Edited version of your private ruling

Authorisation Number: 1012550861460

Ruling

Subject: Goods and services tax (GST) and rental properties and Court Order

Question

How should the rent for the properties be attributed to the partnership and partner 1 and partner 2 (as individuals) for GST purposes?

Answer

For GST purposes, 100% of the rent received before partner 1 and partner 2 were each granted full ownership rights over a property/properties by the Court on the date of the Court Order should be attributed to the partnership.

For GST purposes, 100% of the rent received for a given property after partner 1 and partner 2 were each granted full ownership rights over a property/properties by the Court on the date of the Court Order should be attributed to the sole current owner of that property.

Relevant facts and circumstances

The partnership is registered for GST.

Partner 1 and partner 2 were formerly married to each other.

Previously, partner 1 and partner 2 owned a number of rental properties as joint tenants.

In accordance with a Court Order dated a certain date for Binding Financial Agreement at dissolution of marriage:

· Partner 1 was required to transfer their percentage interest in one of the properties to partner 2.

· Partner 2 was required to transfer their percentage interest in each of a number of properties to partner 1.

· Pending the carrying out of the court ordered transfers, the net rent for each property was required to be split between partner 1 and partner 2 in certain percentages, which was in line with their respective percentage legal interests in the properties.

Due to difficulty in obtaining finance, the required transfers were not made until a certain date. When the interests were transferred, the relevant State or Territory taxation authority backdated the transfers to the date of the Court Order.

Application was lodged with the relevant land titles agency on a certain date to transfer the properties. The effective date of transfer was backdated to the date of the Court Order.

As a result of the transfers, partner 1 is the sole legal owner of some of the properties and partner 2 is the sole legal owner of one of the properties.

All properties were purchased out of joint borrowings or funds of partner 1 and partner 2.

Prior to the date the Court Order was made on a certain date:

· all properties were rented for the mutual benefit of both partner 1 and partner 2;

· some properties were managed by an agent;

· some properties were managed by both partner 1 and partner 2

· rent was paid into a joint bank account of partner 1 and partner 2

· expenses relating to the properties were paid from the joint bank account of partner 1 and partner 2; and

· all leases were executed by partner 1 and partner 2 jointly.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 section 995-1

Reasons for decision

Summary

100% of the rent received before the date of the Court Order should be attributed to the partnership because the partnership carried on a single leasing enterprise from the properties in question during that period.

From the date of the Court Order, 100% of the rent received for a given property should be attributed to the sole current owner of that property because:

· the partnership ceased to carry on a leasing enterprise from the properties on the date of the Court Order, and

· the sole current owner carried on a leasing enterprise from the property in their own right from the date of the Court Order.

Detailed reasoning

Paragraph 8 of Goods and Services Tax Ruling GSTR 2004/6 provides the definition of partnership for GST purposes. It states:

8. A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the 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.

Paragraph 10 of GSTR 2004/6 discusses tax law partnerships. It states:

10. 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'. We refer to this type of partnership as a tax law partnership.

In accordance with paragraph 40 of GSTR 2004/6, co-ownership of a rental property is a tax law partnership.

Paragraphs 64 and 65 of GSTR 2004/6 state:

64. 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.

65. In some cases, an objective evaluation of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership.

Paragraph 62 of GSTR 2004/6 sets out factors that point to a leasing enterprise being carried on by a tax law partnership, and not by each co-owner in their own right. It 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 68 of GSTR 2004/6 provides two extra factors to consider. It 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.

Partner 1 and partner 2 co-owned rental properties. Therefore, they were in a tax law partnership.

Partner 1 and partner 2 funded their acquisitions of the properties out of joint borrowings or funds.

Before the Court Order was made on a certain date:

· partner 1 and partner 2 owned the properties in question as joint tenants;

· the joint activities of partner 1 and partner 2 were for the mutual benefit of both of them;

· only a single manager was appointed to manage a given property;

· the rent was paid into a joint bank account of partner 1 and partner 2;

· expenses relating to the properties were paid from a joint bank account of partner 1 and partner 2; and

· all leases were executed by partner 1 and partner 2 jointly.

Considering these factors, we consider that the partnership between partner 1 and partner 2 carried on a single leasing enterprise from the properties in question until the day before the date of the Court Order.

Hence, 100% of the rent received before the date of the Court Order should be attributed to the partnership.

Taxation Ruling TR 93/32 discusses the income/loss from a rental property jointly owned by husband and wife. The ruling states that this income/loss must be shared according to the legal interests of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable or beneficial interest is different from the legal title.

The Court Order under the Family Law Act 1975 effectively confirmed partner 1's 100% interest in some of the properties (the one's they hold 100% legal ownership in as a result of the transfers) even though, on the date the Order was made, partner 1 and partner 2 were still the registered joint owners. 

Accordingly, it is accepted that partner 1's equitable interest was different from their legal interest from the date of the Order. Therefore, from the date the consent orders were signed on the date of the Court Order those properties are considered to have been theirs. Hence, they were entitled to 100% of the income of these properties from the date of the Court Order.

For the same reasons, it is considered that the other property was partner 2's from the date the consent orders were signed on the date of the Court Order and they were entitled to 100% of the income from that property from that time.

The fact that the actual transfers did not occur until a later date does not change this.

Therefore, we consider that:

· the partnership ceased to carry on a rental property enterprise from the properties in question on the date of the Court Order

· partner 1 carried on a leasing enterprise in their own right from the properties they obtained 100% legal ownership in from the date of the Court Order, and

· partner 2 carried on a leasing enterprise in their own right from the other property from the date of the Court Order.

Hence, for GST purposes, 100% of the rent received for a given property from the date of the Court Order should be attributed to the sole current owner of that property.

Additional information

If partner 1 and partner 2 were not carrying on activities as a partnership elsewhere, the partnership would have ceased on the date of the Court Order.

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