Edited version of private ruling

Authorisation Number: 1011817887536

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Ruling

Subject: GST and supply of interest in real property

Question

Are you making a taxable supply when you dispose of your equitable interest in real property to a charity?

Answer

No, you are not making a taxable supply when you dispose of your interest in the property to the charity. You are making an input taxed supply and therefore the supply will not be subject to GST.

Relevant facts and circumstances

You entered into a joint venture agreement with a charity for a specified period;

The objective of the JV agreement was the construction of units on land, for the purposes of providing residential rental accommodation to certain groups;

Construction was completed and the premises were ready for occupation prior to 2 December 1998;

You carry on an enterprise of providing residential accommodation in Australia;

The charity is the registered proprietor of the land and holds and will retain 100% of the legal title and you submitted that they will also retain 100% interest in the land;

You and the charity are separately registered for GST and are not registered as a GST joint venture for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

Under the terms of the JV agreement, you:

· contributed the capital cost of the construction equal to a specified amount;

· hold X% interest in the project.

Under the terms of the JV agreement, the charity:

· contributed the cost of the land $X;

· extra amenities and other costs $X;

· holds X% interest in the project.

You and the charity now intend to terminate the joint venture as you are required to extinguish your caveat on the title of the land to enable the charity to procure necessary finances to fund construction of additional residential units on the land to enable it to provide accommodation to its clients;

The agreement expressly states that nothing contained in the agreement shall be deemed or interpreted to create a partnership, association or agency;

You do not hold a joint bank account with the charity and your rights and obligations under the agreement are neither joint nor joint and several;

Management of the accommodation was to be carried out solely by the charity;

Your interest in this project will end once the equitable interest is transferred to the charity;

You have previously received a private ruling from the ATO, which held that the provision of an equitable interest in land is not a supply of real property for GST purposes and is therefore not subject to GST;

In support of this current private ruling application, your tax consultant, makes the following contentions on your behalf:

· The fact that the parties have entered into a standard land contract for the sale of land does not change the treatment of the equitable interest as set out in paragraph 34 of GSTR 2000/28 which states:

· Any supply and acquisition of any contractual or equitable interest upon entering into a standard land contract is ancillary to the eventual supply and acquisition of the legal property at settlement and is not a separate supply.

· The relevant agreement which was entered into a number of years ago was for the construction of units on land owned solely by the charity and the provision of subsidised residential rental accommodation to specified clients;

· Your interest in the agreement extended only to ensuring that the charity provided adequate and satisfactory accommodation;

· There has never been any intention for you to acquire a legal interest in the property. The caveat lodged over the relevant land supports this statement. Had you intended to register your legal interest in the property and operate under a tenants in common arrangement, then you would not have needed to lodge a caveat;

· The ability to lodge a caveat over the property does not give the caveator an interest in the property. It simply preserves the status quo by preventing registration of a particular dealing until the caveator has been given the opportunity to pursue remedies against the partly lodging the dealing for registration;

· The overall substance of the agreement is to ensure that certain residential premises are built, managed and operated by the supplier and then provided to a certain sector of the community;

· The equitable interest in the land assigned to you does not give rise or extend to ownership of the land but merely arises out of the various rights and obligations established between the parties entering into the JV agreement;

· The equitable interest acquired by the charity does not amount to an acquisition by the charity of any proprietary ownership of the land or the developed units as the charity already has 100% legal interest in the land. The obligations set out in the agreement between the parties will not cease once the equitable interest is transferred from you to the charity. Rather, the charity intends to expand its operations through the development of further subsidised accommodation for the specified client group;

· You are not in the business of acquiring or supplying equitable interests in property. In this context, the removal of a caveat over land is merely ancillary to the overall aim of the agreement between the parties for the provision of accommodation;

· Your equitable interest in the property does not confer anything of value to you in itself as you would not be able to sell this right to place a caveat on the title deed to any third parties. The right to lodge a caveat is of value to you only in the context of the agreement which has no intrinsic value in itself. The fact that the agreement confers upon you the right to acquire a legal interest in the property has no bearing on the current scenario as that right was not exercised by you;

· Although the agreement provides that you will receive an amount of money equal to the market value of the property, you and the charity have agreed to accept an 'improvements only' valuation of the property. Therefore, the payment being received by you is not in line with your equitable interest as you are only receiving an amount as a result of your initial injection into the project, which did not give rise to any supply in the first instance;

· On the basis of the above, your tax consultant submits that the supply of the equitable interest by you to the charity is not a taxable supply;

· While the contract stipulates that you will, at a certain point in time, acquire a legal interest in the property and that you and the charity would hold the land as tenants in common, this has never been the actual intention of the parties as evidenced by your actions and by the fact that legal interest has never eventuated (the agreement was entered into prior to 1 July 2000);

· While it is noted that the wording of the contract does not accurately reflect the intention of the parties, it should be noted that the parties are primarily concerned with the objectives outlined in the agreement. The subsequent agreement (albeit informal) between the parties to operate under an alternate arrangements effectively varies the written terms of the contract whether or not reflected in writing.

