Edited version of your private ruling

Authorisation Number: 1012497669106

Ruling

Subject: GST and property transactions

Question:

Is the Owners Corporation making a taxable supply in respect of the proposed sale of Lot X at a property located in Australia?

Answer:

No, the Owners Corporation is not making a taxable supply to a third party in respect of the proposed sale of Lot X at the property. Under a bare trust arrangement, the proposed supply of Lot X will be made by X (the Developer and sole beneficiary), who will need to consider their circumstances with regards to making a taxable supply of Lot X.

Facts and circumstances:

X (Developer) was the original owner and developer of the property located in Australia.

Strata Plan X was registered on {date} after completion of stage 1 by the Developer.

The Owners Corporation for Strata Plan X (Owners Corporation) is not registered for goods and services tax (GST).

Strata Plan X consisted of several lots and include a section at the rear of the development designated 'common property'. This common property was initially labelled Lot X on original documents submitted for council approval.

In the original plans, Lot X was to be held in the Developer's name. The Developer owns other lots on the property.

The development plans were redrawn to establish Lot X as common property at the request of the Council. This common property was originally drafted to be included in the original development but undertaken at stage 2 at a later date.

Sometime around the beginning of the 200X calendar year the Developer decided to complete the development of Lot X. This required consent of the Owners Corporation as required by Statute.

No formal documentation was prepared to show that the Developer was entitled to develop the common property.

On 200X, the Owners Corporation resolved to consent to the subdivision of the common property into Lot X, as originally intended, by the Developer and also to grant to the Developer the 'exclusive use and benefit' of the development.

The Minutes of Extraordinary General Meeting dated 200X states:

'..by Special Resolution, that the Owners Corporation for Strata Plan X consent to the subdivision of the common property at the rear of the complex into development Lot X and, in doing so, grant the Developer the exclusive use and benefit of development Lot X and as much airspace above the said Lot X as may be necessary as per the attached plan. The Owners Corporation acknowledges that this development lot shall be the sole responsibility of the developer.'

The Owners Corporation advised that it received no consideration for this nor was it ever expected that it would have been entitled to any from the Developer.

The Owners Corporation confirmed that the development of Lot X shall be the sole responsibility of the Developer, and the Developer has covered all costs of the development.

The resolution made on 200X stated that the Developer will pay all reasonable expenses incurred by the Owners Corporation:

(a) in repairing damage to the common property caused in carrying out any development; and

(b) for any water sewerage, drainage, gas electricity, oil, garbage, conditioned air or telephone service used in carrying out any development; and

(c) for any additional administrative costs associated with the development; and

(d) the Developer agrees with the Owners Corporation that the standard of materials, finishes and improvements erected on the development lot shall be in keeping with the completed buildings and shall not utilise any inferior products.

On 20XX, the strata plan consisting of Lot X was registered on completion of the development. A copy of the strata plan of subdivision of common property was provided.

Title to Lot X, formerly the common property, is held by the Owners Corporation.

The Developer has also been responsible for the levies and costs of Lot X since it was registered. It is noted that the Developer has not actually paid any of these costs and that it is expected that all these outstanding amounts will be paid on settlement of the proposed sale of Lot X.

Whilst no formal documentation was prepared the Owners Corporation agrees and accepts that the Developer was always entitled to develop the common property and that the individual lot owners were made aware of this at the time of purchasing their respective lots. The surveyor has confirmed, in a letter dated in 200X (soon after registration of Strata Plan X), that it was always the Developer's intention to develop Lot X and the only reason for the change to the original plans was the request made by Council. The surveyor has also confirmed that all purchasers of the original lots were made aware of this fact at the time of settlement of purchasing their lots. A copy of the letter was provided.

The Developer has found a willing purchaser for Lot X and it is expected that the sale will proceed in the near future.

The Owners Corporation has resolved at an extraordinary meeting to allow the sale by the Developer to proceed. A Notice of Extraordinary General Meeting dated in 20XX states:

That the Owners - Strata Plan X unanimously resolve pursuant to section 25 of the Strata Schemes Management Act 1996 to allow the Developer to sell Lot X on the following terms:

….

The sale proceeds of the Lot X are to be distributed as follows:

- payment of all levy arrears owed by the Developer until the settlement date, including any levies not issued but which the Owners Corporation is entitled to charge

- payment of all levy arrears on Developer's other two lots

- payment of all the Owners Corporation's costs

- payment of any outstanding rates and/or water charges owing to the Council over Lot X

- payment of any mortgages owing over the lot

- payment of any agent's commission in relation to the sale

The Owners Corporation advises that it will not be entitled to any proceeds from the sale of the property except recovery of outstanding levies on Lot X as described above and associated costs incurred to finalise the sale.

The Owners Corporation has/will not receive any income from the sale of Lot X at any time.

