Edited version of private ruling

Authorisation Number: 1011812356425

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Ruling

Subject : Goods and services tax (GST): supply of properties

Question 1
Can you become participants in a GST joint venture under subsection 51-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1
Yes, you can become participants in a GST joint venture under subsection 51-5(1) of the GST Act.

Question 2

Can the joint venture operator (JVO) claim all the input tax credits in respect to the construction costs incurred in building the specified number of townhouses?

Answer 2

No, the JVO cannot claim all the input tax credits in respect to the construction costs incurred in building the specified number of townhouses.

Question 3

Which entity is liable for GST on the sale of the specified number of townhouses to third parties?

Answer 3
Y in its own right is liable for GST on the sale of the specified number of townhouses to third parties

Question 4

Is Y eligible to use the margin scheme on the supply of the specified number of townhouses?

Answer 4

Yes, Y is eligible to use the margin scheme on the supply of the specified number of townhouses.

Question 5

Is X making a taxable supply when transferring the unsold townhouses to Y?

Answer 5

No, X is not making a taxable supply when transferring the unsold townhouses to Y.

Relevant facts

We have been asked to rule to two entities, X and Y on the GST implications of a proposed transaction. You have supplied the following facts for us to rule on.

X is:

· a non profit organisation

· an endorsed charitable institution

· registered for GST and

· reports its GST obligations quarterly on the cash basis

· not an associate of Y.

X operates an enterprise and prior to the start of GST acquired two properties. The two properties have a house on each of them and are rented out. The properties are currently estimated to be valued at a specified figure. The original two houses on the properties will be demolished as part of the development project.

Y is

· registered for GST

· reports its GST obligations on a quarterly basis and

· accounts on the cash basis

· not a member of a GST group.

X and Y propose to enter into an agreement for the development of a specified number of townhouses on the properties. A copy of the draft agreement has been enclosed with this private ruling application. Y is also a party to this ruling.

There is no association of persons carrying on business as partners or in receipt of income jointly.

Y will undertake the development of the multi-unit dwellings. Y, as joint venture operator (JVO), will make acquisitions on behalf of the participants of the joint venture in carrying on the development enterprise. The supplies to Y are taxable supplies. Y provides consideration for the supplies.

Y will be solely responsible for all aspects of the development including:

· Paying for and obtaining development approval

· Organising finance for construction

· Organising, paying for and supervising construction

· Bearing the construction risk of the project

· Being the joint venture operator

X will allow the land to be used as security for borrowing by Y and pay a specified sum to Y upon receipt by Y of the first progress claim by the builder as a contribution towards costs.

The townhouses will be strata-titled after completion. X will retain a specified number of townhouses for residential rental purposes as long term assets held for investment.

X will then endeavor to sell the remaining specified number of townhouses and give the net proceeds (after deduction of any sales costs and any payment of monies owed to the project financier) to Y. The specified number of townhouses will be available for immediate sale as new residential premises.

Y and the recipient of the supply (ie third party purchaser) of any of the specified number of townhouses will agree in writing that the margin scheme is to apply. The agreement will be made on or before the making of the supply.

Alternatively X will supply any of the specified number of unsold townhouses to Y together with the net sale proceeds from the ones that have been sold. The purchase price stated on the transfer forms, in respect to the transfer of unsold townhouses to Y, is for stamp duty purposes. Y will not pay the purchase price stated on the transfer form. The transfer brings the joint venture to an end.

X will remain the registered owner of the land until settlement of any contracts of sale or transfer to Y on completion of the project.

Y would notify the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture if the Taxation Office accepts that there is a joint venture.

Reasons for decision

Question 1

Can you (X and Y) become participants in a GST joint venture under subsection 51-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Division 51 of the GST Act makes provision for the approval of certain entities engaged in a joint venture to become a GST Joint venture. A GST joint venture is defined in section 195 of the GST Act to be an entity that meets the criteria set out in section 51-5.

Subsection 51-5(1) of the GST Act provides that two or more entities may become the participants in a GST joint venture if:

(a) the joint venture is a joint venture for the exploration or exploitation of
mineral deposits, or for a purpose specified in the regulations; and

(b) the joint venture is not a partnership; and

(c) (Repealed by No the specified number4 of 2010)

(d) each of those entities satisfies the participation requirements for that GST
joint venture; and

(e) each of those entities agrees in writing to the formation of the joint venture
as a GST joint venture; and

(ea) one of those entities, or another entity, is nominated, in that agreement,
to be the joint venture operator of the joint venture; and

(eb) the nominated joint venture operator notifies the Commissioner, in the
approved form, of the formation of the joint venture as a GST joint
venture; and

(f) if the nominated joint venture operator is not a party to the joint venture
agreement - the nominated joint venture operator satisfies the
requirements of paragraphs 51-10(c) and (f).

