Edited version of your written advice

Authorisation Number: 1013111525024

Date of advice: 24 April 2017

Ruling

Subject: GST and property

Question 1

Is Entity A entitled to register as a joint venture operator under Division 51 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

Will Entity A make a taxable supply on the transfer of title in the property to you even though you have always been the beneficial owner through a partitioning agreement?

Answer

No

Question 3

Will you make a taxable supply of your interest in the land when the property is partitioned?

Answer

No

Question 4

How is the value of the taxable supply determined?

Answer

Not applicable

Question 5

Will you make a taxable supply where you sell the property after 5 years?

Answer

No, provided the property has been used solely for making input taxed supplies for a continuous period of at least 5 years since the premises became new residential premises.

Relevant facts and circumstances

You have entered into a project with other Venturers, the purpose of which is to purchase a property and build Units each of similar size.

Each Venturer is to own one townhouse on completion of the project, to rent as a long term residential investment. You do not intend to sell.

You are not registered for GST

Entity A has acquired the land as bare trustee for the Venturers and will be registered on the title.

Entity A is not registered for GST

The project is subject to an Agreement dated xxmmyyyy.

The Agreement contains the following relevant clauses: xxxx

There is no separate trust deed.

Further information was provided via email dated xxmmyyy

Further information was provided via phone on xxmmyyyy confirming that despite the provisions of x and x of the Agreement, the trustee will do little other than hold the legal interest in the land.

A signed Second Supplementary Agreement was supplied on xxmmyyy.

In the agreement the parties to the Joint Venture Agreement dated xxmmyyyy formalise that:

The joint venture is a GST joint venture

Entity A is the Joint Venture Operator of the Joint Venture

Insofar as each Joint Venturer is an owner of an interest in the property of the Joint Venture, which interest will ultimately be transferred to another Joint Venturer, the first -mentioned Joint Venturer holds such interest in the property upon trust for the other Joint Venturer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 51,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15,

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

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C and

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

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 terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Question 1

Is Entity A entitled to register as a joint venture operator under Division 51 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Detailed reasoning

Paragraph 7 of GSTR 2004/2 provides that a joint venture is not an entity for GST purposes and cannot itself make supplies or acquisitions. Therefore each venturer must individually account for GST and input tax credits on their taxable supplies and creditable acquisitions.

However, entities engaged in a joint venture may become participants in a GST joint venture under Division 51 if the participation requirements are satisfied. The nominated joint venture operator then deals with the GST liabilities and entitlements arising from the joint venture's dealings.

A joint venture that meets the requirements of section 51-5 is a GST joint venture.

Under section 51-5

(1) Two or more entities may become the participants in a GST joint venture if

(a) the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the regulations; and

(b) the joint venture is not a partnership; and

(c) repealed

(d) each of those entities satisfies the participation requirements for that GST joint venture; and

(e) each of those entities agrees in writing to the formation of the joint venture as a GST joint venture; and

(ea) one of those entities, or another entity, is nominated, in that agreement, to be the joint venture operator of the joint venture; and

(eb) the nominated joint venture operator notifies the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture; and

(f) if the nominated joint venture operator is not a party to the joint venture agreement - the nominated joint venture operator satisfies the requirements of paragraphs 51-10 (c) and (f).

Under section 51-10

An entity satisfies the participation requirements for a GST joint venture, or a proposed GST joint venture, if the entity:

a) participates in, or intends to participate in, the joint venture; and

b) is a party to a joint venture agreement with all the other entities participating in, or intending to participate in, the joint venture; and

c) is registered; and…

f) accounts on the same basis as all those other participants.

The term 'joint venture' is not defined in the GST Act however paragraph 11 of GSTR 2004/2 states:

11. For the purposes of the GST Act, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

● sharing of product or output, rather than sale proceeds or profits;

● a contractual agreement between the participants;

● joint control;

● a specific economic project; and

● cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture.

Further, paragraphs 22 and 23 of GSTR 2004/2 state:

22. Accordingly, we think that the term joint venture in the context of the GST Act is … therefore limited to arrangements where the participants are to share product or output rather than profits or sale proceeds.

23. This passage also confirms that a feature of joint ventures is the sharing of the costs of the venture by the participants, commonly by way of individual participants contributing money, property or expertise.

On xxmmyyy you entered into the Agreement under which the Venturers have agreed to associate to acquire and develop the property.

On completion of the development of the property, you will be entitled to become registered as the proprietor of a residential unit (Unit). The Venture will terminate 90 days after the transfer of all the Units to the Venturers.

The Venturers have joint control of the project. In addition, clause x specifies that the Venturers each have rights to participate in the management, control and conduct of the Venture. Clause x provides that all operating expenses will be borne by each of the Venturers in proportion to their interests.