Prior to settlement of Lot X the Owners Corporation and the Developer will execute a deed outlining conditions to complete the sale. The proposed Deed of Sale of Lot X in the Recitals states:

A. The Owners Corporation is the registered proprietor of Lot X in Strata Plan X ('the Property').

B. The parties agree that in 200X, the Developer was granted the exclusive use of the Property for the purpose of development and subdivision ('the Exclusive Use').

C. The parties further agree that the Exclusive Use should have also granted the Developer the right to sell the Property.

D. The Owners Corporation agrees and accepts that it was always the understanding of the Owners Corporation and the Developer that the Developer would be entitled to use the Property for further development and each Lot owner was made aware of this at the time of purchasing their respective Lots.

E. The Developer now has a purchaser for the Property and the Owners Corporation agrees to allow The Developer to proceed with the sale of the Property on the terms and conditions set out in this Deed.

In the ruling request, the Owners Corporation contends that the original purchasers (being the lot proprietors/owners) and the Developer are not related parties.

An Income Tax private ruling reference number XXXX was issued to the Owners Corporation on {date} in relation to these transactions.

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 9-15

A New Tax System (Australian Business Number) Act 1999, Section 41

Reasons for decision

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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.

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

(* denotes a defined term in section 195-1 of the GST Act)

'You' is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to apply to entities generally. Entity is defined in subsection 184-1 of the GST Act to include a body corporate. It was decided in Body Corporate, Villa Edgewater Cts 23092 v. FC of T 2004 ATC 2056; 55 ATR 1162 (Villa Edgewater case) that a body corporate was carrying on an enterprise as its activities were done in a businesslike manner, even though the entity only deals with its own membership, and the Tribunal found that it did not matter that many of the activities were provided for in statute and regulations (refer to Miscellaneous Taxation Ruling MT 2006/1).

We need to determine if the Owners Corporation is the entity that is making a taxable supply on the proposed sale of Lot X.

Granting exclusive use and benefit of the common property in 200X

The facts indicate that on 200X, the Owners Corporation resolved to consent to the subdivision of the common property into Lot X, as originally intended, by the Developer and also granted the Developer the 'exclusive use and benefit' of the development. The parties agreed that the exclusive use should have also granted the Developer the right to sell the property.

Taxation Ruling IT 2505 and ATO Interpretative Decisions ATO ID 2008/81 and ATO ID 2008/82 cover certain common property issues.

Ownership of common property of a strata plan varies under different State Acts and Territorial Ordinances. In NSW, section 20 of the Strata Schemes (Freehold Development) Act 1973 (NSW) ('SSFDA 1973') provides that the estate or interest of a body corporate in common property vested in it or acquired by it shall be held by the body corporate as agent for the lot proprietors as tenants in common in proportions equal to their lot entitlements.

When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal (as discussed in Goods and Services Tax Ruling GSTR 2000/37).

Accordingly, the Owners Corporation is not the entity which is making a supply of the common property to the Developer, when the Developer was granted exclusive use of the common property in 200X. The lot proprietors (owners) would have to consider their own circumstances.

Registration of Strata Plan for Lot X in 20XX

The facts indicate that on 20XX the strata plan consisting of Lot X was registered on completion of the development of Lot X. The Developer has covered all the costs of development of Lot X. However, in accordance with Statue, title to Lot X, formerly the common property is held by the Owners Corporation.

In relation to the subdivision of common property to create a new residential lot, ATOID 2008/82 states:

Before an entity can make a taxable supply it must first make a supply. The term 'supply' is a broad concept for GST purposes and is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. The meaning of the term 'supply' is discussed in Goods and Services Tax Ruling GSTR 2006/9 'Goods and services tax: supplies'. The term 'supply' is considered to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. At paragraphs 71 to 91 GSTR 2006/9 also states and explains the proposition that to 'make a supply' an entity must do something.

Section 20 of the SSFDA 1973 provides that the estate or interest of an Owners Corporation in common property vested in it or acquired by it shall be held by the Owners Corporation as agent for the lot proprietors as tenants in common in proportions equal to their lot entitlements. However, the common property may be subdivided by registration of a strata plan of subdivision so as to create one or more new lots (subsections 9(1) and 5(7) of the SSFDA 1973).

In this case, the registration of the strata plan of subdivision containing a lot made up in whole or in part from the common property changes the nature of that property. Since common property is the land in a parcel that is not comprised in a lot, lots and common property are mutually exclusive (Houghton v. Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 51 per Handley JA). Therefore, on registration of the strata plan of subdivision the subdivided property ceases to be common property and becomes a new lot. The legal and beneficial interests in the new lot are vested in the Owners Corporation.

Subsection 9(1) of the SSFDA 1973 states:

(1) Lots (other than development lots) or common property, or lots (other than development lots) and common property, may be subdivided by the registration, as a strata plan of subdivision, of a plan that complies with subsection (3).

