Edited version of your private ruling

Authorisation Number: 1012418128973

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Ruling

Subject: GST and the sale of your interest in a property

Question

When you sell your share in the property, located at a specified address and that is owned by you and a number of other parties, will you be making a taxable supply?

Advice/Answers

No. For GST purposes we consider the underlying supply that you are making is the sale of your interest in a partnership and GST does not apply to the supply as all the requirements of a taxable supply as provided in section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 will not be satisfied. (In transferring the legal interest in the property you are not making a separate supply for GST purposes).

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are not registered for GST. You state that you are not required to be registered for GST at this stage because your GST turnover does not meet the GST registration turnover threshold.

On a certain date, you and other entities entered into a contract for the purchase of a property located at a specified address (the Property) as tenants in common.

You provided a copy of the title search document recording the specified parties (the Parties) as owners and their respective shares.

The Property was purchased for the purpose of developing and selling for a profit. It comprises largely a residential property with an existing dwelling. The land area is a specified number of square meters.

On a certain date, a development application was lodged. Development approval was obtained a few months later for the development of a multi storey building containing a number of residential units, an above basement car park and the strata subdivision thereof, as varied from time to time.

At this point in time, there have been no development activities with the exception of the development application and completion of the construction certificate.

The Property was leased around the time of purchase and residential rent was received. The lease is still in place.

You wish to sell your share in the Property to an entity, who will then be a member of the continuing partnership.

You have provided a copy of an unsigned and undated 'Deed of Retirement from Partnership, Mutual Release, and Indemnity' (the Deed) to be entered into between you and the other owners of the Property.

The Deed includes the meaning of the following terms:

"Continuing Partners" means xx, jointly and severally.

"Parties" means the Continuing Partners and the Retiring Partner.

"Partnership" means the partnership purportedly formed or subsisting between the Continuing Partners and the Retiring Partner for the joint enterprise of purchasing, developing and selling the property for a profit.

"Property" means the whole of the land comprised in certificate of title folio identifier xx, being the whole of the land and all improvements situated at and known as xx.

"Retiring Partner" means xx.

"Succession Date" means a specified date.

The Deed includes the following:

RECITALS

On or about a specified date, the Parties jointly purchased the Property with a view to developing and selling it for a profit.

Each of the Parties contributed finance towards the purchase and acquisition costs of the Property (including stamp duty and legal fees), in the same proportion as their percentage ownership of the property.

By letter dated xx, the retiring partner (by his solicitors) offered his interest in the Property for sale to the Continuing Partners.

The Retiring Partner shall be deemed to have retired from the Partnership with effect from the succession Date.

The Retiring Partner's retirement from the Partnership shall not dissolve the Partnership as between the Continuing Partners.

Simultaneously with the signing, sealing and delivery of this Deed:

(a) the Continuing Partners must pay to the Retiring Partner the Settlement Sum, and

(b) the Retiring Partner must transfer the whole of his right title and interest in the Property to the buying company free from any encumbrances.

The Retiring Partner shall accept payment of the settlement Sum in full discharge for the value of his share and interest in the Partnership, including its capital effects, goodwill, stock in trade, book debts, plant and machinery, and all other assets of any description.

You state that you do not operate any enterprises that deal in partnership interests.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Division 38

The A New Tax System (Goods and Services Tax) Act 1999 Division 40

The A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-A

The A New Tax System (Goods and Services Tax) Act 1999 Division 184

The A New Tax System (Goods and Services Tax) Act 1999 Paragraph 184-(1)(e)

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-40.

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

The A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-5(1)

The A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-5(2)

The A New Tax System (Goods and services Tax) Regulations 1999 Regulation 40-5.09

The A New Tax System (Goods and services Tax) Regulations 1999 Subregulation 40-5.09(1)

The A New Tax System (Goods and services Tax) Regulations 1999 Subregulation 40-5.09(3)

The Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for you

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

We consider you are in a partnership relationship carrying out the development and sale in relation to the Property. Accordingly, for GST purposes we consider the underlying supply that you are making is the sale of your interest in the partnership when you are outgoing from the Partnership. GST does not apply to the supply as all the requirements of a taxable supply as provided in section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 will not be satisfied. (In transferring the legal interest in the property you are not making a separate supply for GST purposes).

Detailed reasoning

Note: In this ruling, unless otherwise stated:

all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Are you in a partnership?

You and other parties purchased the Property for the purpose of development and sale for a profit. In the meantime, the Property has also been leased. Accordingly, it is relevant to consider the entity that is engaging in these activities.

Division 184 defines 'entity' for GST purposes. In your circumstances, it is relevant to consider paragraph 184-1(e) which relates to a partnership.

Partnership is defined in section 195-1 by reference to the meaning given in 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.

Note: The terms marked with an asterisk are defined in section 995-1 of the ITAA 1997.

Goods and Services Tax Rulings, Goods and services tax: general law partnerships (GSTR 2003/13) and Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) explain how the GST Act applies to transactions involving general law partnerships and tax law partnerships respectively.

Paragraphs 10 and 11 of GSTR 2003/13 (similar to paragraphs 9 and 10 of GSTR 2004/6) explain:

10. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'.⁴ We refer to this type of partnership as a general law partnership.