A copy of the JV agreement between you and the charity was provided in support of this application. The relevant terms are summarised below:

· The recitals provide the relevant background to the arrangement and the objectives of the parties in entering into this agreement;

· The association is described as a joint venture for the purpose of designing, erecting, constructing, maintaining and managing upon the land a specified number of units for use as rental accommodation…;

· nothing contained in this agreement is said to create a partnership, association or agency.

· the charity shall not at any time during the term of the agreement sell or transfer its estate or interest in the land or the project except to another association or body approved by you…;

· subject to any agreement to extend or renew this agreement, the charity shall by written notice from you purchase the entire estate or interest of yours free of encumbrances in the land and the project at the market value of that estate or interest as at the date of exercise of the option;

· within a specified period after the determination of the current market value the charity shall prepare and submit to you for execution a deed of assignment of your interest in the project;

· you shall contribute towards the capital cost of the project the sum specified in a schedule to the agreement being the value of the units to be provided by you- which represents the percentage of the total cost of the Project (X%);

· the charity shall contribute a specified sum towards the capital costs of the units being the value of the land provided by the charity and the cost of the development of the Land which represents the percentage of the total cost of the project (X%);

· except as otherwise provided, all costs and expenses of the project shall be borne by the Organisation;

· upon demand by you, the charity shall provide a strata plan and execute and deliver to you free of charge a transfer in registrable form in respect of the number of undivided fractional shares in the land represented by the percentage stated in Item X (X%). Thereafter, the charity shall retain in its own name the number of undivided fractional shares in the land represented by the percentage stated in item X (X%). Until such demand is made and pending the registration of the transfer to you of its share in the land the charity shall be and remain the registered proprietor of the land and HEREBY DECLARES that it holds and shall continue to hold the land UPON TRUST for itself and you as tenants in common in respective undivided fractional shares hereinbefore referred to for the exclusive purpose of the project;

· the respective interests of the parties in the project shall be those stated in items X and X respectively and all property acquired by the parties in connection with the project shall be beneficially owned by them as tenants in common in the shares above mentioned;

· the charity shall charge a rental to all occupants of the Units which shall not exceed X% …All rentals shall be the property of and be retained by the charity;

· you shall pay for the erection and construction on the land of the units;

· the charity shall not use the land or units except for the purpose of providing rental accommodation to eligible clients;

· in allocating the unoccupied units to persons on the waiting list, a management committee shall give preference to specified clients …;

· the units shall be occupied by eligible clients selected on a specified basis;

· throughout the term the charity shall at all times and at its own expense….keep and maintain the units, maintain landscaping of the grounds and common areas, upgrade units; pay all rates and taxes; insure and keep insured the units and all improvements on the land; be responsible for the operation and management of land and the units thereon…;

· the charity shall as soon as practicable after execution of this agreement furnish to you a copy of the form of lease which it proposes to use with respect to tenants of the units;

· the charity shall not replace nor make any alteration addition deletion variation or amendment to or of the said form of lease without your prior consent in writing;

· the agreement may not be varied altered amended renewed or extended except by a further written agreement executed by both parties;

· no further or other covenants or provisions shall arise between the parties by way of collateral or other agreement, except as otherwise hereafter agreed in writing between you and the charity;

· the charity shall not assign sell transfer or dispose of its estate or interest without any prior written consent from you;

· the charity shall not mortgage charge encumber or create any security over its estate or interest in the land or any part thereof without your prior written consent;

· the rights and obligations of the parties shall be several and not joint or collective and each party shall be responsible only for its obligations hereunder to the intent that the parties ownership of their respective interests shall be as tenants in common;

· the charity hereby charges in favour of you all its right title and interest in the land and the units;

· you shall be entitled to lodge upon the title to the land or to that part thereof as shall relate to the estate or interest of the charity an absolute and/or a subject to claim caveat to protect your rights under the agreement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

An entity is liable for GST on any taxable supplies that it makes.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 the supply is not taxable to the extent that it is GST-free or input taxed.