ATOID 2008/82 concluded that the lot proprietors/owners (referred to as the 'entities') of a strata scheme are not making a taxable supply when a new residential lot is created out of the common property of the strata scheme:

A transfer of an interest in land, or the surrender of real property, is within the definition of supply in section 9-10 of the GST Act. However, in this case rights or interests are not transferred or surrendered. The registration of the strata plan of subdivision pursuant to the statute has the effect of extinguishing the entities' interests in the land and creates new rights in the land that vest in the Owners Corporation. The entities do not 'do something'.

Therefore, the entities are not making a supply of their interests and are not making a taxable supply under section 9-5 of the GST Act when a new residential lot is created out of the common property of the strata scheme.

Accordingly, the lot proprietors/owners are not making a supply to the Owners Corporation on registration of the strata plan for subdivision.

Proposed supply of Lot X and bare trust arrangements

In relation to the sale of a new residential lot created out of common property, ATO ATOID 2008/81 states:

The Owners Corporation makes a supply of the new lot to the third party. Section 20 of the SSFDA 1973 provides that the estate or interest of an Owners Corporation in common property vested in it or acquired by it shall be held by the Owners Corporation as agent for the lot proprietors as tenants in common in proportions equal to their lot entitlements. However, the common property may be subdivided by registration of a strata plan of subdivision so as to create one or more new lots (subsections 9(1) and 5(7) of the SSFDA 1973). The registration of the strata plan of subdivision containing a lot made up in whole or in part from the common property changes the nature of that property. Since common property is the land in a parcel that is not comprised in a lot, lots and common property are mutually exclusive (Houghton v. Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 51 per Handley JA). Therefore, on registration of the strata plan of subdivision the subdivided property ceases to be common property and becomes a new lot. The legal and beneficial interests in the new lot are vested in the Owners Corporation. Further, under subsection 110(2) of the Strata Schemes Management Act 1996 (NSW) an Owners Corporation may dispose of or otherwise deal with any lot vested in it as a result of a subdivision of the common property. Consequently, the sale of the newly created lot is a supply made by the Owners Corporation.

Accordingly, on registration of the strata plan of subdivision containing a lot made up of the common property this changes the nature of that property and becomes a new lot. Prima facie the legal and beneficial interests in the new lot are vested in the Owners Corporation that would make the supply to any third party.

Legal ownership of an asset can differ from beneficial ownership. Where the legal and beneficial ownership of an asset is different, a trust situation occurs.

Given the arrangements that the lot proprietors/owners and the Owners Corporation have with the Developer, we need to consider if a bare trust arrangement exits between the Owners Corporation and the Developer, for the proposed supply of Lot X to a third party.

The facts indicate that in the original plans, Lot X was to be held in the Developer's name. However, at the request of the Council, the original development plans were redrawn to establish Lot X as common property. This was confirmed by the surveyor in a letter dated {date}. Although no formal documentation was prepared to show that the Developer was entitled to develop the common property, in 200X the Owners Corporation resolved to consent to the subdivision of the common property into Lot X as originally intended by the Developer and also granted to the Developer the exclusive use and benefit of the development. The Developer has covered all the costs of the development of Lot X, and the Owners Corporation had not received (nor expect) any consideration for development on Lot X. The Owners Corporation also resolved at a meeting in 20XX, and outlined in the proposed deed of sale, to allow the Developer to sell Lot X.

Goods and Services Tax Ruling GSTR 2008/3 discusses dealings in real property by bare trusts. This Ruling explains how the GST Act applies to supplies of real property involving bare trusts and similar trusts where the trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries.

GSTR 2008/3 states:

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.

30. In applying the GST law to a dealing in real property held on a bare trust, the question arises as to which entity makes the relevant taxable supply or creditable acquisition as the case may be - the trustee or the beneficiary.

…

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

38. On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. For instance, in the example at paragraph 11 of this Ruling, despite legal title to the property being held by T, the property is used by B in carrying on its enterprise.

39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

40. The definition of 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T transfers legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

Footnote 20 states: [20] 'Similarly, in the case of input taxed and GST-free supplies, if, in the course or furtherance of its enterprise, B causes T to transfer the legal title to trust property held under a bare trust, it is B that makes the input taxed or GST-free supply. This analysis is restricted to the bare trust circumstances dealt with in this Ruling. It does not follow that in every case where an entity (A) causes another entity (B) to do something, A makes the supply of the thing done by B.'

41. This is consistent with the scheme of the GST Act. 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 or creditable acquisitions of the assets to be made.