Paragraph 51-5.01(1)(f) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) lists the building of residential premises as being a specified purpose for GST joint ventures.

It is accepted that you are engaged in a joint venture as:

● you have entered into a contractual Agreement where the common undertaking is to generate a product to be shared (Units);

● you have joint control of the specific economic project;

● you bear your own share of the costs; and

● the Venture is for a purpose specified in the GST Regulations.

However, as you are not registered for GST the participation requirement of a GST joint venture (section 51-10(c)) is not satisfied.

Although the Venturers have agreed in writing in the Second Supplementary Agreement (supplementary agreement) to the formation of the Venture as a GST joint venture (as required by paragraph 51-5(e)) neither you, the proposed joint venture operator, nor a number of the other parties to the supplementary agreement, are registered for GST. Therefore, the participation requirements for a GST joint venture, set out in section 51-10(c) are not satisfied and accordingly the requirements of section 51-5(d) are not met.

As the requirements of section 51-5(d) are not met, the venture is not a GST joint venture and Entity A is not entitled to nominate as the joint venture operator under Division 51. Each Venturer must individually account for GST and input tax credits on their taxable supplies and creditable acquisitions.

Question 2

Will Entity A make a taxable supply on the transfer of title in the property to you even though you have always been the beneficial owner through a partitioning agreement?

Detailed reasoning

For a supply to be a taxable supply under section 9-5, the entity making the supply must do so in the course or furtherance of an enterprise it carries on.

Section 9-20 defines an enterprise as an activity, or series of activities, done:

(a) in the form of a business or

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

(c) on a regular or continuous basis, in the form of lease, licence or other grant of an interest in property.

Clause x of the Agreement provides that Entity A is the legal owner of the land, held for the benefit of the Venturers. Clause x provides that the joint venture property will be held by the Venturers as tenants in common. You have advised that Entity A holds the property as bare trustee and a project manager has been appointed to run the project.

GSTR 2008/3 discusses bare trusts and similar trusts for GST purposes. These may include where the trustee has active duties to perform, the key point being that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property. The principles in this ruling apply regardless of whether there is a single beneficiary or multiple beneficiaries of the bare trust.

You advised that Entity A holds the title to the property as a bare trustee and its activities are passive or minor in nature. Its activities are associated mainly with the execution of legal documents for the acquisition, development and disposal of the property.

Clauses x,x and x indicate that the project (and hence the dealings in the property) are under the management, control, and at the direction of, the Venturers (beneficiaries).

A bare trust which performs minor or passive activities does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property. In directing the trustee to transfer legal title in property, it is the beneficiary that causes the supply to be made.

Therefore Entity A, as bare trustee, is not carrying on an enterprise and will not make a taxable supply pursuant to section 9-5 on the transfer of the legal title in the property to you.

Question 3

Will you make a taxable supply of your interest in the land when the property is partitioned?

Detailed reasoning

Under a partition the transfer by each participant in a joint venture of their interests in the land is a taxable supply provided all the requirements of section 9-5 are met. It makes no difference whether the joint venture is a GST joint venture or not. In Question 1 it was concluded that you were participating in a joint venture, however it was not a GST joint venture.

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (Australia), and

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

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

For the supply of interests in the property to be taxable supplies, all of the requirements in section 9-5 must be satisfied. In your case, the property is connected with Australia and any supplies under partitioning will not be input taxed or GST-free.

Supply for consideration

Under the agreement, you acquired the property with the other Venturers as tenants in common, held by a trustee under a bare trust. You have agreed to associate as a joint venture to acquire and develop the property. Any structures will be demolished, the property will be subdivided into lots, residential units will be constructed and then the legal title will be transferred by the bare trustee, Entity A, to each party in relation to their respective interest. This transaction is called partitioning by agreement.

GSTR 2009/2 outlines the Commissioners views on partitioning:

12. It is common for real property to be held by more than one entity as …tenants in common whether at law or in equity. Circumstances may arise between these entities resulting in the termination of the co-ownership by way of the partition of the real property between them. The circumstances may include …the conclusion of a venture between two or more entities to develop, subdivide and share the products of the subdivision.

13. The term 'partition' is not used or defined in the GST Act… It is defined for the purpose of this Ruling by reference to its ordinary and property law meanings.

15. … It is an equitable remedy which terminates …co-ownership by effecting a physical division of the property owned by the co-owners and conferring separate estates in fee simple to each co-owner in accordance with the respective values of each party's new parcel.

'Supply' has the meaning given by section 9-10 of the GST Act and is any form of supply whatsoever. The wide definition of the term includes the transfer or conveyance of an interest in or right over land by a co-owner.