The term 'supply' is broadly defined in section 9-10 of the GST Act. In this case, it is relevant to consider whether you are making a supply in the form of:

a grant, assignment or surrender of real property;

a creation, grant, transfer, assignment or surrender of any right.

'Real property' is defined in section 195-1 of the GST Act to include:

any interest in or right over land; or

a personal right to call for or be granted any interest in or right over land; or

a licence to occupy land or any other contractual right exercisable over or in relation to land.

The issue to be considered in this case is whether you are making a supply (more specifically a taxable supply) when you transfer your interest in the property to the charity.

In determining this, we will firstly consider the terms of the arrangements between the parties and the interests held by the respective parties in relation to the joint venture.

The terms of the arrangement between you and the charity were outlined in a written agreement referred to as a 'joint venture agreement' (the Agreement) entered into prior to 1 July 2000.

The Agreement describes the association between the parties as being for the purpose of designing, erecting, constructing, maintaining and managing upon the Land a number of housing units for use as rental accommodation for eligible clients.

According to the Agreement, you were to contribute towards the capital cost of the project (as specified in item X of the Schedule) and the charity was to contribute the value of the land and a monetary contribution towards the cost of the development of the land. The Agreement specifies that nothing in the Agreement shall be deemed to create a partnership, association, or agency arrangement.

From the facts provided, we agree that the parties are not in a partnership (neither at general law or tax law), nor is there an agency arrangement.

While the Agreement acknowledges that the legal title to the property was held (and continued to be held) by the charity, it provides that the parties respective interests in the land and the development was to be held by the charity on trust for both parties.

Relevantly, the Agreement provides that pending registration of the transfer to you of your share in the land the charity shall remain the registered proprietor of the land and holds and shall continue to hold the land upon trust for itself and you as tenants in common in respective undivided fractional shares.

The Agreement further provides that subject to any agreement to extend or renew the agreement, the charity shall purchase your entire estate or interest free of encumbrances in the Land and the Project at the current market value of that estate or interest (as at the date of exercise of that option). Within X days after the determination of the current market value, the charity was to prepare and submit to you for execution a deed of assignment of its interest in the project.

Your tax consultant advised that despite the terms included in the written agreement, it was never the intention of the parties for you to hold any legal interest in the property which is evidenced by the fact that you lodged a caveat over the land. They submit that if you had intended to register your legal interest in the property and operate under a tenants-in-common arrangement, then you would not have needed to lodge a caveat.

Your tax consultant considers that the equitable interest in the land assigned to you does not give rise or extend to ownership of the land but merely arises out of various rights and obligations established between the parties entering into the JV agreement. They submit that the removal of the caveat over the land is merely ancillary to the overall aim of the agreement between the parties for the provision of accommodation to the specified clients and the fact that the Agreement confers upon you the right to acquire a legal interest in the property has no bearing on the current scenario as that right was not exercised. On this basis they conclude that you are not making a taxable supply when you dispose of your equitable interest in the property.

In response, we provide the following comments.

The definition of 'real property' includes 'any interest in or right over land'. The definition is not limited to the supply of legal interests in land. It follows that a supply of premises can include a supply that is only a part interest in real property.

Further, there is nothing in the GST Act requiring legal title to the assets of an enterprise to be held or dealt with by the entity carrying on the enterprise in order for taxable supplies of assets to be made.

In this case, despite the fact that the legal title to the land is held by the charity, you obtained rights in relation to the property that go beyond merely a 'security' (in the form of a caveat) that limits the charity from dealing with the property without recognition of the rights held by you. [The circumstances of this case can be distinguished from that where a financier, or mortgagor registers its interest in the title of the land.]

We agree that the caveat is merely the mechanism that registered your rights under the JV arrangement. We also agree that the removal of the caveat is not the 'thing' being supplied by you to the charity.

However, the agreement between you and the charity provides you with equitable, contractual (and legal interests) in the property equivalent to a X% interest. The charity holds the remaining X% interest.

The fact that the legal title is held in the name of the charity does not preclude you from having an interest (whether described as a beneficial or legal interest) in the property. Your tax consultant submits that the fact that the agreement confers upon you the right to acquire a legal interest in the property has no bearing on the current scenario as that right was not exercised by you.

We agree that it is not relevant that you did not exercise your right to have legal title transferred to you relevant to your interest in the property. We acknowledge that it is necessary to consider the transaction that occurs, rather than a transaction that might have occurred. [As outlined in 'Proposition 10' in Goods and Services Tax Ruling GSTR 2006/9 'supplies'.]

