Edited version of your written advice

Authorisation Number: 1051345010901

Date of advice: 6 March 2018

Ruling

Subject: GST and transfer of interest in property

Question 1

Are you liable for GST in regard to the proposed transfer where Person C transfers their 1/3^rd interest in property situated at a specified location?

Answer

No

Question 2

If yes, are the buyers as individuals entitled to claim the relevant GST credit?

Answer

Not Applicable

Question 3

If yes, are the buyers as a resultant partnership entity entitled to claim the relevant GST credit?

Answer

Not applicable

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Person A, Person B and Person C (You) are registered for GST as a family partnership.

You carry on an enterprise of leasing commercial property situated at a specified location (the Property).

Person C intends to transfer their one third share in the Property to Person A and Person B. No written agreements or contracts between the parties have been entered into to date.

The parties intend to agree that the transfer/sale is to be the sale of a going concern and will include a statement as such in the Contract.

The parties have verbally agreed to engage an independent duly licenced Certified Real Estate Valuer to provide a relevant market valuation.

Upon the implementation of the transaction, the Property will be owned by Person A and Person B with each owner having an equal (half) share in the Property.

Prior to the settlement of the transfer, Person A and Person B will register for GST (as a partnership) and will continue to carry on the leasing of the Property.

The Property consists of X shops and is currently fully tenanted. The current tenants have been in the Property for many years and all of the original written lease agreements have expired and have not been renewed. All tenancies are continuing on the basis of the original leases.

Person A and Person B acquired the Property in joint names under a single contract in the mid-1980s as an investment (for letting purposes/receipt of rental income).

A number of years later, Person A and Person B discussed with Person C the likely sale by them to them of a 1/3^rd portion of the Property subject to provisos agreed upon by all three parties.

A written Contract for the sale of land was signed by the parties. The vendors being Person A and Person B and the purchaser being Person C.

You have held the Property for lease on a regular and continuous basis since that date.

Currently each partner has a one third interest in the Property.

The title of the Property is in the names of Person A and Person B as joint tenants and Person C as tenant-in-common with the other co-owners.

An oral agreement between family members, Person A, Person B and Person C, was made setting out specific provisos as to the holding of the Property by the co-owners, their rights and obligations to each other and rules of behaviour in certain cases. The main points are summarised as follows:

● Both Person B and Person C not to actively involve themselves in the management of the Property, unless absolutely necessary;

● Person A was authorised to manage the Property on behalf of all the co-owners;

● Person A to appoint real estate agents whenever needed for letting or collection of rents;

● Person A to make all decisions regarding the Property without reference to the other co-owners;

● Person A to act in all respects and manner for the mutual benefit of all the co-owners/family members;

● If ever any co-owner decided to sell his/her interest in the Property such interest to be firstly offered to the other co-owners and if a value/price cannot be assessed by them or agreed upon then a certified property valuer or two local real estate agents (one chosen by Person A and Person B and one by Person C) to be engaged for valuing such interest and that value will be the price for the sale;

● All parties agreed that any sale to an outsider would be vetted by the remaining co-owners and may be rejected on reasonable grounds;

● Any disputes among the co-owners to be referred to another member of the family or a recognised mediator for resolution, before legal action is taken.

All funds for the acquisition of the Property by Person A and Person B in the 19XX’s and by Person C a few years later were provided by all co-owners out of cash savings. No loans were entered into.

The joint activities of the co-owners are for the mutual benefit of all co-owners who also consider themselves a family.

The co-owners have authorised Person A to act on their behalf in all matters involving the Property.

Person A has, at times, appointed outside real estate agents for the letting, rent collection and management of individual lock-up shops on the Property. No real estate agent has ever had management control of the entire Property.

Typically, Person A personally does all things necessary relating to the leasing of the lock-up shops on the Property.

Person A manages the necessary repairs and maintenance of the Property.

Person A advertises, discusses and agrees with prospective tenants the terms of occupancies.

Person A liaises in all respects with existing tenants in all instances and for all reasons.

A joint bank account in all three names of the co-owners is used for all transactions involving the Property.

Income from the Property is paid directly, either from tenants personally or real estate agents, into the joint bank account of the partners.

All expenses relating to the Property are paid from the same bank account.

Any and all liabilities relating to the Property are paid from that same jointly held bank account.

In the situation sufficient funds are not available in the joint bank account to meet liabilities or expenses for the Property the usual course of events is for Person B to provide out of their savings the funds needed which are transferred into the joint bank account of the co-owners. Return of such temporary advances from Person B is made out of such joint bank account.

Typically Person A prepares Statements of Rents Received and Expenses on a monthly basis for Person C. A one third portion of net funds are remitted to Person C out of the joint bank account of the partnership.

Person C is registered for GST as an individual sole trader and carries on an enterprise in the medical field.

Person A is not registered for GST.

Person B is not registered for GST.

Person C did not acquire their interest in the Property in carrying on their existing enterprise in the medical field. Person C’s interest in the Property is not part of, nor owned by the business. The Property does not form part of the assets of the business and the resultant income from the Property is not part of the income of the business. Any and all income received from the Property by Person C since their acquisition is included in their personal income tax return under either ‘Rental’ or ‘Partnership’ income. Their share of net income from the Property is also banked into a separate personal bank account and not into the bank account of their business.

No single co-owner makes independent decisions with regard to the acquisition of an interest in this Property. All co-owners must agree to such decisions.

The co-owners do not act independently of each other in making decisions about their respective investment. All decisions are mainly made by Person A, or if needed, in consultation by all owners.

No co-owner, other than the authorised co-owner Person A, acts alone with respect to the appointment of a manager or agent for the Property. No co-owner acts in other ways independently in such appointments of managers or agents.

