Edited version of your private ruling

Authorisation Number: 1012601683709

Ruling

Subject: GST and property

Question 1

Is the A & B partnership (the Partnership) which is registered under a specified Australian business number (ABN), able to cancel its GST registration under subdivision 25-B of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The Partnership may apply for cancellation of the GST registration.

Question 2

Was the Partnership making a taxable supply under section 9-5 of the GST Act when it sold the properties located at the specified lot numbers in Australia?

Answer

No. The Partnership is not an entity for GST purposes and therefore, cannot be making supplies or taxable supplies.

Question 3

Were you (individual A) making a taxable supply under section 9-5 of the GST Act when the properties located at the specified lot numbers in Australia were supplied?

Answer

No. You were not making a taxable supply. You were either making an input taxed supply of residential premises or, in the case of premises that you were living in, the sale was outside the scope of GST.

Relevant facts and circumstances

Individual A (you) are registered for GST.

On <date> you and individual B (B) registered a partnership named A & B (the Partnership) for GST with the specified ABN. On <date> you and B together entered into a contract to purchase the property located in Australia (the Property). Settlement occurred on <date>.

At the time of the purchase, there were N numbers of near completed villas/townhouses/units on the Property. All the villas were at a liveable stage. You stated in a phone conversation on <date> that all of the villas at the time of the purchase settlement were capable of being occupied and only needed minor works to complete them. You and B moved into a villa each on or near settlement date. B is currently still living in her villa.

Your intention was that whilst completing the villas, you and B would reside in a villa each and upon completion the villas would be sold.

Each of the villas was designed for residential accommodation, with bedrooms, bathrooms, kitchen and other features necessary for a residence. The vendor issued a tax invoice dated <date> to A and B showing an amount of $x as total supply and GST on the supply being $y. You and B held the property in a specified ratio. That is you held p% of the Property and B held q%.

At the date of settlement, the N number of villas was on a single certificate of title. Other than the villas there were no other improvements on the land.

You advised that the villas only needed minor works including retiling of bathrooms, landscaping, installation of clothes lines, letter boxes, fitting of insulation and completion of driveways.

The works on the various villas were completed in a period ranging from a few months to around 2 years from purchase date.

From title search following purchase of the Property:

The partnership entity claimed the GST credits in relation to the purchase of the Property and costs of completing all the villas. Around 18 months from purchase date, a final inspection by the Council required submission/completion of the following items prior to the issue of the final occupation certificate:

1. Wet area certification for a specified number of villas in accordance with the Construction Certificate.

2. Thermal Insulation certificate for the development in accordance with the construction Certificate.

3. Completion of letterboxes and clotheslines in accordance with the landscaping plan.

Following the purchase, the Property was subdivided into N lots. A villa was located on each of the lots. You and B were still registered as co-owners of each of the N number of lots immediately after the subdivision. The Lot numbers match the villa numbers.

The separate certificates of title for each of the N lots include the following details (each lot with identical names and fraction of share as on the original single title prior to subdivision):

The N lots were subsequently partitioned, with you becoming the sole owner of (N-1) lots and B became the sole owner of one lot, lot B.

Title searches made on <date> in relation to the N lots following partitioning of the land include the following details for the lots:

In mm/yyyy you moved out of building A2 into building A1.

Building A2 which you had been living in was sold on <date>. Villa A1 was sold on <date> and you moved out of it on settlement date.

You have only ever occupied building A2 and A1. The rest of the villa(s) were sold on specified date(s).

The villas were never leased and the works on them took a period of time to complete because of time and financial constraints.

You advised that after lengthy discussion with the Australian Taxation Office (ATO) and other named accounting bodies you considered there were never any grounds for a partnership. Therefore, on <date> all the input tax credits claimed by the Partnership entity were reversed. That resulted in an amount owing to the ATO totalling $z, of which $w was repaid by you on <date>.

The information you have provided in relation to the audit conducted by the ATO includes the following:

• the Partnership business includes the development of the Property and

• the Partnership purchased the Property to be completed for resale

On <date>, in response to questionnaires, you provided the following information to the Income Tax division of this office:

1. There was no formal or written partnership entered into.

2. You paid p% and B paid q% of the purchase price of the semi-finished villas.

3. The intention was not for the profit on the sale of the villas to be split between you and B in the same proportions as the ownership. B was to retain villa B as her principal place of residence as her share of the arrangement, and you to retain the remaining villas as your share of the arrangement.