However, we consider that the relevant transaction that occurs is the supply of your interest in the land (and any improvements on the land) to the charity.

Your tax consultant submits that the fact that the parties have entered into a standard land contract for the sale of land does not change the treatment of the equitable interest. In support, they refer to paragraph 34 of Goods and Services Tax Ruling GSTR 2000/28.

In response, in the context of GSTR 2000/28, the reference to the entry into contractual rights concerning the property not being the 'main supply' is in relation to the sale of real property where the sale involves the transfer of both the juristic rights and the physical land. It confirms that in such cases it is not appropriate to artificially dissect the associated rights from the land that is supplied under a standard land contract. It should be noted that paragraph 34 also recognises that rights or obligations can be the 'thing' supplied where payment is made to secure those rights. We agree that in this case the 'standard land contract' of itself is irrelevant to the issue at hand. However, we consider that in these circumstances the rights held (which are being supplied by you) go beyond merely defining the terms of the arrangement. In this case, it is the relevant thing that is supplied by you, for which the charity has agreed to pay a specified amount.

The factual circumstances confirm that in order to gain unrestricted access to the property the charity must acquire all of the interests held by you relevant to the property. We consider that materially, while the charity holds legal title to the land, it does not hold a 100% interest in the land. It holds title to the property in its own name but on trust for both parties. This does not equate to the charity having full ownership of the land and buildings in its own right. Rather, the charity has one part interest and you the other. To the extent of the X% interest, it must deal with the property as trustee for you.

Your tax consultant submits that there has never been any intention for you to acquire a legal interest in the property. In our opinion, the trust relationship created under the Agreement and the terms of that agreement go to supporting this very intention. That is, that you would hold a X% interest in the property.

As the title is held by the charity on trust for you, from the charity's perspective, it only holds a X% equitable interest in the property (despite holding full legal title). As a consequence, it cannot deal with the property other than in a way set out in its agreement with you. This is further supported by clause X in the Agreement which confirms that the charity 'charges in favour of' you, 'all its right title and interest in the land and the units'.

Your tax consultant further submits that if you had intended to register your legal interest as a tenant in common then you would not have had to lodge a caveat. As previously stated, the caveat is merely the mechanism to register your interest in the property to secure the equitable, beneficial and legal rights that you held. The lodgement of the caveat is evidence of the existence of those rights.

The interest held by you is of value given that it can call upon the charity to provide you with legal title (in order that you may deal with your interest in the property by way of sale). The fact that you did not, or decided not to, enforce legal title to be provided is not relevant to the overall interests held in the property.

The parties have agreed that the property would become wholly that of the charity. However, in order for this to occur, you are required to surrender your interests in the property. This is a real and valuable interest representing approximately X% of the physical property via the trustee (in the form of the charity).

The charity has agreed to pay an amount to obtain from you, your interests in the property. The charity is paying for more than the mere removal of the caveat and the restrictions that it represents on the dealings with the property. Rather, the charity's payment to you represents consideration for your supply of your interest in the property, including the beneficial interest held in trust together with your enforceable rights under the agreement to have legal title in the property provided to you. The supply involves the supply of rights of physical and legal possession of the premises and land that was the X% held by you. In acquiring your interest, the charity acquires something of value as it can now undertake an expanded operation in relation to the property.

For the reasons outlined, we consider that the supply made by you of your interest in the property, to the charity is a supply of 'real property'. The supply is made for consideration equal to the amount provided by the charity to acquire those rights. The fact that the parties have agreed to determine the price on the basis of the market value of the improvements is a contractual matter and does not go to defining the supply.

As all of the requirements of section 9-5 of the GST Act are met, you will be making a taxable supply when you supply your interest in the property to the charity, except to the extent (if any) that the supply is input taxed.

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) provides that the sale is not input taxed to the extent that the residential premises are:

commercial residential premises; or

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

The premises are not commercial residential premises and you advised that the premises were completed and ready for occupation from early1990s. On the understanding that the premises have been used only for making input taxed supplies of residential rent for at least five consecutive years, then the premises will not be 'new residential premises' (as defined in section 40-75 of the GST Act). It follows that you will be making an input taxed supply when you dispose of your interest in the residential premises (property) to the charity.

Additional information:

In support of this private ruling application, your tax consultant referred to a previous private ruling issued to you on a similar matter.

We have considered the circumstances of each case and advise that there are material factual differences that distinguish the decision made in that ruling from this case.

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