Edited version of your written advice

Authorisation Number: 1012853336686

Date of advice: 4 August 2015

Ruling

Subject: Court Appointed Trustee and GST

Question 1

Is a taxable supply made by the Statutory Trustees when the specified Lots are sold?

Answer

Yes

Question 2

Can the Statutory Trustees apply the margin scheme?

Answer

Yes, provided the requirements of section 75-5 are met.

Relevant facts and circumstances

You were appointed as Statutory Trustees for the sale of vacant residential land described as Lots XX (the Lots) pursuant to an Order made by the Supreme Court (the Court Order).

The Order of the Court provides that the Lots will vest in the Statutory Trustees. Pursuant to paragraph 4 of the Court Order, the Statutory Trustees are ordered to sell the Lots and stand possessed of the net proceeds of sale on trust to be held pending agreement between the co-owners as to their distribution.

The appointment of the Statutory Trustees resulted from a dispute between two partners in a partnership regarding the sale of the Lots. It did not result from the insolvency of the partners.

The estate comprised XY vacant Lots of residential land of which one was sold prior to your appointment and one has been sold since your appointment. The remaining vacant Lots are on the market for sale.

The Statutory Trustees will not be undertaking any development or building activities other than arranging for the sale of the vacant Lots in accordance with the Court Order (for example, the activities set out in clauses 4 and 6 of the Court Order).

Your Representative has confirmed that the enterprise of property development was conducted by the partnership.

Your Representative also confirmed that the land, which is the subject of the dispute, was specifically purchased for the purposes of property development and subdivision.

In an e-mail, your Representative advised as follows and provided the following documentation:

• Partnership Agreement

• The Partnership was entered into for the purpose of subdividing the original Lot into a number of vacant Lots.

• The original property was purchased by the two partners as Tenants in Common in equal shares. The Contract of Sale was provided.

• According to the Partners, the outcome of a Private Ruling applied for when the property was purchased, was that the purchase was not subject to GST. Therefore, when the original Lot was acquired, the purchase price did not include Goods and Services Tax (GST).

• XX Lots are subject to the Court Order. Lot A of the original XY lots was sold by the partnership prior to the appointment of the Statutory Trustees.

• Following appointment of the Statutory Trustees, one Lot has settled and another Lot is expected to settle shortly. Any funds received post appointment has been distributed in accordance with the Court Order.

• The Statutory Trustees have an ABN in respect of their appointment and have registered for GST, but have not lodged any Business Activity Statements.

You have provided a copy of the Court Order. This document provides inter alia:

1. Clause A lists the Lots over which you have been appointed as Statutory Trustees for Sale. This includes Lots XX.

2. Clause B outlines that the Lots vest in you as Statutory Trustees for sale.

3. Clause C states:

The Trustees sell the properties and stand possessed of the net proceeds of sale (after payment of costs and expenses including the Trustees' costs of marketing and sale of the Properties) after payment of rates, taxes, costs of insurance, maintenance, repairs and other outgoings on trust for the Applicant and Respondent to be held by the trustees pending agreement between the parties as to their distribution or the making of a further Court order as to the appropriate distribution of the net proceeds between the parties.

4. Clause D states:

The Trustees may do all things reasonably necessary by way of engaging persons required to undertake valuations, reports, repairs, maintenance and presentation of the Properties, and for the providing of such other services as the Trustees in their sole discretion shall determine are warranted in connection with the marketing and sale of the Property and the performance of the Statutory Trustees duties.

5. Clause E provides that the Trustees' costs are to be paid in priority as the first charge from the proceeds of sale.

Relevant legislative provisions

A New Tax System (Goods and Services TAx) Act 1999 Section9-5.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-70

A New Tax System (Goods and Services Tax) Act 1999 Section 9-75

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1A)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 75-11

A New Tax System (Goods and Services Tax) Act 1999 Division 184

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 184(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 184(3)

Reasons for decision

In this reasoning, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials referred to are available on the Australian Taxation Office (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

Question 1

Is a taxable supply made by the Statutory Trustees of Lots XX when the properties are sold?

Section 9-5 of the GST Act 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 the indirect tax zone; 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.

You were appointed as Statutory Trustees for the sale of Lots XX (the Lots) in the Supreme Court. The Lots thereupon vested in you to be held by you upon Statutory Trust to be sold.

Following appointment of the Statutory Trustees, one Lot has settled and another Lot is expected to settle shortly. Any funds received post appointment has been distributed in accordance with the Court Order.

