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Ruling

Subject: GST and tax law partnership

Question:

Are you carrying on the enterprise as a co-owner in the tax law partnership formed when you acquired interest in the property?

Answer:

Yes, you are carrying on the enterprise as a co-owner in the tax law partnership formed when you acquired interest in the property.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You entered into an agreement to acquire an interest in a property.

You entered into a Co-Owners' Agreement (the agreement) with another entity.

The agreement explains the relationship of the co-owners as follows:

Nothing contained in this agreement will:

· be regarded as constituting a partnership between the Owners; or

· constitute the Owners as partners with one another for any purpose or scope,

· except to the extent to which the joint receipt of income in respect of the Property constitutes the Owners of the Property as a partnership for income tax purposes.

(b) If the Owners' ownership of the Property gives rise to a tax law partnership, the Owners agree and acknowledge, in reliance on GSTR 2004/6, that:

· they are each separately carrying on an enterprise for GST purposes; and

· the tax law partnership is not carrying on an enterprise for GST purposes.

Nothing contained in this agreement will render any of the Owners liable for any debts or obligations of the other Owners other than as provided in this agreement, nor will any Owner be constituted the Agent of the other Owners, except to the limited extent specifically permitted by this agreement and as may be subsequently agreed upon within consent of the Owners.

The interests in the properties are held by the co-owners as tenants in common.

Under the agreements, the co-owners must enter into a Property Management Services Agreement with a third entity (the Manager) and into a Development Management Services Agreement with a fourth entity (the Development Manager).

As a shared objective, the co-owners agreed that they will keep and maintain the properties as high class retail centres to maximise the return from the properties consistent with maintaining and enhancing the properties' long term investment values.

If an owner wishes to sell a portion or all of its interest, it must serve a Transfer Notice in writing to the other owner. The Transfer Notice constitutes an offer to sell the interest to the other owner (the offeree). If the offeree notifies the seller that it wishes to acquire all of the interest, the seller must sell to the offeree. If the offeree wishes to acquire less than all of the interest, the seller may (but is not required) to sell to the offeree. If the offeree does not notify the seller of its wish to acquire some or all of the interest within a specified period, the seller is entitled to sell the interest to a third party on terms and conditions no more favourable than those out in the Transfer Notice.

An owner may deal with some or all of its interest to any of its Permitted Transferees. 'Permitted Transferees' is defined in the agreements as:

'in relation to a person:

· a Subsidiary of that person;

· an entity of which the person is a Subsidiary; or

· an entity which is another Subsidiary of a company or entity of which the person is a subsidiary

· if the person is a party to this agreement as the responsible entity, trustee or custodian of a trust, any replacement responsible entity, trustee or custodian of the same trust where immediately before and immediately after the relevant transaction, the beneficiaries of that trust are identical;

· if the person is the sole beneficiary of a trust, the responsible entity, trustee or custodian of that trust (in that capacity);

· if the person is a party to this agreement as the responsible entity or trustee of a trust and there is only one beneficiary of the trust, that beneficiary (in the capacity in which it is beneficiary);

· the responsible entity, trustee or custodian of a trust in respect of which all beneficiaries are Permitted Transferees of the person under other paragraphs of this definition; or

· where the person is an entity whose securities are listed on a stock exchange, and those securities are 'stapled' to those of another entity so that the securities must be traded together, that other entity or a Permitted Transferee of that other entity other than pursuant to this paragraph 8.'

· If an owner (Owner A) or a related entity of the owner proposes to acquire an interest in a retail shopping centre, a parcel of land on which a retail shopping centre is constructed or a parcel of land to be developed as a retail shopping centre within 5 kilometres of the property, Owner A must give the other owner (Owner B) an Acquisition Notice. The Acquisition Notice constitutes an offer from Owner A to allow Owner B to participate in the proposed acquisition. If Owner B accepts the offer, Owner A must procure that Owner B is entitled to participate in the proposed acquisition. If Owner B does not accept the offer within the specified period, Owner A can enter into the proposed acquisition without the participation of Owner B.

· The co-owners are registered for GST in their own right in relation to broader enterprises and they acquired the interests in carrying on those enterprises.

· The co-owners' acquisitions have been made separately.

· The co-owners do not make acquisitions out of joint funds or borrowings.

