Edited version of private ruling

Authorisation Number: 1011819461085

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Ruling

Subject: GST and transfer of interest in real property

Question

Is the transfer of the Property held by you to a partner of a tax law partnership subject to goods and services tax (GST)?

Answer: Yes, however the tax law partnership is liable for the GST.

Relevant facts and circumstances

You are not registered for GST.

You have advised that you were a bare trustee entity and were holding a commercial property (Property) for two entities who are partners in a partnership (Partnership). The property was acquired before1 July 2000 and GST was not applicable to the purchase.

You have provided a Deed of Settlement (the Deed whereby both parties agreed to terminate the Partnership. Of relevance are the following:

· Pursuant to the tax law Partnership, you hold the following property located in Australia on trust for the two partners as tenants in common in equal shares:

· The properties listed above are subject to registered mortgage in favour of a financier under which the tax law Partnership currently owes approximately $XXXXXX (the "Mortgage").

The Property was included in the accounts of the Partnership.

The Partnership is registered for GST. Both of the partners are not registered for GST.

All property acquisition costs were provided by the Partnership or you borrowed monies from the financiers in the capacity as a bare trust for and at the direction of the partners.

You have provided a registered first mortgage as security for the borrowings undertaken by or on behalf of the Partnership.

The Property are the only assets of which you are the legal owner and were leased at a combined annual rent of more than $75,000.

You received the rent, and distributed the proceeds to the Partnership. The Partnership included the rent from the Property in their assessable income.

All activities you undertook were made at the direction of the partners. Subject to satisfaction of any mortgage affecting the Property, you must transfer the Property as directed by the Partnership.

You were reimbursed by the Partnership for all expenses incurred in relation to the Property.

Clauses of the Deed provide that:

Partner A must pay out and discharge all the sums owing to the mortgagee under the Mortgage and any other mortgages currently registered under the titles to the Property and tender to partner B a copy of the discharge of the Mortgage executed by the mortgagee.

· Partner A hereby releases partner B from any right of contribution Partner A has or might have against partner B arising from the payment to the mortgagee referred to in the preceding paragraph.

· Partner A must by the Settlement date pay partner B half of the difference between the agreed value of the Property and the sum lawfully due and owing under the Mortgage…

· Upon receiving both copies of the discharge of Mortgage referred to in clause above and the sum referred to clause above, partner B's 50% beneficial interest in the Property is transferred to partner A or such other party as partner A nominates in writing to partner B beforehand.

You have contended that the transfer was not a supply of a going concern as there was no agreement, written or otherwise, between the parties to that effect.

Reasons for decision

Summary

You are not liable for GST arising from the transfer of the Property. The tax law partnership is liable for GST on the transfer of the Properties to the partner.

Detailed reasoning

Although the Deed provides that you were holding the Property in trust for the partners, we need to consider the surrounding facts to determine whether a bare trust arrangement was entered into between you and the Partnership.

Goods and Services Tax Ruling GSTR 2008/3 explains how the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to supplies of real property involving bare trusts. This ruling also applies to the form of bare trust (resulting trust) that is created, without a declaration of trust or other instrument, where an intending purchaser place funds in the hands of a nominee to purchase a real property for the intending purchaser and the legal title to the real property is transferred to the nominee and not the intending purchaser.

Paragraphs 11 to 14 of GSTR 2008/3 provide the background for a bare trust arrangement. They state:

11. An entity (B) that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is to be used in its enterprise to be acquired by another entity (T) to hold on a bare trust for B - that is, subject to an obligation to transfer legal title to the asset to B, or to a third party if B so directs, and with no other active duties to perform.

12. Alternatively, the trust may not strictly be a bare trust, because the trustee has minor active duties to perform, but nevertheless the trustee is required to act at the direction of the beneficiary in dealing with title to the trust property. Where this Ruling refers to 'bare trusts' it should also be taken to refer to trusts of this kind which may not strictly fall within accepted definitions of bare trusts but share similar features. The key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property.

13. An example of an arrangement where a bare trust may be created is where a general law partnership (B) decides to acquire and develop real property for sale. The partners may not wish to disclose their names to the vendor of the property and so arrange for a company (T) that they control to acquire title to the property. If there are a large number of partners, it may also be more convenient for the partnership to have a single company that can execute legal documents associated with the acquisition, development and disposal of the property. T acquires and holds the legal title to the property on trust for B. T has no discretion regarding the use and disposal of the trust property and deals with it solely at the direction of B.

In your circumstances:

· The Property was acquired by you for the Partnership

· All property acquisition costs were provided by the Partnership or you borrowed monies from the financiers in the capacity as a bare trust for and at the direction of the partners.