We need to consider in what capacity you sold the Lots and whether an enterprise is conducted in that capacity in relation to the Lots.

Division 184 explains the meaning of entity which includes inter alia, a trust as set out in paragraph 184-1(1)(g).

In relation to trusts, subsection 184(2) states:

The trustee of a trust or of a *superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

Subsection 184(3) further explains that a legal person can have a number of different capacities in which the person does things. In each of those capacities, the person can be taken to be a different entity.

Therefore, when you were appointed as Statutory Trustees and perform activities in accordance with the Court Order, you are acting in a different capacity to yourselves as individuals and are taken to be a different entity.

In accordance with the Court Order, you, as Statutory Trustees, have a wide scope in relation to your powers to sell the Lots held in Trust by you, including:

• To sell the Lots and stand possessed of the net proceeds of sale (after payment of costs and expenses including the Trustees' costs of marketing and sale of the Lots) after payment of rates, taxes, costs of insurance, maintenance, repairs and other outgoings on trust for the Applicant and the Respondent to be held by the Trustees pending agreement between the parties as to their distribution or the making of a further Court Order as to the appropriate distribution of the net proceeds between the parties.

• Investing the net proceeds on trust for the applicant and the respondent in an interest bearing cash deposit account with an Australian based institution.

• Doing all things reasonably necessary by way of engaging persons required to undertake valuations, reports, repairs, maintenance and presentation of the Lots, and for the providing of such other services as the Trustees in their sole discretion shall determine are warranted in connection with the marketing and sale of the Property and the performance of the Statutory Trustees duties.

• To review and determine the amount payable by the parties to Entity C for accounting services relating to the Lots and to make payment of the amount as determined to Entity C.

In this case, you, in your capacity as Statutory Trustees of the Lots, will arrange the sale of the Lots and transfer the titles in accordance with the requirements of the Court Order for the benefit of the parties to that Court Order. Therefore, you deal with the Lots in your capacity as Statutory Trustees for the Lots.

Enterprise conducted as Statutory Trustees of the Property

The enterprise of the partnership between Entity A atf the Entity A Trust and Entity B atf the Entity B Trust (the Partnership) was one of property development and the purpose and intention of the Partnership was to develop and sell the subdivided property as vacant land.

The reasoning in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 (Toyama) is relevant in so far as it considers whether the court appointment of a trustee to take the place of someone involved in activities which previously amounted to carrying on an enterprise would alter the characterisation of those activities.

In Toyama, Justice White held that the Trustees appointed by the court in that case carried on an enterprise, being a series of activities done in the form of a business, required to be undertaken pursuant to their appointment as Trustees for Sale of the relevant property.

The following paragraphs from the judgement in Toyama are relevant in considering whether the principles in Toyama have application to your role as Statutory Trustees, in selling the Trust Property:

• Paragraph 66 of Toyama states that the trustees:

'entered into the contract for the sale of the property and conveyed the title to it. The trustees are the entities who made the supply.'

• Paragraph 67 of Toyama states:

'The trustees carried on an enterprise within the meaning of the Act, being a series of activities done in the form of a business. They were appointed as trustees by the Court because of their professional qualifications as solicitors. Although the orders appointing them do not currently provide for their remuneration, Landmark accepts that they will be entitled to proper remuneration for the work they have done. That work includes retaining real estate agents, solicitors, counsel and accountants; giving instructions for the marketing of the property; liaising with Toyama and Landmark; preparing the contract of sale; arranging for the marketing and public auction of the development site; and selling of the site. These activities have a commercial character.'

• Paragraph 73 of Toyama states:

'When the enterprise carried on by the trustees is regarded as a whole, it can be seen that it involves a series of acts done by the trustees. These included the engaging of consultants, the marketing of the property, the obtaining of judicial advice and the sale of the property.'

• Paragraph 76 of Toyama states:

…Whilst I accept that the trustees were engaged in a separate activity from the joint venturers, Landmark and Toyama, it was nonetheless a related activity. The trustees were appointed to wind up the venture on which Toyama and Landmark had engaged when they fell out. In my view, the mere appointment of a trustee to take the place of someone involved in activities which amounted to the carrying on of an enterprise, would not alter the characterisation of those activities. Clearly the activities conducted by the joint venturers, Toyama and Landmark, were activities in the nature of a business done for profit. The activities of the trustees, although a different enterprise, because carried on by different entities, had a business or commercial character because they brought the activities of the joint venturers to fruition. Moreover, the trustees were themselves acting in business, as professional persons who would charge fees for the work done in selling the site for the profit of the joint venturers.