4. The properties have been subdivided and partitioned with B receiving one villa and you receiving the rest of the villas. If you make any profit from selling your villas, this would be in your name only.

5. A joint bank account was set up for the purchase and development of the Property, but only at the insistence of the ATO to allow the receipt of GST refunds.

6. Both parties had the power to operate the joint bank account however as you had paid the GST upfront you transferred the refunds from the joint account to your own personal account as way of reimbursement. Expenses for materials etcetera were paid from private funds of A and B.

7. The Contract for the purchase of the villas was in the names: A and B. Invoices etcetera were addressed to the person who purchased the item. Any sale of villas was in individual names.

8. You kept business records on excel spread sheets and invoices.

9. Both you and B were actively involved in the purchase of the villas/properties. B assisted in the completion of the villas, but once subdivision was finalised any sale arrangements were to be made by the respective owners.

10. The share of capital injections into the development was in the proportion q% by B and p% by you.

11. There were no drawings made by either party in respect to potential profit on the sale of the villas.

12. You considered a partnership for tax purposes did not exist even when tax returns were lodged because you and B were not carrying on a business. The arrangement was that, as soon as the subdivision was finalised, B would take one of the lots/villas as her share of the arrangement and you would take the rest as your share of the arrangement. No joint income was ever received. You instigated the ABN and the partnership in the naïve belief that because GST had to be paid on the purchase, the only way to recoup the GST from the sale and the completion expenses, was to register for a partnership and GST. As the Property was purchased as residential premises, you incorrectly registered and claimed the GST. The error did not become obvious until he commenced marketing a lot/building for sale.

Relevant legislative provisions

A New tax System (Goods and services Tax) Act 1999 Division 38

A New tax System (Goods and services Tax) Act 1999 Division 40

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

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

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

A New tax System (Goods and services Tax) Act 1999 section 25-55

A New tax System (Goods and services Tax) Act 1999 section 40-65

A New tax System (Goods and services Tax) Act 1999 section 40-75

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

A New tax System (Goods and services Tax) Act 1999 section 195-1

Reasons for decision

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

A & B PARTNERSHIP, and

INDIVIDUAL A.

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

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 material referred to are available on the ATO website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

1 Is the partnership A & B, registered under the specified ABN, able to cancel its GST registration under subdivision 25-B of the GST Act?

Section 25-55 provides, among other requirements, that the Commissioner must cancel your GST registration if the Commissioner is satisfied that you are not required to be registered for GST or not carrying on an enterprise.

Further, section 23-5 states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

The expression 'you' in this case refers to the partnership A & B and the question in the context of this ruling is 'Is the partnership an entity for GST purposes and if it is, is it required to be registered for GST?'

Under subsection 184-1(1) the meaning of an entity includes a partnership.

The definition of 'partnership' has the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), which 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.

Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnership (GSTR 2003/13) includes explanations on the definition of partnership. In referring to the definition of 'partnership', paragraph 10 of GSTR 2003/13 states:

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 ...

Paragraph 17 of GSTR 2003/13 explains that a partnership is formed when two or more entities commence carrying on a business as partners.

On the facts provided, we consider you and B purchased the Property as tenants in common in p% and q% share respectively with the intention to subdivide the land and for B to take a subdivided lot and you would take the rest of the other lots. The subdivided lots each with a villa were of equal value and B had retained one lot which was her q% share. B moved into villa B and has continued to live there. Therefore, it is reasonable to consider that B's intention in entering into the arrangement was to use the lot she retained as her primary residence which is of a private and domestic nature and not the carrying on of an enterprise.

We consider that although you and B engaged in subsequent activities together following the joint purchase of the Property, the activities were undertaken to separate your interests through the subdivision and partition processes. As B's intention was to acquire a residence, B's activities were solely of a private and domestic nature and not the carrying on of an enterprise.

Accordingly, for GST purposes, we consider you and B were not carrying on a business or enterprise as partners or in receipt of income jointly. Therefore, we determine the partnership you have formed to purchase the Property and carry out the subsequent activities did not satisfy the definition of a partnership entity for GST purposes.

