1051563224114 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1051563224114

Date of advice: 16 August 2019

Ruling

Subject: General law partnership - trading stock - assessable income and deductions - GST registration requirement - making taxable supply - entitlement to input tax credit - margin Scheme

Question 1

Will A and B enter into a general law partnership (GLP) upon entering into the Development Agreement (DA)?

Answer

Yes

Question 2

Does land owned by B become trading stock of the GLP upon entering into the DA under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

If the GLP holds the land as trading stock, can the GLP elect to hold the land at market value under section 70-45 of the ITAA 1997?

Answer

Yes

Question 4

If B retains ownership of the land, how is the net income or loss of the GLP to be calculated?

Answer

The net income of the GLP is to be calculated in accordance with section 90 of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 5

Is the GLP required to be registered for GST purposes?

Answer

Yes

Question 6

Is the GLP entitled to input tax credits (ITCs) under subsection 11-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) in relation to the acquisition of Land and the services for which the following amounts are paid:

(a) Development Fee

(b) Project Costs

(d) Offshore Selling Agent Fee.

Answer

(a) No

(b) Yes

(d) Yes

Question 7

In relation to the sale of each Lot, is the GLP:

(a) making a taxable supply under section 9-5 of the GST Act?

(b) entitled to apply the margin scheme under Division 75 of the GST Act when transferring the land to the GLP?

Answer

(a) Yes

(b) Yes - subject to whether the supply of land by the B to the GLP was under the Margin Scheme.

Entity B

Question 8

If B is taken to transfer the land to the GLP, is the B:

(a) making a taxable supply under section 9-5 of the GST Act?

(b) making an input taxed financial supply under Division 40 of the A New Tax System (Goods and Services Tax) Regulations 1999 (the GST Regulations)?

Answer

(a) Yes

(b) No

Question 9

Is B entitled to input tax credits under subsection 11-5 of the GST Act for acquisitions in relation to:

(a) reimbursement of Project Costs incurred by the Project Manager?

(b) payment of the Development Fee to A?

Answer

(a) No

(b) No

Entity A

Question 10

Is A entitled to claim a deduction for the Participation Fee paid to the B pursuant to the DA, under section 8-1 of the ITAA 1997?

Answer

Question 11

Does A derive assessable income under section 6-5 of the ITAA 1997 when, pursuant to the DA, B pays A 50% of the net proceeds from the sale of each Lot?

Answer

Yes

Question 12

Is the Participation Fee paid by A pursuant to the DA:

(a) a taxable supply under section 9-5 of the GST Act, and

(b) consideration for the supply?

Answer

(a) No

(b) No

Entity C

Question 13

Is C:

(a) entitled to claim a deduction under section 8-1 of the ITAA 1997 in the year it incurs Project Costs pursuant to the Project Management and Exclusive Selling Agency Agreement (PMESAA)?

(b) required to return assessable income under section 6-5 of the ITAA 1997 amounts received as reimbursements from the Project Account for Project Costs?

Answer

(a) Yes

(b) Yes

Question 14

Is C entitled to input tax credits under section 11-5 of the GST Act for Project Costs it incurs pursuant to the PMESAA?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

1. C is a broad acre residential land developer.

2. C is the head company of the consolidated group ('C Group') for income tax purposes.

3. A is owned 50% by C and 50% by an unrelated party.

4. B is the owner of the Property.

5. A, B and C have entered into a DA to develop the Land. Pursuant to the DA, the following was agreed:

(a) B (the Owner) is to retain ownership of the Property for the duration of the Project

(b) A (the Developer) is to carry out the Project

(d) B will appoint C as its exclusive selling agent.

6. Nothing in the DA, or any other Transaction Document, constitutes or is to be treated as creating a partnership, tax law partnership for income tax or GST purposes or a joint venture between any of them.

7. A and B must establish the Management Committee to manage the Project and is comprised of two members each from A and B. Each committee member may vote in relation to any resolution and their vote is binding on A and B. A will have one vote and B will have one vote. All decisions of the Management Committee will be made or passed by unanimous resolution. If the Management Committee is unable to reach unanimous resolution then the parties must follow the process outlined in the DA.

