Edited version of your private ruling

Authorisation Number: 1012435364148

Ruling

Subject: Goods and services tax (GST) and rental property and partnerships

Question 1

Should the share of the rent you receive from the rental property be included in the calculation of your GST turnover or should it instead be included in the calculation of GST turnover of a partnership that exists between all co-owners?

Answer

The share of the rent you receive from the rental property should be included in the calculation of your GST turnover. It is not attributable to the partnership that exists between the co-owners.

Relevant facts and circumstances

You, a super fund, own a share in a commercial rental property (the property). There are two other co-owners.

The property is a shop located in Australia.

Your share of the rent is less than $75,000 a year.

You also receive interest and dividend income.

You stated that you are not related to the other owners of the property.

You stated that the leasing activity is not for the mutual benefit of all co-owners and that each co-owner does not act for the mutual benefit of all co-owners.

None of the co-owners acts on behalf of all co-owners.

You act independently of the other co-owners in making decisions about your own investment.

You are primarily concerned with securing an enhanced value or return on your own investment.

The co-owners did not jointly acquire the property under a single contract.

The property is held by the co-owners as tenants in common.

The co-owners did not fund their acquisition of the property out of joint borrowings or funds.

The co-owners did not jointly appoint a manager or agent to manage the leasing activity on behalf of all co-owners.

Income from the property is not paid into a joint bank account of all the co-owners.

Expenses of the property are not paid from a joint bank account of all co-owners.

The co-owners enter into a single lease agreement with the tenant.

The lessee pays a percentage of the rent to you and a percentage of the rent to the other co-owners.

You issue a separate invoice to the lessee for your share of the rent.

There is a written agreement between the co-owners.

The agreement states:

every agreement or undertaking expressed or implied by which more persons than one agree or undertake any obligation or derive any benefit under this Deed binds or benefits those persons jointly and each of them severally.

The agreement states:

Each co-owner hereby irrevocably appoints the other co-owner his attorney for the purposes of signing all documents which should be signed by a co-owner pursuant to this Deed, and without limiting the generality of the foregoing any purchaser's deed, any mortgage deed, any proposal for public liability insurance, and any development or building application. Such appointment will take effect seven (7) days after failure of the other co-owner to execute such document after written request.

History of the ownership of the property

The property was jointly purchased many years ago by an individual (individual 1) and their spouse (individual 2).

In a certain year, subsequent to the divorce of the two individuals, you purchased individual 2's part share and individual 2's super fund purchased individual 1's part share.

In a certain year, individual 3 and individual 4 purchased the part share of the property previously owned by individual 2's super fund. Individual 3 purchased the business operated from the property at the same time. The agreement was drawn up at this time. A single lease agreement between all co-owners and the tenant was then also executed. Subsequent to the execution of the agreement, you always received a percentage share of the rent.

In a certain year, the trustee of you changed from a number of individuals to a corporate trustee.

In a certain year, individual 3 sold the business to the entity. However, individual 3 and individual 4 retained their share of property ownership. The lease was duly assigned to the entity.

The entity continues to pay a percentage of the rent to you.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

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

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision

Summary

Your share of the rental income should be included in the calculation of your GST turnover as it is income from an enterprise that you carry on in your own right. Your share of the rental income should not be included in the calculation of the partnership's GST turnover.

Detailed reasoning

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it carries on an enterprise, and

(b) its GST turnover meets the registration turnover threshold of $75,000.

We need to determine whether your share of the rental income is consideration for supplies you make in the course or furtherance of your enterprise or whether it is instead attributable to a partnership that exists between the three co-owners.

Paragraphs 18 and 19 of Goods and Services Tax Ruling GSTR 2004/6 set out two different types of partnerships. They state:

18. A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership) ... in receipt of ordinary income or statutory income jointly'.

19. If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership.

Paragraph 3 of Taxation Ruling TR 93/32 states:

3. Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business.

Paragraph 23 of GSTR 2004/6 provides guidance in determining whether co-owners of rental property are in partnership. It states:

23. In Yeung & Anor v. FC of T (Yeung ), Davies J took the view that:

It is sufficient for the existence of a partnership as defined in sec.6(1) of the Act that the properties were owned by the six members of the family as tenants-in-common, that the leases were in the names of the six and, therefore that the rents were derived by the six.

As you and the other owners co-own the property and you each lease the property to the same tenant under the same lease agreement, the co-owners are in partnership. This partnership is a tax law partnership, as the leasing activity does not amount to a business.

