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Edited version of your written advice

Authorisation Number: 1012816784546

Ruling

Subject: GST and supply of real property

Question 1

Does goods and services tax (GST) apply to the supply of residential premises from the company to its shareholders?

Answer

Yes

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.

JOINT VENTURE AGREEMENT

COMPANY'S FUND

TRANSFER OF UNITS

DEFINITIONS

Project: means the acquisition, development, construction and disposal of the Real Property described in the Constitution.

Units: means the lot that the Shareholder is entitled to pursuant to the Constitution of the Company.

Cash contribution is the amount referred to in the Schedule is the amount of the cash that each shareholder must pay to the company for its funding.

THE CONSTITUTION

Any invitation to the public to subscribe for, and any offer to the public to accept subscriptions for, any shares in or debentures of the company is prohibited.

Any invitation to the public to deposit money with, and any offer to the public to accept deposits of money with, the company for fixed periods or payable at call whether or not bearing interest, is prohibited

SHARE RIGHTS

Relevant legislative provisions

Subsection 7-1(1)

Section 9-5

Section 9-10

Section 9-15

Section 9-20

Section 9-40

Section 11-5

Paragraph 11-15(2)(a)

Section 40-65

Subsection 40-75(1)

Section 72-70

Paragraph 184-1(b)

Section 195-1

Income Tax (Assessment) Act 1936

Section 318

Reasons for decision

Summary

The company is the entity who owned the residential premises in question. The company made supplies of real property when the company supplied (transferred) each of the residential premises to the company's shareholders in the course of carrying on an enterprise for GST purposes.

The company will therefore be liable for GST under the GST Act as it made taxable supplies of those premises to the company's shareholders.

Detailed reasoning

Under sections 7-1(1) and 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is liable for GST on the taxable supply it makes.

Supply

The term 'supply' is statutory term defined in section 9-10 of the GST Act to mean:

*an asterisk denotes a defined term in the GST Act

Under section 195-1 of the GST Act - Definitions 'real property' means:

It is considered that by transfer the title of the residential premises to the company shareholders, a supply is made by under paragraph 9-10(2)(d) of the GST Act.

Entity

'Entity' is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to have the meaning given by section 184-1 of the GST Act

All Corporations Act companies are entitled to an ABN. The term 'Corporations Act Company' is defined to mean 'a body registered as a company under the Corporations Act 2001'. Under paragraph 184-1(b) of the GST Act, the company is an entity for GST purposes.

The company is the entity who owns the residential premises. The company made the supply of real property when the company made a supply (transferred) of the residential premises to the company's shareholders.

The company will be liable for GST if the supply the company made (as discussed above) is a taxable supply for GST purposes.

It is noted that the shareholders did not make any supply in returning the relevant class of share to the company. The interest in the share is not supplied to the company. Legal ownership of the share does not transfer to the company as the result of the distribution of the residential premises to the shareholders. The entitlement of the distribution arises when the share was acquired, not when the shares is returned to the company. The shareholders made no supply to the company.

Is the supply under the JV Agreement taxable supply?

Under section 9-5 of the GST a supply becomes taxable when all of the requirements in the section are met. This section states:

9-5 Taxable supplies

You make a taxable supply if:

(a)  you make the supply for *consideration; and

(c) the supply is *connected with Australia; and )

(d) you are *registered, or *required to be registered.

The supply is not GST-free under any provision of the GST Act or other Acts. The supply of new residential premises is not input taxed under subsection 40-40(2)(b) of the GST Act or any other Acts. The supply of the completed residential premises in the company's circumstances is considered the supply of new residential premises in accordance with paragraph 40-75(1)(a) of the GST Act where it provides that residential premises are new if they have not been sold as residential premises. The company's supply is the first supply of those residential premises after completion.

We need to consider whether any of the requirements under section 9-5 of the GST Act above is not met.

The company has provided that the residential premises are in Australia and the company is registered for GST. We need to consider whether the transfer is made in the course or furtherance of an enterprise and whether the transfer is made for consideration.

In the course or furtherance of an enterprise

Paragraph 3.10 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 provides:

Therefore, we need to consider whether the company was carrying on an enterprise of land development (subdivision, building residential premises). Where it is considered that the company was, the transfer is considered to be within the course or furtherance of that enterprise.

The Enterprise

The Project is a one-off activity that the company carries on. The activity is not considered to be done in a form of business as it is not repetitive. However, under paragraph 9-20(1)(b) of the GST Act, which defines the meaning of the term 'enterprise', the activities under the Project can be considered as done:

An enterprise is an activity, or series of activities done:

(b) in the form of an adventure or concern in the nature of trade.

Paragraph 9-20(1)(b) was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

The Commissioner has expressed his views on the meaning of paragraph 9-20(1)(b) at paragraphs 233 to 261 of Miscellaneous Tax Ruling MT 2006/1. The Ruling states:

MT 2006/1 identifies the following six badges or identifying features of trade at paragraphs 247 to 257:

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides the following relevant views:

Application of the factors:

Conclusion

On balance, and considering all relevant factors, we consider that factors that suggest the company's supplies of residential premises to the company's shareholders are of a commercial nature prevail. The company's activities are not dissimilar to activities of other builders who are carrying on an enterprise of land development.

It is considered that the company was carrying on land development (acquisition, development, construction and disposal of the real property) in accordance with paragraph 9-20(2)(b) of the GST Act.

The supply is made for consideration

The term 'consideration' for GST purposes is defined in section 9-*15 of the GST Act as follows:

(1) Consideration includes:

The company did not collect any amount payable for the residential premises at the time of the supply (transfer of title).

As discussed above, the supply of the company to the shareholders is not made in response to any supply from the shareholders. The shareholders have certain rights to claim their entitlement from the shares. The distribution of the premises satisfied the rights of the shareholders but is not made in return for those shares.

In accordance with the JV Agreement and clauses of the Constitution:

It is considered that the payments the shareholders made to the company under those clauses mentioned above are consideration for the supply of the residential premises in question.

As all of the requirements under section 9-5 of the GST Act are met, the company made a taxable supply when the company transferred the titles of the 7 residential premises the company owned to the shareholders.

What is the GST payable on the supply?

The company has provided that the payments that the shareholders made in return of the shares (that is made in return for the interest in the Lot associated with the share) is lower that the market value. The supply for an inadequate consideration is not relevant unless the supplier and the recipient of a supply are associates. If it is the case, Division 72 of the GST applies.

Section 72-70 of the GST Act provides that:

The GST amount will be calculated on the market value of the residential premises unless the recipients are registered and they acquired the residential premises for a creditable purpose.

Although most the recipients are registered for GST, all of the recipients did not acquire the residential premises solely for a creditable purposes (for use as rental property) and therefore failed the test under paragraph 11-15(2)(a) of the GST Act.

It follows that:


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