Further, the factors outlined in the private ruling (issued to you recently by the Income Tax Division of the ATO) to determine that you were not carrying on a business as a partner in a partnership for tax purposes, applies equally to this GST private ruling.

As the Partnership is not a partnership entity for GST purposes to carry on an enterprise, the requirements in paragraph 23-5(a) would not be satisfied. Under the circumstances, the Commissioner is satisfied the Partnership is not carrying on an enterprise or required to be registered for GST. Therefore, the Partnership may cancel the GST registration pursuant to section 25-55.

2. Was the Partnership making a taxable supply under section 9-5 of the GST Act when the Properties located at a specified address in Australia were sold?

As the Partnership is not a partnership entity for GST purposes, it cannot make any supplies or taxable supplies.

3. Were you (individual A) making a taxable supply under section 9-5 of the GST Act when the properties located at the specified lot numbers in Australia were supplied?

Section 9-5 provides that 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.

Section 40-65 provides:

(1) A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The terms 'residential premises' and 'new residential premises' are defined in section 195-1:

'residential premises' means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

'New residential premises' has the meaning given in section 40-75 which provides that residential premises are new residential premises if they, among other things, have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease.

It is, therefore, necessary to establish if the land and villas on the Property have previously been sold as residential premises. In your situation, it is necessary to consider whether the vendor's supply of the Property to you and B was the first sale of residential premises. If that was the case, then subsequent sales as residential premises may be input taxed supplies under subsection 40-65(1).

Paragraph (b) of the definition of residential premises requires that the 'residential premises' is capable of being occupied as a residence or for residential accommodation. Accordingly, it is necessary to establish if the land and villas were 'capable of being occupied' at the time of settlement when you and B purchased the Property.

The facts state:

• At the time of purchase around mm/yyyy, there were N numbers of near completed villas on the Property.

• In mm/yyyy, a final inspection by the Council required submission/completion of the following items prior to the issue of the final occupation certificate:

1. Wet area certification for villas A1 and A2 in accordance with the Construction Certificate.

2. Thermal Insulation certificate for the development in accordance with the construction Certificate.

3. Completion of letterboxes and clotheslines in accordance with the landscaping plan.

• Works on the villas were completed in a period of time between a few months to around 2 years from the purchase date.

The above facts would generally indicate the Property cannot satisfy as being 'capable of being occupied' under paragraph (b) of the definition of residential premises, and that would mean the Property was not 'residential premises' at the time it was supplied to you and B.

However, you have confirmed the N number of villas were at a liveable stage on settlement. The villas only needed minor works including retiling of bathrooms as they were not of the standard preferred, fixing damage caused by the previous builders, landscaping, installation of clothesline, letter boxes, fitting insulation and completing driveways. Further, you and B moved into one villa each as your residence at around the settlement date. The reason the works took a period of time to complete was only because of finance and time constraints.

In evaluating the factors above, the Commissioner considers it reasonable to determine that the land and villas on the property were 'residential premises' at the time the vendor supplied to you and B. Accordingly, the sale of the Property by the vendor to you and B would be the first sale of 'residential premises'.

That meant you and B acquired new residential premises. When you subsequently sell the properties/villas, you would not be selling new residential premises as the land and villas have previously been sold as residential premises by the vendor to you and B.

The villas were designed as a residence or for residential accommodation with bedrooms, bathrooms, kitchen and other features suitable for a residence. Accordingly, when the land and villas were subsequently supplied, the supply would be an input taxed supply of residential premises to be used predominantly for residential accommodation, unless the premises sold were your residence, in which case the supply would be of a private and domestic nature and would be outside the scope of the GST.

The N-1 lots were sold on various specified dates.

Prior to the above sales, the Property was subdivided and the subdivided lots were subsequently partitioned. The GST implications in relation to those transactions are as follows:

Subdivision of the land

Section 40-75 (2AA) states:

Despite subsection (1), the *residential premises are not new residential premises if:

(a) they are created from residential premises that became the subject of a *property subdivision plan; and

(b) the residential premises referred to in paragraph (a) were not new residential premises immediately before they became the subject of that plan.

This subsection has effect subject to paragraphs (1)(b) and (c).

