling.


Refer to paragraph 18 of Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?


See GSTR 2003/13 at paragraph 59.


See GSTR 2006/8 at paragraph 47 and GSTR 2006/7 at paragraph 59.


Commissioner of Taxation v. Reliance Carpet Co Pty Ltd [2008] HCA 22.


Societe thermale d'Eugenie-les-Bains v. Ministère de l'Economie, des Finances et de l'Industrie [2007] 3 CMLR 1003.


Navakumar v. Commissioner of State Revenue [2007] VCAT 476 at [43].


See also comments made by Gleeson CJ and Callinan J in their dissenting judgment in the High Court decision Chief Commissioner of State Revenue (NSW) v. Dick Smith Electronics Holdings Pty Ltd (2005) 213 ALR 230 at 235-236 at [22] to [24].


See Canny Gabriel Castle Jackson Advertising Pty Ltd and Anor v. Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at page 327; 3 ALR 409 at page 412.


Sections 184-1 and 184-5(1).


Ed RC I'Anson Banks, 1995, Lindley and Banks on partnership (Lindley and Banks), 18th edition, Sweet & Maxwell, London at paragraph 17-02.


Ed RC I'Anson Banks, 1995, Lindley and Banks on partnership (Lindley and Banks), 18th edition, Sweet & Maxwell, London at paragraph 18 to 33.


Subsection 75-10(2) is subject to subsection 75-10(3).


The term 'associate' is defined in section 195-1 of the GST Act by reference to section 318 of the ITAA 1936. The definition is very wide. Under the definition, partners in a partnership are associates of each other and the partnership. Associates of a partnership also include spouses and children of a partner of the partnership.


A reconstitution of a partnership occurs where a change in the partnership does not lead to the winding up of a partnership, but instead the continuing partners and any new partners conduct the business of the partnership without any break in its continuity. Reconstituted partnerships are discussed at paragraphs 148 to 150 and paragraphs 170 to 171 of GSTR 2003/13.


The views set out under this sub-heading would equally apply where the distribution occurs during the continuance of the partnership.


See GSTR 2006/8 at paragraph 47 and GSTR 2006/7 at paragraph 59. See also paragraphs 33 and 34 of this draft Ruling for a discussion on consideration.


As reflected in the partner's loan account or similar.


Paragraph 136 of GSTR 2003/13 prior to its replacement by new paragraph 136 as per draft Addendum to GSTR 2003/13 issued on 11 June 2008.


A supply made by a partnership to a partner for no consideration can be a taxable supply under Division 72. Paragraphs 86 to 92 of GSTR 2003/13 explain the application of Division 72 to a general law partnership.


Subsection 75-5(2).

Not previously issued as a draft

References

ATO references:
NO 2006/10067

ISSN: 1443-5160

Related Rulings/Determinations:

GSTR 1999/1
GSTR 2000/21
GSTR 2003/3
GSTR 2003/13
GSTR 2006/7
GSTR 2006/8

Subject References:
Acquisition of real estate
GST consideration
GST non-monetary consideration
Partnerships
Partnership restructuring
Partnership interests
Distribution in-specie
GST margin scheme
GST property and construction
GST lease and real property
GST sale of real property
Real property
GST supply
Taxable supply

Legislative References:
ANTS(GST) Act 1999 9-70
ANTS(GST) Act 1999 9-75
ANTS(GST) Act 1999 40-65
ANTS(GST) Act 1999 Div 72
ANTS(GST) Act 1999 Div 75
ANTS(GST) Act 1999 75-5
ANTS(GST) Act 1999 75-5(1)
ANTS(GST) Act 1999 75-5(1A)
ANTS(GST) Act 1999 75-5(2)
ANTS(GST) Act 1999 75-10
ANTS(GST) Act 1999 75-10(2)
ANTS(GST) Act 1999 75-10(3)
ANTS(GST) Act 1999 75-11
ANTS(GST) Act 1999 75-11(7)
ANTS(GST) Act 1999 75-13
ANTS(GST) Act 1999 184-1
ANTS(GST) Act 1999 184-5(1)
ANTS(GST) Act 1999 184-5(1)(a)
ANTS(GST) Act 1999 195-1
ITAA 1936 318
ITAA 1997 995-1
TAA 1953 Sch 1 105-60
Tax Laws Amendment (2005 Measures No. 2) Act 2005
Partnership Act ACT 1963 6(1)
Partnership Act NSW 1892 1(1)
Partnership Act NT 1997 5(1)
Partnership Act Qld 1891 5(1)
Partnership Act SA 1891 1(1)
Partnership Act TAS 1891 6(1)
Partnership Act Vic 1958 5(1)
Partnership Act WA 1895 7(1)

Case References:
Archibald Howie Pty Ltd v. Commissioner of Stamp Duties (NSW)
(1948) 77 CLR 143
[1948] HCA 28


Canny Gabriel Castle Jackson Advertising Pty Ltd and Anor v. Volume Sales (Finance) Pty Ltd
(1974) 131 CLR 321
3 ALR 409

Chief Commissioner of State Revenue (NSW) v. Dick Smith Electronics Holdings Pty Ltd
(2005) 213 ALR 230
[2005] HCA 3
58 ATR 241
2005 ATC 4052

Commissioner of Taxation v. Reliance Carpet Co Pty Ltd
[2008] HCA 22

Navakumar v. Commissioner of State Revenue
[2007] VCAT 476
(2007) 66 ATR 186

Re Rayleigh Weir Stadium
[1954] 2 All ER 283
[1954] WLR 786

Societe thermale d'Eugenie-les-Bains v. Ministère de l'Economie, des Finances et de l'Industrie
[2007] 3 CMLR 1003

Other References:
A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 1) 2000, MSV 2000/1
A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 2) 2000, MSV 2000/2
A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination, MSV 2005/1
A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination, MS 2005/2
A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination, MSV 2005/3
Ed RC I'Anson Banks, 1995, Lindley and Banks on partnership (Lindley and Banks), 18th edition, Sweet & Maxwell, London