Edited version of private advice

Authorisation Number: 1051553011221

Date of advice: 24 July 2019

Ruling

Subject: Sale of property

Question 1

Is the sale of the property a taxable supply?

Answer

Yes, the sale of the property is a taxable supply.

Question 2

Is GST payable on the sale of the property?

Answer

Yes, GST is payable on the sale of the property.

See reasons for decision below for who (the entity) is liable for GST.

Relevant facts and circumstances

You together with your partner purchased a vacant block of land (property) with the intention of constructing your primary place of residence.

Before any development applications were lodged for permission to construct a house at the property and any construction work commenced, some personal issues arose where you could no longer build the property as intended by you and your partner.

However you and your partner intended to proceed constructing the residence at the property.

You and partner required financial assistance to build the residence. Accordingly, you and your partner decided to enter into an agreement which was called a 'Joint venture agreement' (JV Agreement) with a third party to develop the property.

The JV Agreement stipulated that the property would be developed as a profit making venture. Further the Joint Venturers under the JV Agreement (namely, you, your partner and the third party) agreed to divide the profits derived from the venture in accordance with the JV Agreement.

You and your partner entered into a contract to sell the property to a third party for more than $XXX.

Relevant legislative provisions

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

Reasons for decision

Taxable supply

A taxable supply is defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 as follows:

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.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

It is necessary to determine the entity (the 'you') that is making the supply. Even though you have entered into a JV Agreement, what needs to be determined is whether there exists a GST Joint Venture. In this regard, the Goods and Services Tax Ruling, Goods and Services Tax: what is a joint venture for GST purposes? (GSTR 2004/2) states the following:

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. While it is expected that the other features will also be present, there may be circumstances where not all are present, for example in a joint venture established by statute there may not be a separate joint venture agreement. The reasons for this view are based on a consideration of the meaning of the term joint venture in the context of the GST Act, drawing on dictionary definitions, judicial comments and the definition of 'non-entity joint venture' in the GST Act, as discussed below. Paragraphs 30 to 41 elaborate on each of these features.

12.  The term joint venture is not defined in the GST Act. Accordingly, it takes its ordinary meaning having regard to the context in which it appears in the GST Act. The term is defined in the Butterworths Concise Australian Legal Dictionary (Second Edition) as:

An association of persons for particular trading, commercial, mining, or other financial undertakings or endeavours with a view to mutual profit. It is not a technical legal term with a settled common law meaning: United Dominions Corp Limited v. Brian Pty Ltd (1985) 157 CLR 1; 60 ALR 741. The association is usually for the participation in a single project rather than a continuing business. A joint venture may be carried out by way of a partnership, company, trust, agency, joint ownership, or other arrangement. It may include an activity carried on by a body corporate which was formed to carry on the activity by means of joint control or ownership or shares in the body corporate: (Cth) Trade Practices Act 1974 s4J(a).

......

17.  Non-entity joint venture' is defined as an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a)          under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

(b)          that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

Further, GSTR 2004/2 explains the differences between joint ventures and partnerships.

Considering the JV Agreement it is our view that it has the features of a non-entity joint venture as outlined in paragraph 17 of GSTR 2004/2.

Is the JV Agreement a partnership?

The fact that there is no partnership agreement does not preclude an arrangement being considered a partnership. For instance, Example 2 outlined in GSTR 2004/2 states, despite the fact that it was specifically stated that the arrangement between the parties is not a partnership, it has been concluded the arrangement had the characteristics of a partnership than a joint venture. Accordingly, even though the JV Agreement does not stipulate that it is a partnership and the arrangement is for a specific project, it is our view that the arrangement has been undertaken in the form of a partnership than as a joint venture. For example, the JV Agreement clearly states that it is the intention of the joint venturers to share the profits (which is the most vital requirement for the arrangement to be a joint venture). It is our view that you and your partner is one of the partners and the third party 'joint venturer' is the other partner of this partnership that undertook the development project.

Accordingly, the entity for the purpose of section 9-5 of the GST Act is the partnership of you and your partner as one partner and the third party joint venturer as the other partner (partnership).

Enterprise

Even though the venture undertaken under the JV Agreement may have been a one-off activity for the partnership, these activities undertaken (including the sale of property) are considered to be done by the entity in the course of its' enterprise of developing the property. Whilst you and your partner had an intention to develop the property for private and domestic purposes, at the time of entering into the 'JV Agreement' you were both were aware that the property will be sold for a profit as required under the JV Agreement. Further, the evidence provided suggests that the property was in fact sold after being built in line with the conditions placed under the JV Agreement. Accordingly, we do not consider that the activities of developing the property had any private or domestic flavour. The activity of developing the property with the intention of making a profit amounts to carrying on an enterprise.

The rest of the requirements of section 9-5 of the GST Act

The partnership is required to be registered for GST as the property was sold for more than the registration turnover threshold of $75,000. The property is located in Australia and thus is connected with the Indirect Tax Zone.

The sale of the property is not an input taxed supply of residential premises as the property is new residential premises. The sale of the property is not an input taxed supply under any other provision of the GST Act nor is a GST-free supply.

Accordingly, the sale is a taxable supply as it meets the requirements of section 9-5.

The partnership is required to pay GST on the sale of the property.

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