As stated above, the reasoning in Toyama is relevant in so far as it considers whether the court appointment of a trustee to take the place of someone involved in activities which previously amounted to carrying on an enterprise would alter the characterisation of those activities.

For example, in [73] of Toyama White J states '…the property sold was not owned by an individual and used as a residence, but a disused house on a development site having development consent. … The sale of the development site was a commercial transaction'.

Further at [76], White J notes the mere appointment of a trustee to take the place of someone involved in activities would not alter the characterisation of those activities. The activities of the trustees, although a different enterprise, had a business or commercial character because they brought the activities of the joint venturers to fruition. That is, it is relevant to consider the surrounding purposes of the property in question - for example, whether the property was held for commercial development purposes or say domestic purposes.

In your case, you were appointed as Statutory Trustees by the Court to perform activities resulting in the sale of the Lots that were previously held pursuant to property development activities conducted by the Partnership, thereby bringing the activities of the Partnership to fruition. That is:

(1) The Partnership was established and the land specifically purchased for the purposes of developing the Property and selling the XX subdivided Lots as vacant residential land.

(2) When the Lots were vested in you as Statutory Trustees, you engaged the relevant professionals to ensure the Lots were sold in accordance with the terms of the Court Order in a business-like manner.

Although no single factor is determinative in deciding the enterprise question, in your case, you carried on related activities in relation to the Lots (which later vested in you in accordance with the Court Order). The factors outlined above confirm that the sale of the Lots is made or will be made in the course or furtherance of an enterprise (if it had been made by the Partnership).

That is, considerable weight is given to the fact that a series of activities were done by you as Statutory Trustees, had a commercial character in relation to the sale of the development site that was the Partnership Property.

The activities conducted by you in your capacity as Statutory Trustees of the Lots, are on par with Toyama in that those activities were made in the course of an enterprise carried on by you in relation to the Lots, thereby bringing the activities of the Partnership to fruition.

You have confirmed that you have an ABN in respect of your appointment as Statutory Trustees and have registered for GST.

Consequently, you have made or will be making taxable supplies of the Lots pursuant to section 9-5 as the supplies are for consideration, in the furtherance of an enterprise, are connected with Australia and you are registered for GST. Further, the supplies are not GST-free or input taxed.

Question 2

Can the Statutory Trustees for the sale of Lots XX apply the margin scheme?

You have confirmed that GST was not paid on the purchase price of the original Lot pursuant to a ruling which was received from the Australian Taxation Office at the time of purchase.

If you make a taxable supply of real property, the GST payable under the basic rules in sections 9-70 and 9-75 is 1/11th of the price. However, under subsections 75-5(1) and (1A), if you make a taxable supply of real property by:

(a) selling a freehold interest in land;

(b) selling a stratum unit; or

(c) granting or selling a long-term lease,

You may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply. The agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.

Under subsection 75-10, a taxable supply of real property under the margin scheme is 1/11^th of the margin for the supply. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies.

Subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme. Under subsection 75-5(3), a supply is ineligible for the margin scheme if, among other things, it is a taxable supply on which the GST was worked out without applying the margin scheme.

Based on the information provided to us, we consider that you are eligible to apply the margin scheme in working out the amount of GST payable in respect of taxable supplies relating to the sale or future sale of Lots XX providing the requirements of section 75-5 are met.

Apportionment methods

To ascertain the proportion of the purchase price that relates to the subdivided lot, you may use any fair and reasonable method of apportionment. The method of apportionment used must result in the sum of the proportionate amount of the purchase price that relates to each subdivided lot equalling in total, the actual consideration for the acquisition. You cannot change the method of apportionment after sales of lots have been made unless the changed method is applied to calculate the margin for all the sales.

Examples of some methods that you may use are as follows:

• area - the consideration for the real property acquired is apportioned on the basis of the proportion of the total saleable area of the development represented by the particular lot.

• lots or sites - the apportionment is based on the number of lots or sites.

• anticipated selling price - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total anticipated selling price of the development represented by the particular lot; and

• total aggregated selling prices - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total aggregated selling prices of the development represented by the particular lot. This method is only suitable for a development where all the lots are sold in a time that allows the aggregated selling prices to be calculated by the time the relevant Activity Statements are due to be lodged.

The methods above may be used provided they give a fair and reasonable result. Use of 'lots or sites' as an apportionment method would not give a fair and reasonable result if the size or value of the lots or sites varied significantly.

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