8. The functions and duties of the Management Committee are set out in the DA and includes:

(a) may act for and bind A and B in regard to any matter in relation to the Project including the sale of the Lots

(b) to maintain the day to day management and control of the Project and its operation

(d) authorise the opening and operation of bank accounts for the Project

(e) setting the Sale Price that is to apply for each Lot

(f) approving sale contracts for the Lots based on recommendations from Project Manager

(g) approve payments to be made to A and B pursuant to the DA.

9. Other duties of the Management Committee include:

(a) must agree on the sale price for each lot

(b) must take out all insurance required by law or that the Committee Members determine is or would be prudent for an entity carrying on a project like the Project, or that is otherwise desirable or necessary.

10. A must pay an upfront Initial Contribution, called the Participation Fee (excluding GST), to B within ten business days after the Condition Subsequent is satisfied and after receiving a tax invoice from B. B must open a Project Account in its own name. The Project Account is to be used by A and B for the Project. The Initial Contribution, A's and the B's contributions to Project Costs, and the proceeds of sales of Lots must be deposited to the Project Account.

11. The DA states:

The parties acknowledge that:

(i) the Owner and the Developer are each making equivalent equity contributions to the Project;

(ii) the Owner's equity contribution is the Property, the value of which the Owner and Developer have agreed is equal to the amount of the Participation Fee (excluding GST); and

(iii) the Developer's equity contribution is the Participation Fee.

12. The 'Project' means the development of the Property and the marketing and Sale of the Lots. The Project is to be carried out by A and B in accordance with each Transaction Document and during the term.

13. 'Property' means the property specified in Item 10 of Schedule 1 and includes all improvements, rights and entitlements attaching to the Property, whether amalgamated or subdivided.

14. A and B will each hold a 50% Project Interest for the life of the Project. The parties acknowledged that the Property will continue to be owned by B throughout the life of the Project and the Property does not form part of the Project Interest held by A.

15. 'Project Interest' means each of A's and B's right, title and interest in and to this document, each other Transaction Document, the Project and the Project Assets. 'Project Asset' means:

(a) the Property, but without in any way affecting the Owner's sole and continuing ownership of the Property;

(b) the benefits of and the rights under this document and each other Transaction Document; and

(c) any other property and assets of any kind (including, cast at bank or on deposit and debtors) created or acquired for the purposes of the Project or in the course of carrying it out, excluding property which is owned by the Owner or the Developer, respectively, and which they (or either of them) make available to, and for the use of, the Project.

16. A and B acknowledge and agree that they are each liable for 50% of the Project Costs. For the Project Costs incurred to the limit of the Initial Contribution, B's 50% share is discharged by making the Property available for the Project and for A's 50% share is discharged by the payment of the Participation Fee. For Project Costs incurred in excess of the limit of the Initial Contribution, B will fund its 50% share by injection of additional equity and A will fund its 50% share by injection of additional equity or by debt financing. If A elects to use debt financing, it must be approved by the Management Committee before being established and the Property cannot be used as security. Both parties must deposit money into the Project Account once the Initial Contribution has been fully drawn to discharge their respective liabilities for Project Costs Claims.

17. B authorises and directs C, as the Project Manager, to incur and pay all Project Costs. All Project Costs are to be paid by B from the Project Account and is to reimburse C for Project Costs properly incurred by it in accordance with the PMESAA. Cheques drawn from the Project Account must be signed jointly by one representative of C and a Committee Member that is not an associate of C.

18. Pursuant to the PMESAA, B will appoint C to:

(a) provide Project Management Services, and

(b) sell or procure the sale of the Lots arising from the subdivision of the Property as the exclusive selling agent.

19. For C agreeing to carrying out these services, B agreed to pay C the following fees:

(a) the Administration Fee is an amount of x% (plus GST on that amount) of the total Sale Price of all Lots sold in the Project that is payable in accordance with the PMESAA

(b) the Project Management Fee is an aggregate amount equal to x% (plus GST on that amount) of the Sale Price of each Lot that is payable in accordance with the DA

(c) the Selling Fee is an aggregate amount equal to x% (plus GST on that amount) of the Sale Price of each Lot that is payable in accordance with the DA.