No co-owner can act and has never acted on their own behalf instead of and for the mutual benefit of all the co-owners. No co-owner acts primarily for their own benefit in any way. All acts by co-owners are for the benefit of all co-owners.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-40

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(b)

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supply you make. The term ‘taxable supply’ is defined in section 9-5. 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 Australia, and

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

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

The question in this case centres on the supply of an interest in property.

What is the entity structure – a partnership or each co-owner?

GST and the co-ownership of property is examined in Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6).

The term ‘partnership’ is defined for GST purposes as:

(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

(b) a limited partnership.

In your case, we consider the co-owners fall within the second limb of paragraph (a) of the definition above and is a partnership being an association of persons in receipt of ordinary income or statutory income jointly.

Such partnerships are referred to as a ‘tax law partnership’.

What is the enterprise being carried on?

The term ‘enterprise’ is defined in section 9-20 and includes a activity or 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. As such, we consider that the rental of the six units/shops on the Property constitute an ‘enterprise’ for GST purposes.

Who is carrying on the enterprise – the Partnership or each co-owner?

We need to determine whether it is the tax law partnership or each co-owner (in their own right) that carries on the enterprise. Paragraph 61 of GSTR 2004/6 provides that such a determination requires the objective evaluation of all the facts and circumstances of a case, including the conduct of the co-owners or the property. Paragraph 62 of GSTR 2004/6 lists a number of factors which may indicate that the enterprise is being carried on by the tax law partnership. Paragraph 66 of GSTR 2004/6 lists factors that may point to an enterprise being carried on by each co-owner in their own right, and not by a tax law partnership.

Paragraphs 81 to 84 of GSTR 2004/6 discuss tax law partnerships involving family members and present similar circumstances to your specific situation.

In your situation we consider it is the tax law partnership that is carrying on the leasing enterprise in relation to the Property (referred to in GSTR 2004/6 as an ‘enterprise partnership’).

Paragraphs 114 to 116 of GSTR 2004/6 provides that where a tax law partnership carries on an enterprise (i.e. the partnership is an enterprise partnership), supplies or acquisitions made by, or on behalf of, partners in a tax law partnership in their capacities as partners are taken to be supplies or acquisitions made by the partnership.

Given the above, we consider in this case that the reference to ‘You’ in section 9-5 and section 9-40 referred to above is a reference to the tax law partnership of Person A, Person B and Person C.

Is the supply by way of transfer of the interest in the Property a taxable supply?

As discussed previously with reference to section 9-5, a supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In your situation, the parties intend to agree that the transfer/sale is to be the sale of a going concern and a statement as such will be included in the agreement for the transfer of Person C’s interest.

Subsection 38-325(2) provides that for GST purposes, a supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

Once it is established that a supply is a supply of a going concern, subsection 38-325(1) provides that the sale of the going concern will be GST-free if:

● the supply is for consideration; and

● the recipient is registered or required to be registered; and

● the supplier and the recipient have agreed in writing that the supply is of a going concern.

Paragraphs 183 to 190 of GSTR 2004/6 discuss supplies (by an enterprise partnership) of an interest in income producing property. Paragraph 184 of GSTR 2004/6 provides that an enterprise partnership can carry on a leasing enterprise, in relation to each co-owner’s interest in the leased property, as part of a larger enterprise involving all the interests.

Paragraph 187 of GSTR 2004/6 states in part that a supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease.

In your case the Property consists of X shops and is currently fully tenanted. The current tenants have been in the Property for many years and all of the original written lease agreements have expired and have not been renewed. All tenancies are continuing on the basis of the original leases.

Goods and Services Tax Ruling GSTR 2002/5; Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the application of the going concern provisions for GST purposes and discusses circumstances involving periodic tenancies.

Paragraph 65 of GSTR 2002/5 provides that if upon expiration of a lease, the tenant is allowed to continue in possession pursuant to a short term periodic tenancy, the new periodic tenancy may be capable of assignment. A periodic tenancy means that the tenant pays rent to the landlord with reference to a period (for example, monthly) and therefore has a legally enforceable right to occupy the premises for the period. Paragraphs 69 and 70 (Example 9) of GTSR 2002/5 illustrate a scenario where there is a periodic tenancy (no written lease agreement), with the owner of the property considered to be supplying a going concern on the proviso that the current periodic tenancy has not terminated and will continue.

We consider your circumstances are similar with paragraph 65 (and as illustrated in Example 9) of GSTR 2002/5 and therefore consider in your case, paragraph 38-325(2)(a) has been satisfied.

Paragraph 188 of GSTR 2004/6 provides that paragraph 38-325(2)(b) will be satisfied where property is used in a leasing enterprise at the time of the supply (settlement), the enterprise partnership, being the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply as is the situation in your case. As such, subsection 38-325(2) has been satisfied.

In regard to subsection 38-325(1):

● the parties have verbally agreed to engage an independent duly licenced Certified Real Estate Valuer to provide a relevant market valuation in order to determine consideration for the transfer;

● prior to the settlement of the transfer, Person A and Person B will register for GST (as a partnership); and

● the sale contract will contain an written statement that the parties agree that the transfer/sale is to be the sale of a going concern.

Given the above, section 38-325 will be satisfied.

In summary, the transfer of the 1/3^rd interest in the Property will be a supply from one partnership (consisting Person A, Person B and Person C) to the newly formed partnership consisting of Person A and Person B.

The supply will be a GST-free supply of a going concern and as such GST will not be applicable to the transfer where the requirements of section 38-325 as discussed above are satisfied.

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