Paragraph 62 of GSTR 2004/6 states:

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

· an oral or written agreement (for example, a syndicate agreement or agreement between family members) determines the mutual rights and obligations of the parties. The agreement may set out rules by which a co-owner might be admitted to a syndicate, or may indicate an intention to act for the mutual benefit of all family members. This agreement may be made before the acquisition of property (see Tikva and FC of T v. Walsh (PJ and BJ)(Walsh )), or it may be made later;

· the income producing property is jointly acquired by the co-owners under a single contract (see McDonald, Walsh and Tikva );

· property is held by the co-owners as joint tenants;

· the co-owners fund their acquisition of the income producing property out of joint borrowings or funds (see AAT Case 11,324, Walsh, and Cripps v. Federal Commissioner of Taxation );

· the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners (see Yeung and MacDonald );

· the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise;

· income from the income producing property is paid into a joint bank account of the co-owners;

· expenses relating to the income producing property are paid from a joint bank account of the co-owners; and

· the co-owners jointly pay all liabilities in relation to the income producing property.

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 to 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 to the income producing property, each co-owner makes the payment in the course of carrying on their own enterprise.

Paragraph 68 of GSTR 2004/6 states:

68. The fact that a single lease agreement is executed by all the co-owners, and that the lessee pays a single rental amount are further factors that need to be considered and weighed in the context of all the evidence in determining which entity carries on the enterprise. The presence of a single lease agreement and a single lease amount is not decisive of an enterprise being carried on by a tax law partnership.

Paragraphs 71 and 72 of GSTR 2004/6 state:

71. We consider that, in any particular case, a preponderance of the factors mentioned in paragraph 62 of this Ruling would lead to a conclusion that the partnership and not each co-owner, carries on the enterprise.

72. However, a preponderance of the factors mentioned in paragraph 66 of this Ruling 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. In these cases, we take the view that, although a tax law partnership may exist, it does not carry on any enterprise in relation to the property.

A clause in the agreement, when read in combination with the rest of the agreement, indicates that there are joint obligations of the co-owners as a result of signing the agreement. It also effectively provides that benefits under the agreement are for the joint benefit of all co-owners.

A clause in the agreement indicates that the co-owners have the power to act on behalf of all co-owners. However, this is only to take effect where a co-owner fails to execute a document which should be signed by them pursuant to the agreement.

We do not consider that the partnership between the co-owners in your case carries on a single property leasing enterprise, because:

· your arrangement with the other co-owners exhibits only up to three of the nine factors in paragraph 62 of GSTR 2004/6 (factors 1, 5 and 6)

· you act independently of the other co-owners in making decisions about your own investment

· you are primarily concerned with securing an enhanced value or return on your own investment

· the lessee pays 50% of the rent to you and 50% of the rent to the other owners, and

· you issue a separate invoice to the lessee for your share of the rent.

Furthermore, you do not consider that the leasing activity is for the mutual benefit of all co-owners or that each co-owner acts for the mutual benefit of all three co-owners. This suggests that you did not have an intention that the leasing activity would be for the mutual benefit of all co-owners or that each co-owner would act for the mutual benefit of all co-owners. The fact that you are primarily concerned with securing an enhanced value, or return on your own investment also suggests that each co-owner is not acting for the mutual benefit of all co-owners.

Additionally, although a clause in the agreement gives each co-owner power to act on behalf of other co-owners, this power will only take effect if a co-owner has failed to sign a document when required to do so, and such failure may not happen.

Therefore, you carry on a separate leasing enterprise from the property in your own right (as the superannuation fund). Accordingly, your share of the rent is consideration for a supply you make in the course or furtherance of your enterprise. Hence, the total rental income from the property is not attributed to the partnership for the purposes of calculating GST turnover. Your share of the rent is attributable to you in your own right only.

In calculating your GST turnover, you would include your share of the rent from the property. If your share of the rent is less than $75,000, you are not required to be registered for GST, but you may choose to register for GST. As your GST turnover is less than $75,000, you are not currently required to be registered for GST. The interest and dividend income is excluded from the calculation of GST turnover.

Although you are not required to be registered for GST, you will need to quote your ABN to the tenant in order to avoid the tenant deducting PAYG withholdings from the rent you receive.

As the partnership of the co-owners is not carrying on an enterprise, it is not entitled to an ABN.

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