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

Paragraphs 10 and 11 of GSTR 2003/13 explain:

19. Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. A lack of intention to be in partnership may mean that a partnership does not exist at law.⁷

20. However, an express intention not to form a partnership, although a strong indicator that the relationship is not a partnership, will not be determinative in all cases. Even a declaration in an agreement between the parties not to form a partnership will be ineffective if all the indicia of a partnership are present.⁸ Nevertheless, such a declaration may be used to rebut inferences that could otherwise be drawn from other clauses of any agreement the parties have between themselves.⁹ If there is no written agreement, then the intention of the parties may be implied by their words and conduct.¹⁰

As stated earlier, you and the other parties purchased the Property for the purpose of developing and selling for a profit. A development application was lodged, and approval was obtained for construction of a multi storey building containing a specified number of residential units, an above basement car park and the strata subdivision thereof.

Accordingly, we consider you and the other parties are an association of persons carrying on a business in common with a view of profit. That is, a business is being carried on and you and the 3 other owners are carrying on the business activities as partners in a partnership entity, being a general law partnership.

What is the supply you are making?

Having established that you and the other parties are in a general law partnership (the Partnership), it is relevant to consider the guidelines in GSTR 2003/13 in relation to the supply you are making as an outgoing partner.

The following paragraphs in GSTR 2003/13 state:

148. Under general law, any change in the membership of a general law partnership leads to its dissolution. However, as previously discussed in paragraphs 126 and 127 of this ruling, the dissolution may not lead to the winding up of the partnership. The continuing partners and any new partner may conduct the business of the partnership without any break in its continuity. We refer to this as a reconstituted partnership.

184. The GST consequences of a reconstituted partnership for the partners will depend on the circumstances of the reconstitution. A reconstitution may result from a partner selling or assigning their interest in the partnership...

185. A sale or assignment of an interest in a partnership may be made by a continuing partner to an incoming partner, or by an outgoing partner to either a continuing or an incoming partner. The supply is a partner-to-partner transaction and does not involve the creation or supply of any new interest by the partnership. Such a sale or assignment is a supply by the partner of a financial interest, and is a financial supply if the requirements of Subregulation 40-5.09(1) are satisfied. If the partner making the supply is unregistered, or the supply is not made in the course or furtherance of an enterprise carried on by the partner, no GST consequence arises in relation to the supply.

Based on the facts provided, we consider the supply that you will be making as an outgoing partner is the supply of your interest in the Partnership, to the incoming partner (the specified entity), as explained in paragraph 174 of GSTR 2003/13. Accordingly, we will need to establish whether GST applies to this supply.

Section 9-40 requires that you must pay the GST payable on any taxable supply that you make.

Are you making a taxable supply?

Section 9-5 provides for the requirements of a taxable supply.

You make a taxable supply if:

(a) you make a 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.

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

Note: The terms marked with an asterisk are defined in section195-1.

Divisions 38 and 40 consider the GST-free and input taxed provisions respectively. Where a supply is GST-free or input taxed, GST will not be payable.

Based on the facts provided, Division 38 does not apply to make the sale of your interest in the Partnership GST-free.

In your situation, it is relevant to consider Subdivision 40-A which deals with financial supplies. Under subsection 40-5(1) a financial supply is input taxed. Subsection 40-5(2) states that 'financial supply' has the meaning given by the A New Tax System (Goods and services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09 of the GST Regulations details 'what supplies are financial supplies", and states:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of

the interest.

Item 10(d) of subregulation 40-5.09(3) mentions the disposal of an interest in or under the capital of a partnership as a financial supply. As explained in GSTR 2013/13, an interest in a partnership is a financial interest under subregulation 40-5.09(3), and will be a financial supply if all the requirements of subregulation 40-5.09(1) are met.

In your case, not all of the requirements in subregulation 40-5.09(1) are satisfied in the sale of your interest in the partnership. This is because:

· you are not carrying on any enterprises that deal in partnership interests.Therefore, selling your interest in the Partnership cannot be made in the course or furtherance of any such enterprise.

· you are not registered for GST, and you state that you are not required to be registered for GST.

Therefore, Division 40 does not apply and you will not be making an input taxed supply when you sell your interest in the partnership.

For the same reasons, you do not satisfy the requirements in paragraphs 9-5(b) and (d). Accordingly, when you sell your interest in the Partnership to a buyer, you are not making a taxable supply and GST will not be payable.

This is also reflected in the explanation in paragraph 174 of GSTR 2003/13 which includes that "...If the partner making the supply is unregistered, or the supply is not made in the course or furtherance of an enterprise carried on by the partner, no GST consequence arises in relation to the supply.

Are you making a separate supply on transferring legal interest in the Property?

GSTR 2003/13 sets out the following:

Change in the legal ownership of property upon a transfer of a partnership interest

181. As partnerships are not recognised as separate legal entities, legal title in partnership property is held by the partners. Regardless of legal title, each partner has a beneficial interest in each and every partnership asset. The partner or partners holding legal title do so on trust for themselves and the other partners, that is, the partnership.

182. A supply of an interest in a partnership by a partner may require the outgoing partner to effect a change in legal title or interest in partnership assets. The acquiring partner acquires the beneficial and legal interests under the supply of the interests in the partnership. For GST purposes, the transfer of the legal interest does not involve any separate supply by the outgoing partner.

183. Any supply of partnership property would be by the partnership. Therefore, where property stays in the partnership, there is no supply as the supply and acquisition would be by the partnership.

As explained above, when you transfer your share of ownership in the Property to the incoming partner, for GST purposes you are not making any separate supply of the legal interest in the Property. Where there is no supply, there cannot be a taxable supply. Accordingly, that supply has no GST consequences for you.

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