20. A clause of the DA states:

The Owner must make the following payments in the following order of priority from the gross proceeds from the Sale of a Lot:

(i) firstly, to the Owner: any GST in respect of the Sale which the Owner is obliged by law to remit to the ATO (for the Owner to remit that GST to the ATO);

(ii) secondly, to the Owner: settlement interest, outgoings adjustments and other settlement costs;

(iii) thirdly, to the Project Manager: the Project Management Fee payable pursuant to the PMESA Agreement;

(iv) fourthly, to the Project Manager: the Selling Fee payable pursuant to the PMESA Agreement;

(v) subject to clauses x and x, fifthly, to the Developer: an amount equal to 50% of the Net Proceeds (Development Fee) in consideration for and in recognition of the Developer's contribution to the Project; and

(vi) subject to clauses x and x, sixthly, to the Owner: the balance of the gross proceeds from the sale of that Lot as revenue arising from the sale of the Lots.

21. All three parties to the DA must indemnify each other party (each a Beneficiary) against any loss or claim the Beneficiary suffers or incurs arising from or in connection with:

(a) any breach by a party of any of its obligations under the DA or any other Transaction Document, and

(b) the negligence, dishonesty, fraud or wilful misconduct of a party or any of its officers, employees, contractors or agents.

Information provided

22. You have provided the following documents in relation to the ruling request:

(a) your original Application for Private Ruling

(b) supplementary information provided on various dates, and

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 6-10

Income Tax Assessment Act 1997, section 6-15

Income Tax Assessment Act 1997, section 8-1

Income Tax Assessment Act 1997, paragraph 8-1(2)(a)

Income Tax Assessment Act 1997, section 10-5

Income Tax Assessment Act 1997, section 17-10

Income Tax Assessment Act 1997, section 17-30

Income Tax Assessment Act 1997, subsection 20-25(1)

Income Tax Assessment Act 1997, section 20-20(3)

Income Tax Assessment Act 1997, subsection 70-10(1)

Income Tax Assessment Act 1997, section 70-30

Income Tax Assessment Act 1997, section 70-35

Income Tax Assessment Act 1997, section 70-45

Income Tax Assessment Act 1997, subsection 70-45(1)

Income Tax Assessment Act 1997, paragraph 118-130(1)(a)

Income Tax Assessment Act 1936, section 90

Income Tax Assessment Act 1936, section 92(1)(a)

A New Tax System (Goods and Services Tax) Regulations 1999 Division 40

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

A New Tax System (Goods and Services Tax Act) 1999, subsection 995-1(1)

A New Tax System (Goods and Services Tax Act) 1999, subsection 11-5

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

A New Tax System (Goods and Services Tax Act) 1999, Division 75

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Will the Developer (A) and B enter into a GLP upon entering into the DA for the land development?

Summary

By entering into the DA to develop the land, A and B will enter into a GLP.

Detailed reasoning

1. Section 7 of the Partnership Act 1895 (WA) (Partnership Act) states:

(1) Subject to subsection (3), partnership is 'the relation which subsists between persons carrying on a business in common with a view of profit'.

(2) In deciding whether a partnership does or does not exist in any particular case, the court shall have regard to the true contract and intention of the partners as appearing from the whole of the facts of the case.

(3) Partnership does not include the relation which subsists between -

(a) The partners in an incorporated limited partnership; or

(b) An incorporated limited partnership and its partners.

2. Section 8 of the Partnership Act sets out certain rules to apply in determining whether a partnership exists as follows:

(1) Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

(2) The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which, or from the use of which, the returns are derived.

(3) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent upon or varying with the profits of a business, does not of itself make him a partner in the business.

(4) The receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such.

(5) A contract for the remuneration of a servant or agent of any person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business, or liable as such, or give him the rights of a partner.

(6) A person who, immediately before the death of a deceased partner, was the spouse or de facto partner of the partner, or who is the child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business, or liable as such.

(7) The advance of money by way of loan to a person engaged, or about to engage, in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business, or liable as such. Provided that the contract is at the time of the advance entered into in writing and signed by or on behalf of all the parties thereto.

(8) A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not, by reason only of such receipt, a partner in the business, or liable as such.

3. Section 195-1 of the GST Act defines 'partnership' by reference to the definition of 'partnership' in subsection 995-1(1), which states:

partnership means:

(a) an association of person (other than a company or a *limited partnership) carrying on a business as partners or in receipt of *ordinary income or *statutory income jointly; or

(b) a limited partnership.

