Edited version of your written advice

Authorisation Number: 1013098481881

Date of advice: 29 September 2016

Ruling

Subject: GST and partnerships

Question 1

Is ABC and XYZ in a tax law partnership due to their co-ownership as joint tenants of 'the property'?

Answer

Yes.

Question 2

If ABC and XYZ are in a tax law partnership for goods and services tax (GST) purposes, would the sale of the property be subject to GST?

Answer

No.

Relevant facts and circumstances

ABC is not currently registered for GST.

XYZ is currently registered for GST.

ABC and XYZ purchased the property pre- 2000. The property has a house on a X acre block.

ABC and XYZ only own the property and their residential home as joint tenants.

The property has only and solely been used as residential rental property since the time of purchase. The property was mostly rented by long term tenants. The current tenant has been renting the property for over 8 years.

In respects to the property:

• ABC and XYZ make all the decisions jointly

• ABC and XYZ funded the acquisition of the property out of joint borrowings, and

• all income and expenses are paid to and from ABC and XYZ joint bank account.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-65(2)(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question 1

A partnership is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by reference to the definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997. That definition states that a partnership is:

(a) an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company; or

(b) a limited partnership

The first limb of the definition refers to an association of persons 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. We refer to this type of partnership as a general law partnership.

On the information provided, ABC and XYZ are not in a general law partnership because ABC and XYZ are not carrying on a business as partners.

The second limb of the definition includes an association of persons that is not in business, but is nevertheless in receipt of ordinary income jointly. We refer to this type of partnership as a tax law partnership.

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) explains that tax law partnerships exist only for tax purposes and that most tax law partnerships arise in situations where an association of persons (other than a company or a limited partnership) is 'in receipt of ordinary income or statutory income jointly'. Most tax law partnerships arise because property is acquired or used to derive income jointly.

In this case, ABC and XYZ purchased the property, which has been leased as residential premises. ABC and XYZ carry on an activity of leasing from which income is received jointly. A tax law partnership was thus formed at the time when ABC and ABC entered into an agreement to acquire the property and carry out the leasing activity jointly.

Under section 184-1 of the GST Act, a tax law partnership is an entity for GST purposes. The GST Act treats the partnership as an entity separate from its partners.

Question 2

The partnership of ABC and XYZ must be registered for GST to become liable for GST on any taxable supplies made and to be entitled to claim input tax credits for any creditable acquisitions.

Section 23-5 of the GST Act provides that you are required to be registered if:

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

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

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

To be registered for GST, the partnership of ABC & XYZ must be 'carrying on an enterprise' and meet the relevant $75,000 GST turnover threshold.

'Carrying on an enterprise'

Firstly, it must be determined if the partnership is carrying on an enterprise.

Paragraph 9-20(1)(c) of the GST Act provides that an enterprise is an activity, or a series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the GST Act. The principles in MT2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraph 153 of MT2006/1, explains that in the absence of a statutory definition, the terms, 'activity' and 'series of activities' take their ordinary meaning:

'An activity is essentially an act or series of acts that an entity does. Entities can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term 'activity, or series of activities' for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.'

Paragraphs 303 through to 322 of MT 2006/1 discuss the phrase 'on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. The phrase does not relate to the sale or trade of the property but rather it relates to the activity of a lessor or grantor of the interest in the property.

Paragraph 306 of MT 2006/1 states that to be an enterprise, the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed.

In the circumstances of ABC and XYZ, as the lessor they have acquired an income producing property and undertaken the activity or act of leasing the property. The property has been leased on a continuous basis that is, the leasing of the property has not ceased or been interrupted for a significant amount of time since the property was purchased in 1976. Therefore, ABC and XYZ are carrying on enterprise of leasing for the purpose of the GST Act.

In reference to paragraph 62 of GSTR 2004/6, the conduct of ABC and XYZ, being the co-owners of an income producing property, indicate that the enterprise is carried on by the partnership. This is an objective test based on the following:

• ABC and XYZ, the only partners in the partnership, funded the acquisition of the property, out of jointly borrowed funds

• the property was jointly acquired by ABC and XYZ, as co-owners under a single property contract

• the property is held in the name of both ABC and XYZ as joint tenants

• a joint bank account held in the name of ABC and XYZ receives the rental income and is used to pay the expenses (liabilities) relating to the property, and

• both ABC and XYZ control the decision making process.

The enterprise is being carried on, not by ABC and XYZ as individuals but as partners in the partnership.

Consequently, the sale of the property is by ABC and XYZ in their capacity as partners in the partnership. As such, the sale of the property is a supply made by the partnership and is not a supply made by ABC and XYZ individually as co-owners. Paragraph 234 of GSTR 2004/6 states:

234. Any sale of a property or interest in a property which is used in carrying on an enterprise by a partnership is a supply by the partnership and not by the co-owners. There are GST consequences if the partnership is registered.

Therefore, the partnership will be required to be registered for GST if its GST turnover meets the relevant $75,000 registration threshold.

GST Registration turnover threshold

Division 188 of the GST Act contains the rules to work out the GST turnover for the purposes of determining whether the partnership is required to be registered for GST. The GST turnover calculation under Division 188 of the GST Act does not include input taxed supplies (paragraph 188-15(1)(a) of the GST Act).

Under sections 40-65 and 40-35 of the GST Act the sale and lease of residential premises is input taxed.

The term 'residential premises' is defined in section 195-1 of the GST Act to mean 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;

Paragraph 6 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) says in part that residential premises are premises comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 of the GST Act where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

The property comprises of land and a house. The actual use of the house is for residential accommodation. The property is currently occupied by tenants as a residence. Accordingly, it satisfies the definition of the residential premises in section 195-1 of the GST Act.

Paragraph 40-65(2)(b) of the GST Act excludes the sale of new residential premises from being input taxed, other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. The property has been used solely for residential purposes prior to 1998.

Therefore, the lease and the sale of the property are input taxed supplies. The income received from the lease and the sale of the property is not included in the GST turnover calculation.

Provided the partnership does not have any other income or carrying on other type of enterprise, the partnership will not be required to register for GST, hence, the sale of the property will not be subject to GST.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).