42. These conclusions are consistent with our understanding of the usual commercial practice in accounting for GST. They also accord with the approach to interpreting the GST Act adopted in Sterling Guardian Pty Ltd v. FC of T (Sterling Guardian ) where Stone J said:

The clear thrust of the GST Act, both in its wording and as explained in the EM, is that of a practical business tax imposed with respect to elements of commerce. As Senior Counsel for the respondent pointed out, although in economic terms the burden of the GST is borne by the ultimate consumer, in terms of 'imposition, collection and administration' it is a tax on business. It is for the taxpayer to prepare business activity statements and pay the appropriate GST and in this context abstract propositions about interests in land and the acquisition of a brand new set of rights arising from registration of a strata plan are irrelevant.

In relation to the creation of the trust, paragraphs 48 to 50 of GSTR 2008/3 state:

48. In this example, the trust is created by T acquiring the legal title to the land after first executing the declaration of trust. T holds the legal title to the land subject to a bare trust in favour of B from the moment it acquires title to the land. There are no GST implications in respect of the creation of the trust. As the land is subject to the trust from the outset, there is no supply of an interest in the land by T to B. In any case, T does not carry on any enterprise in respect of the land.

49. A less common alternative is that B may first acquire the land and then transfer title to the land to T to hold on a bare trust for B. In those circumstances, there is no taxable supply by B to T. This is because no consideration is provided by T to B in respect of the transfer of the legal title.

50. We consider that Division 72 (associates) does not apply in these circumstances. That is because, even if the provisions of Division 72 are otherwise satisfied, the market value of the supply is, having regard to the circumstances of the transfer of the legal title, nil. In substance, only the legal title is transferred. The land remains an asset to be used in B's enterprise. As the legal title of itself is of no economic value, the market value is nil.

Furthermore, for the sales to third parties paragraphs 59 to 60 of GSTR 2008/3 state:

59. B makes taxable supplies of the units to third parties. It is in the course of B's enterprise that the sales of the units to third parties are made.

60. Although it is T that executes the transfer documents that transfer title to the units to third party buyers, T is not liable for GST on the sales as it does not execute the transfers in the course of an enterprise that it carries on in respect of the land.

The facts provided indicate the following arrangements between the parties:

· From the Minutes of meeting in 200X that a resolution was passed to consent to the subdivision of the common property into Lot X (as originally intended by the Developer) and also to grant to the Developer the exclusive use and benefit of the development. The proposed deed of sale confirms that the parties agree that in 200X the Developer had been granted the exclusive use of Lot X for the purpose of development and subdivision, and agree that the exclusive use would also grant the Developer the right to sell Lot X.

· From the Minutes of {date} in 200X, the Owners Corporation also acknowledged that the development of Lot X was the sole responsibility of the Developer, who has covered all costs of the development.

· Prior to the meeting in 200X, The surveyors confirmed, in a letter, that it was always the Developer's intention to develop Lot X and the only reason for the change to the original plans was the request made by Council. The surveyors also confirmed that all purchasers of the original lots were made aware of this fact at the time of settlement of purchasing their lots. The proposed deed of sale confirms that each lot proprietor/owner was made aware of this at the time of purchasing their respective lots.

· The parties agree that in 200X the Developer had been granted the exclusive use and benefit of the development of Lot X, which would also grant the Developer the right to sell Lot X. The Owners Corporation also resolved at a meeting in 20XX and outlined in the proposed deed of sale to allow the Developer to sell Lot X. The Developer has found a purchaser and the Owners Corporation agrees to allow the Developer to proceed with the sale. The parties have demonstrated that the Developer can direct the Owners Corporation to transfer the property to the Developer or a third party.

· The Owners Corporation advises that it has not and will not be entitled to any proceeds from the sale of Lot X (other than recovery of outstanding levies and associated costs).

On the basis of these facts, we accept that a bare trust was created over Lot X.

Further we noted that in the Income Tax private ruling (reference number XXX) issued to the Owners Corporation, we have concluded that the Owners Corporation does hold Lot X for the Developer as a bare trustee. This is because: 

· Although there was no written Declaration of Trust made, a resolution was passed on {date} in 200X to grant the Developer exclusive use and benefit of Lot X. 

· The Developer has been responsible for all levies and costs of Lot X since it was registered on the Strata Plan and is responsible for all costs relating to the subdivision and development of Lot X.

· Since the resolution passed on {date} in 200X the Developer has acted as if he was the owner of the property. The Owners Corporation has had no duties to perform other than holding the legal title of Lot X.

Accordingly, despite legal title to Lot X being held by the Owners Corporation, the property is used by the Developer in carrying on their enterprise. Lot X has been held on bare trust for the Developer. The Owners Corporation is not making the proposed supply of Lot X. The Developer (who is the sole beneficiary) will need to consider his circumstances with regards to making a taxable supply of Lot X.

Additional information

Due to the bare trust arrangements that the lot proprietors/owners and the Owners Corporation have with the Developer, the Owners Corporation should inform the Developer of his potential GST obligations in respect of the Developer's proposed sale of Lot X to a third party.

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