Such a joint venture is a GST joint venture.

Subregulation 51-5.01(1)(f) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) sets out the specified purposes for GST joint ventures that are involved in the construction industry. It provides that the design, or building, or maintenance, of residential or commercial premises is a specified purpose.

You have to satisfy all the above conditions for you to become participants in a GST joint venture. The first criterion in paragraph (a) of subsection 51-5(1) of the GST Act is that there is a joint venture.

We note for your information that Goods and Services Tax Ruling GSTR 2004/2 deals with what constitutes a joint venture for GST purposes. In accordance with paragraph 11 of GSTR 2004/2, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

· sharing of product or output, rather than sale proceeds or profits;

· a contractual agreement between the participants;

· joint control;

· a specific economic project; and

· cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture.

We believe that you have the requisite features of a joint venture based upon the information given to us.

We also believe that you satisfy the requisite conditions under subsection 51-5(1) of the GST Act to become the participants in a GST joint venture based upon the information given to us.

Question 2

Can the joint venture operator (JVO) claim all the input tax credits in respect to the construction costs incurred in building the specified number townhouses?

Subsection 51-35(1) of the GST Act provides that if the joint venture operator of a GST joint venture makes a creditable acquisition or creditable importation, on behalf of another entity that is a participant in the joint venture, in the course of activities for which the joint venture was entered into:

(a) the joint venture operator is entitled to the input tax credit for the
acquisition or importation; and

(b) the participant is not entitled to the input tax credit on the acquisition or
importation

Section 11-5 of the GST Act provides that 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.

Under section 11-15 an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise. However it does not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

The specified number townhouses for rent

Subsection 40-35(1) of the GST Act provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of residential premises (other than a supply of commercial
residential premises or a supply of accommodation in commercial
residential premises provided to an individual by the entity that owns or
controls the commercial residential premises); or

(b) the supply is of commercial accommodation and Division 87 (which is
about long-term accommodation in commercial premises) would apply to
the supply but for a choice made by the supplier under section 87 -25.

Commercial residential premises are defined the in the GST Act to mean amongst other things:

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

………..

(f) anything similar to residential premises described in paragraphs (a) to
(e).

Residential premises are defined in the GST Act to mean land or building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a
residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

From the facts you have supplied:

· the townhouses meet the definition of residential premises as they are intended to be occupied and are capable of being occupied as a residence and

· the townhouses do not meet the definition of commercial residential premises nor is
there a supply of commercial accommodation

It follows that the supply of the specified number of townhouses by way of lease is an input taxed supply. Acquisitions that relate to the specified number of townhouses are not for a creditable purpose. Such acquisitions are not creditable acquisitions. The JVO cannot claim input tax credits under subsection 51-35(1) of the GST Act nor under any other provision of the GST Act in respect to such acquisitions.

The specified number of townhouses for sale

Subsection 40-65(1) of the GST Act provides that 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).

However, subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation
(regardless of the term of occupation) before 2 December 1998.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial
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.

It follows that the sale of the specified number of townhouses is a sale of new residential premises as they have not previously been sold as residential premises due to subparagraph 40-65(2)(b) of the GST Act and therefore will not be an input taxed supply of residential premises.

Acquisitions that relate to the specified number of townhouses are for a creditable purpose. Such acquisitions are creditable acquisitions. The JVO can claim input tax credits under subsection 51-35(1) of the GST Act in respect to such acquisitions.

Answer 3

Which entity is liable for GST on the sale of the specified number of townhouses to third parties?

As set out in the answer to question 1 we accept that you are a joint venture. In the arrangements, as set out in your joint venture agreement, Y will seek to sell the specified number of townhouses within the joint venture scheme although X will sign any sale contracts. Any unsold townhouses will be then transferred to Y who will then seek to sell them in its own right.

One of the critical components of a joint venture operation is that the participants share the product not the profit. Goods and Services Tax Ruling GSTR 2004/2 deals with joint ventures. Paragraph 33 of GSTR 2004/2 provides that if the participants share profits or the proceeds of sale of the product, rather than sharing the product, the arrangement is not a joint venture. However, the participants may agree that the product is to be sold collectively by another entity, or by one of the participants, on behalf of each of the participants. This does not mean that the participants are sharing in the proceeds of the sale or that there is a joint profit to share. Rather, the entity that sells each participant's share of the product sells on behalf of that participant. Each participant records the GST on the sale of their share in the individual business activity statement.

Subsection 51-30(1) of the GST Act provides amongst other things that GST payable on any taxable supply that the joint venture operator of a GST joint venture makes, on behalf of another entity that is a participant in the joint venture, in the course of activities for which the joint venture was entered into:

(a) is payable by the joint venture operator; and

(b) is not payable by the participant.