Goods and Services tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land (GSTR 2009/2) includes the following explanation:

50. The Commissioner considers that the subdivision of land by co-owners does not constitute a supply for the purposes of GST. All that results is that the subdivided land is held under different titles by the same owners. While the effect of the subdivision is to create new rights and titles in substitution of the original rights and titles, there is no change in the ownership of the subdivided land. Accordingly, where land is jointly held, a subdivision, by itself, does not involve a transfer of any interests in the land between the co-owners.

In this case, when the Property was originally purchased the proprietorship was as follows:

Following subdivision into N lots, the separate certificates of title registered the ownership (each lot with identical names and fraction of share as on the original single title prior to subdivision) as follows:

In your case, as there was no change in the ownership following subdivision, the subdivision of the single parcel of land into N lots does not involve a transfer of any interests in the land between you and B. In accordance with paragraph 50 of GSTR 2009/2, the subdivision did not constitute a supply, therefore, there could not have been any taxable supply made by you in this transaction.

Partitioning of the land

In this case, when land in the N lots was subsequently partitioned, the ownership was as follows:

You have not provided the title search or certificate of title in relation to lot B following the partition. In this ruling it has been assumed from the facts that the first schedule for lot B would be recorded in the name of B.

An example in GSTR 2009/2 illustrates a relevant situation:

Example 2 - Partition of land by tenants in common in unequal shares

24. Christine and David own Greenacre as tenants in common in unequal shares. Christine has three undivided one-fourth shares and David has one undivided one-fourth share. Christine and David agree to subdivide Greenacre into two new lots - Blueacre having a value of $100,000 and Yellowacre having a value of $300,000. If Christine takes Yellowacre and David takes Blueacre the partition agreement is effected by:

• Christine transferring her three undivided one-fourth shares in Blueacre to David, and contemporaneously,

• David transferring his one undivided one-fourth share in Yellowacre to Christine.

25. The effect of the partition is that where once Christine and David each had an unequal interest in Greenacre (and following the subdivision - in both Blueacre and Yellowacre), Christine now has a 100% interest (or sole ownership) in Yellowacre and David has a 100% interest (or sole ownership) in Blueacre.

Paragraph 46 of GSTR 2009/2 further states that:

Under a partition by agreement, the transfer or conveyance by each co-owner³¹ of their respective interest in the land to be taken by the other co-owners in severalty is a supply as defined in subsection 9-10(1).

Property and Construction Industry partnership - Issues Register (P & C Issues Register) at issue 15.4.12(c) addresses the issue that where a block of land contains a residential building, and the block of land, together with the residential building, has previously been sold as residential premises, then the mere subdivision of the block of land into a smaller block of land containing the same residential building will not make the smaller block of land 'new residential premises'

In accordance with paragraph 46 of GSTR 2009/2, you are considered to be making a supply in the partitioning transaction. However, in line with the guidelines in P & C Issues Register the residential premises on the N subdivided lots prior to the partitioning were not made into new residential premises by the subdivision.

Accordingly, in supplying your specified number of undivided fraction of share in Lot B to B, you were not making a taxable supply of new residential premises. The supply was an input taxed supply of residential premises under section 40-65, and GST was not payable.

Sale of the N-1 lots/properties

You sold the N-1 lots/properties on various specified dates.

You initially moved into lot A2 as your residence around mm/yyyy shortly after purchase settlement. In mm/yyyy you moved from villa A2 into a second villa, villa A1 in anticipation of the sale of villa A2.

Villa A2 was sold in mm/yyyy. Villa A1 was sold in mm/yyyy and you moved out on settlement date. You only ever occupied villa A2 and A1. The other villa(s) were sold in various specified mm/yyyy

The villas were never leased. The works carried out on them took a period of time to complete because of time and financial constraints.

As determined earlier, the physical characteristics of the villas were of residential premises to be used predominantly for residential accommodation, and were not new residential premises. Accordingly, the sales of those villas were:

(a) where the property was your residence, the supply would be of a private and domestic nature and would not satisfy paragraph 9-5(b). The supply would be outside the scope of the GST, or

(b) where the property was not your residence, you would be making an input taxed supply of residential premises under section 40-65.

Accordingly, in selling the specified lots at the specified address you (individual A) were not making a taxable supply, and GST was not payable.

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