To effect a partition under an agreement, all the co-owners agree to divide the land and to mutually transfer or convey their respective interests in the parts to be taken and enjoyed in severalty by the other. Clause x of the joint venture agreement states that the joint venture property shall be acquired and held by the joint venturers as tenants in common in proportion to their respective shares. For each Venturer to obtain the severalty interest in their unit, it is necessary for each Venturer to mutually convey their interest in the land to the other. This is a supply as defined by subsection 9-10(1).

Consideration is defined in section 195-1 to include 'any consideration within the meaning given by section 9-15, in connection with the supply and includes any payment, or act or forbearance, in connection with, in response to, or for the inducement of a supply of anything.

The consideration for a co-owner transferring their interest in land to the other co-owners is the transfer or conveyance made by the other co-owners of their respective interests in another part of the land to the first co-owner. In this case the transfer or conveyance by the other Venturers is consideration received by you for the supply of your interests to the other Venturers. You are therefore making a supply for consideration.

Enterprise

The scope of the joint venture project encompasses the purchase of the property through the construction of the Units and the transfer of entitlements to the joint venturers. For GST purposes a joint venture is not an entity and so each joint venturer must individually account for their obligations under the GST Act. As such we look to your activities and whether you are carrying on an enterprise.

A beneficiary of a bare trust may carry on an enterprise involving an asset held on trust by the bare trustee. GSTR 2008/3 states:

40. The definition of a 'taxable supply' concerns itself with supplies made in the course of an enterprise…if T transfers legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

41… There is nothing in the GST Act requiring legal title to the assets of an enterprise to be held or dealt with by the entity carrying on the enterprise, in order for taxable supplies or creditable acquisitions of the assets to be made.

You entered into the joint venture for the purpose of acquiring a residential townhouse for leasing. Leasing meets the definition of enterprise as defined by section 9-20(1)(c) and you will therefore be carrying on an enterprise for the purposes of the GST Act.

'Carrying on' an enterprise is defined as including doing anything in the course of or the commencement of the enterprise. Activities that are part of the process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. The partition of an asset which has a connection with an enterprise and is applied in that enterprise would be in the course of furtherance of that enterprise, in this case, the leasing enterprise.

Paragraph 57 of GSTR 2009/2 states:

57 …if land is applied or intended to be applied in an enterprise carried on by a co-owner, a supply of that co-owners interest in the land under a partition by agreement …is in connection with the enterprise and is a supply in the course or furtherance of that enterprise.

The principles drawn from Example 6 in GSTR 2009/2 highlight that transfer of an interest can be in the course or furtherance of an enterprise being carried on. The transfer is connected with the enterprise. The principles are not limited to an enterprise of property development but apply in respect of any enterprise for GST purposes including a leasing enterprise, as in this case.

In participating in the joint venture you are undertaking activities in the course of the commencement of your enterprise of leasing. Accordingly, you satisfy paragraph 9-5(b).

Registration

Section 23-5 requires that an entity that is conducting an enterprise is required to be registered if its turnover meets or exceeds the registration turnover thresholds (currently $75 000).

As you are carrying on an enterprise we need to consider whether your GST turnover meets or exceeds the registration turnover threshold.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Of relevance in your case is your projected GST turnover.

Your projected GST turnover, at any particular time, is the value of all taxable and GST-free supplies that you have made, or are likely to make, during the current month and the next 11 months.

Paragraph 188-25(a) provides that when calculating your projected turnover you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether the supply of your interests under partitioning is excluded from the calculation of your projected GST turnover.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses what is regarded as a 'capital asset' at paragraphs 31 to 36.

Whilst not specifically defined for GST purposes, the term 'capital assets' generally refers to those assets that make up the profit yielding subject of an enterprise and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

Capital assets are to be distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business.

The supply under partition of your interest in land to the other Venturers constitutes the transfer of a capital asset for the purposes of section 188-25 and therefore will be disregarded when calculating your projected turnover.

As the supply of your partition interests is disregarded when calculating your projected GST turnover, your projected GST turnover will be below the GST registration turnover threshold and you are not required to be registered.

Accordingly, as all of the requirements of section 9-5 are not met you will not be making taxable supplies under the Agreement.

Question 4

How is the value of the taxable supply determined?

Detailed reasoning

Not applicable

Question 5

Will you make a taxable supply where you sell the property after 5 years?

Detailed reasoning

Section 40-65 provides that the sale of real property (residential premises) is input taxed. However, the sale of residential premises is not input taxed to the extent that the residential premises are new residential premises.

The term 'new residential premises' is defined under subsection 40-75(1) of the GST Act, and provides that residential premises are new residential premises if they:

(a) 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; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, where you use the unit only for the purpose of making input taxed supplies (i.e. residential rental) for a continuous period of at least 5 years from when the premises would otherwise have become new residential premises, they are no longer new residential premises. A subsequent sale of the unit would be a wholly input taxed supply.

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