In this case, the critical issue is whether the supply by the JVO of any of the specified number of townhouses will be in the course of the activities for which the joint venture was entered into.

Although you have set out in your joint venture agreement that the joint venture will attempt to sell some of the properties in the course of the scheme we need to examine whether this is in the course of activities of your joint venture. Subparagraph 51-5.01(1)(f) of the GST Regulations, sets out that the specified purposes under which you are a joint venture is the 'design, or building, or maintenance, of residential or commercial premises'.

We consider that, in referring to the '...activities for which the joint venture was entered into', subsection 51-30(1) of the GST Act is referring to activities which are part of the specified purposes for which the joint venture was approved.

The parties may between themselves agree that other activities, such as the re-sale of the premises by the participant to third parties, are part of the activities for which the joint venture is entered into. However, this does not have the effect of extending the operation of Division 51 of the GST Act, including subsection 51-30(1), to activities which are not specified purposes.

Therefore when Y sells any of the specified number of townhouses while the joint venture scheme is operational, the GST that is payable on the taxable supplies is not paid by the JVO as the sales are not part of the specified purposes. It follows that, the GST is payable under section 9-5 of the GST Act by Y.

On the other hand, if Y sells any of the specified number of townhouses after the joint venture scheme has finished operating, the GST that is payable on the taxable supplies relates to Y's supplies in its own capacity. It follows that, the GST is payable under section 9-5 of the GST Act by Y.

As per section 9-5 of the GST Act 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

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

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

In the case of Y they will receive consideration in the course of their enterprise, for their supply of the specified number of townhouses located in Australia and they are registered for GST. Therefore as the supplies are not GST free or input taxed (they meet the definition of new residential premises) Y is liable for the GST.

Question 4

Is Y eligible to use the margin scheme on the supply of the specified number townhouses?

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on 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;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act defines supplies that are ineligible for the margin scheme. None of these supplies apply to Y.

Therefore, Y did not acquire the entire freehold interest through a supply that was ineligible for the margin scheme.

Based on the information you provided Y is not excluded from accessing the margin scheme because of subsection 75-5(2) of the GST Act.

Based on the information you provided Y satisfies subsections 75-5(1) and 75-5(1A) of the GST Act in that:

Y and the recipient of the supply (ie third party purchaser) of any of the specified number of townhouses will agree in writing that the margin scheme is to apply; and

The agreement will be made on or before the making of the supply.

Therefore, Y is eligible to use the margin scheme on the supply of the specified number of townhouses.

Question 5

Is X making a taxable supply when transferring the unsold townhouses to Y?

Section 9-5 of the GST Act provides that 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

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

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Goods and Services Tax Ruling GSTR 2004/3 deals with avoidance of GST on the sale of new residential premises. Paragraphs 33 to 35 of GSTR 2004/3 provide that it is not possible to make a definitive statement that will cover all possible joint venture arrangements. The GST implications of each arrangement must necessarily depend on the facts in the particular case. However, in many cases the requirements of section 9-5 would not be satisfied in respect of the arrangements by which a participant in a joint venture obtains its share of the product or output of the venture.

For example, joint venture arrangements are common in the mining industry. Each participant in a mining joint venture may own a share of the mining tenement. Under the terms of a joint venture for mining, say, coal, each participant is entitled to a share of the coal extracted from the site by the joint venture operator on behalf of the participants. In that case, having regard to the relevant facts in each case, it may be doubtful whether there would be a supply by the joint venture operator to the participants in respect of their shares of the coal. Each participant is merely receiving their entitlement under the terms of the joint venture. Any transfer of possession of one participant's share of the output by the joint venture operator to that participant may be made as agent for the participant. In that case, there would be no supply for GST purposes. In any case, if under the terms of the particular joint venture, there is no consideration for a supply or an insufficient nexus between any consideration and the supply, there is no taxable supply under the basic rules.

Similarly, in a joint venture for the construction of residential premises each participant may receive a specified number of home units in a unit development as their share of the product or output of the joint venture. In this case, if the legal title to the units is held by one of the participants, such as the joint venture operator, it may be necessary for the legal title to each unit to be transferred to the participant entitled to that unit under the terms of the joint venture. However, if there is no consideration for the transfer of the title, there is no taxable supply in these circumstances. Whether there is consideration is a question of fact to be determined having regard to the documentation and other relevant circumstances in each case.

We consider that Y is purely taking its share of the joint venture product. X is not making a supply when transferring the unsold townhouses to Y. There is also no consideration. Therefore, X has not met all the conditions necessary for making a taxable supply of unsold townhouses to Y.

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