· You have provided a registered first mortgage as security for the borrowings undertaken by or on behalf of the Partnership.

Other than holding the titles to the Properties, you do not have any control over the Property nor conduct any business through them. You have further provided that:

· The Property was included in the accounts of the Partnership.

· The Property is your only assets as the legal owner. You lease the Property under the direction of the Partnership. The proceeds of the lease went to the Partnership. The Partnership included the rent from the Property in their assessable income and distributed the net rent to each partner.

· You were reimbursed by the Partnership for all expenses incurred in relation to the Properties.

· All activities you undertook were made at the direction of the partners. Subject to satisfaction of any mortgage affecting the Properties, you must transfer the Property as directed by the Partnership.

Based on the fact above, it is considered that the arrangement above between you and the Partnership is a bare trust arrangement.

Paragraph 45 of GSTR 2008/3 provides for a summary of the outcomes of the bare trust arrangement under the Ruling:

Outcome 1

The beneficiary (B) of a bare trust may carry on an enterprise involving the use or exploitation of real property even though title to the property is registered in the name of a bare trustee (T).

Outcome 2

B may make supplies and acquisitions of real property in the course or furtherance of its enterprise even though title to the property is transferred or received by T.

Outcome 3

B may make supplies in the course or furtherance of its enterprise for consideration even though the consideration is received by T who is bound to pay the consideration to B or at B's direction. Therefore B, not T, has the liability for GST if the supply is a taxable supply.

Likewise, B may make acquisitions in the course or furtherance of its enterprise for consideration even though T provides the consideration (furnished to T by B) to the supplier. Therefore B, not T, has the entitlement to an input tax credit if the acquisition is a creditable acquisition.

Outcome 4

A bare trust involving a trustee holding real property on behalf of a beneficiary does not carry on an enterprise, merely by the trustee dealing with the property at the direction of the beneficiary.

It is considered that the beneficiaries together formed a tax law partnership that was carrying on the leasing enterprise.

Who is the supplier of the interest in the Properties

The two co-owners jointly acquired the Property (although you are the legal owner under the bare trust arrangement as discussed above) as tenants in common and each acquired a 50% interest in the Property.

The partners act jointly in relation to the acquisition and leasing of the Property.

Goods and Services Tax Ruling GSTR 2004/6: Tax law partnership and co-owners of the property explains how the GST Act applies to transactions involving tax law partnership.

It is considered that the entity consisting of the two co-owners is a tax law partnership created for the purposes receiving income jointly from the leasing enterprise of the Properties [please refer to paragraph 62 and contrast with paragraph 66 of GSTR 2004/6.

The tax law partnership consisting of the two partners is the entity that:

· borrowed the funds for the Property under a mortgage

· carried on the leasing enterprise and received the rent and remitted the GST (the Partnership is registered for GST, both partners are not registered for GST), and

· distributed the net rent (after deducting leasing expenses) to the partners.

It is the view of the Australian Taxation Office in paragraph 103 of GSTR 2004/6 that:

103. We agree with the Tribunal's view that a tax law partnership does not have capital. We further take the view that partners in a tax law partnership have neither interests in the capital of a partnership, nor interests in the partnership. The only interest that a partner in a tax law partnership has is an interest in the property, coupled with a right to a share of the net income or losses in accordance with that interest.

Under paragraph 108 of GSTR 2004/6, when the Property became the asset of the Partnership, any subsequent supply of the Property or an interest in the Property, is a supply made by the Partnership.

Following the Deed of Settlement the Partnership was terminated and the non-individual entity was required to transfer 50% interest in the Property it owned to J the individual for a monetary consideration representing 50% of the agreed value of the Property.

Paragraph 183 of GSTR 2004/6 further explains that for GST purposes a sale of a co-owner's interest in a property may be a supply by either an enterprise partnership or by a co-owner that carries on a leasing enterprise in its own right. Paragraphs 114, 234 and Example 19 of GSTR 2004/6 add further that any sale of a property or an interest in a property which is used in carrying on an enterprise by a partnership is a supply by the partnership, not by the co-owners.

Therefore, the Partnership is the entity that made the supply of the 50% interest in the Property to the individual.

The supply in question is subject to GST because all of the requirements under section 9-5 of the GST Act are met:

· the supply is made for monetary consideration as agreed between the parties

· the supply is made in the course or furtherance of the Partnership enterprise as carrying on an enterprise includes doing anything the course of the commencement or termination of the enterprise

· the Property is located in Australia,

· the Partnership was registered for GST at the time of the supply, and

· the supply is not GST-free or input taxed under any provision of the GST Act or other Acts.

It follows that the Partnership is liable for GST arising from its supply to the individual.

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