· Each co-owner will not act for the mutual benefit or on behalf of the other co-owners and is primarily concerned with securing an enhanced value or return on their investment.

· The income and expenses will not be paid to or from a joint bank account in the name of the co-owners.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 184-1 and

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

Reasons for decision

Subsection 184-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines an entity to include a partnership.

For GST purposes, the term 'partnership' has the same meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 995-1(1) of the ITAA 1997 states:

partnership means:

· 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

· a limited partnership.

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. This partnership is referred to as a tax law partnership.

Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. The execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time.

You entered into the agreement which clearly expressed that there is nothing in that agreement that constitutes a partnership between the parties or constitute the parties as partners for any purpose other than the joint receipt of income in respect of the property. Thus, a tax law partnership exists between you and the other co-owner of the interest in the property.

Is the enterprise carried on by the tax law partnership?

Goods and Services Tax Ruling GSTR 2004/6 explains what a tax law partnership is and how the GST Act applies to transactions involving tax law partnerships.

The fact that a tax law partnership exists does not necessarily mean that in every case it is the partnership that carries on an enterprise. In some cases, an enterprise is carried on by each co-owner and not by a tax law partnership.

Paragraph 66 of GSTR 2004/6 states:

66. The following factors may point to an enterprise being carried on by each co-owner in their own right, and not by a tax law partnership:

· the co-owner is registered for GST in its own right in relation a broader enterprise and acquires an interest in property in carrying on that enterprise;

· there is an agreement between the co-owners not to form a partnership nor to jointly carry on an enterprise;

· each co-owner makes independent decisions with regard to the acquisition of an interest in income producing property;

· each co-owner's acquisition of their interest in property is made separately;

· any borrowings by a co-owner are to fund the acquisition of their interest in the income producing property only; the co-owners do not fund the acquisition of each of their interests out of joint funds or borrowings;

· the co-owners act independently of each other in making decisions about their respective investments;

· each co-owner acts independently with respect to the appointment of a manager or agent, even though the same manager or agent is usually appointed to act on behalf of all the co-owners;

· the gross rental income may be paid into a single trust account operated by a property manager or agent and operating expenses may be met from this trust account. The income is not paid into and the expenses are not paid out of a joint bank account in the name of the co-owners;

· the manager or agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income from the trust account to the co-owners on a regular basis;

· each co-owner does not act for the mutual benefit or on behalf of the other co-owners and is primarily concerned with securing an enhanced value or return on their investment;

· property is held as tenants in common, rather than as joint tenants; and

· although contributing to a mutual fund to pay all liabilities in relation the income producing property, each co-owner makes the payment in the course of carrying on their own enterprise

You and the other co-owner are registered for GST in their own right in relation to their respective enterprises. You acquired interests in the properties in carrying on those enterprises. You acquired the interests separately. The acquisitions were not funded out of joint borrowings. The properties are held as tenants in common. The income and expenses will not be paid into or out of joint bank accounts in the name of the co-owners.

The agreement required you and the other co-owner to enter into the Property Management Services Agreement with the Manager. This requirement indicates that each co-owner did not act independently with respect to the appointment of a manager or agent.

The restrictions that the agreement placed on the co-owners' dealing with their interests and on acquiring an interest in other properties diminish the co-owners' ability to act independently of each other in making decisions about their respective investments and with regard to the acquisition of an interest in income producing property.

Based on the information provided, some factors mentioned in paragraph 66 of GSTR 2004/6 are present in the tax law partnership formed when you acquired interest in the property. The other factors are either present to a certain extent or are non-existent.

GSTR 2004/9 provides our view that it is not possible for each co-owner of an income producing property and a tax law partnership to carry on an enterprise in relation to the same property at the same time.

Paragraph 72 of GSTR 2004/9 provides that a preponderance of the factors mentioned in paragraph 66 of GSTR 2004/9 would lead to a conclusion that an enterprise is carried on by each co-owner in their own right in respect of their interest in an income producing property.

We take the view that, on balance, each co-owner carries on an enterprise in their own right in respect of their interest in the property.

As you and the other co-owner carry on the enterprise in your own right, the GST laws would apply to each of you as a separate entity. Accordingly, you may make supplies and acquisitions in respect of your interest in the property.

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