4. The income tax definition extends the meaning given to the word partnership in State and Territory Partnership Acts. According to the statutory definitions and in general law, a partnership is the relationship between persons carrying on a business in common with a view to profit. The definition of 'partnership' is therefore wider for income tax purposes, as persons only need to be in receipt of income jointly.

5. There are no statutory rules in the Income Tax Assessment Acts that assist in deciding whether persons are carrying on a business as partners. Therefore, whether a partnership exists is a question of fact. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

6. A partnership is an association of two or more persons carrying on a business together, with each contributing money, property, labour or skill, with the expectation to share in the profits and losses, rights and responsibilities about the business operations and management. The key elements of a GLP are that of 'carrying on a business' with a 'view to profit'. A joint tenancy, tenancy in common, joint property or part ownership of property, will not, of themselves, create a partnership in respect of anything so held or owned. Therefore, the fact that B retains ownership of the land does not mean that a GLP does not come into existence. What is important is A and B carry on a business together with a view to profit from the use of the property.

Carry on business as partners

7. Whether or not a taxpayer's activities amount to carrying on a business is a question of fact and degree and is ultimately determined by a weighing up of the taxpayer's facts and circumstances. It therefore has to be determined whether A and B are carrying on a business as partners.

8. The Commissioner, in Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8), sets out what is to be considered in deciding whether persons are carrying on business as partners. At paragraph 10 of TR 94/8, the following is stated:

the essential element for a partnership to exist is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties.

Conduct of the parties

9. TR 94/8 sets out a number of factors that we look at in deciding whether the conducts of the persons demonstrates that they are carrying on a business as partners. No single factor is decisive, although the entitlement to a share of net profits is seen as essential.

10. Paragraph 5 of TR 94/8 provides that the weight given to these factors varies with the individual circumstances of a case. The factors are not exhaustive, are considered objectively, and no single factor is decisive, although the entitlement to a share of the net profits is essential.

11. Each factor is discussed below.

Intention to enter into a Partnership

12. Paragraph 10 of TR 94/8 provides that the essential element when considering whether a partnership exists is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties.

13. Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. However, it will not be determinative in all cases. Even a declaration in an agreement between the parties not to form a partnership will be ineffective if all the indicia of partnership are present.

14. Paragraph 12 of TR 94/8 provides that a written or an oral agreement is accepted as prima facie evidence of an intention to act as partners. However, a written and signed agreement is not necessary to demonstrate an intention, as this agreement can be inferred from a course of conduct agreed to by all parties.

15. You are agreement with this view, as expressed in your Application for Private Ruling, where you state:

The question of whether a partnership exists for income tax purposes, is a question of fact, and is not determined by the description ascribed to it by the parties. This was affirmed in Radich v Smith (1959) 101 CLR 209 where McTiernan J said: "the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it".

16. You also advised that paragraph 14 of TR 94/8 says generally, a lack of intention to be in a partnership means that a partnership does not exist at law.

17. However, paragraph 15 of TR 94/8 goes on to state:

Mutual assent and intention must be demonstrated, but do not stand alone and must be assessed with all relevant circumstances including the conduct of the parties. (Jolley's Case).

18. You also referred to paragraph 19 of GSTR 2003/13 that states:

Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. A lack of intention to be in a partnership may mean that a partnership does not exist at law.

19. In addition, paragraph 20 of GSTR 2003/13 states:

However, an expression not to form a partnership, although a strong indication that the relationship is not a partnership will not be determinative in all cases. Even a declaration in an agreement between the parties not to form a partnership will be ineffective if all the indicia of a partnership are present. ...

20. Therefore, even though the DA states that no partnership is created as a result of A and B entering into the DA or any other Transaction Document, is not determinative that a partnership does not exist. What is necessary is to examine if a partnership has in fact been created by examining the course of conduct agreed to by both A and B.

Joint ownership of business assets

21. The DA defines 'Project Interest' to mean:

Each of the A's and B's right title and interest in and to this document, each other Transaction Document, the Project and Project Assets.

22. The DA defines 'Project Assets' to mean:

(a) the Property, but without in any way affecting the Owner's [B's] sole and continuing ownership of the Property;

(b) the benefits of and rights under this document and each other Transaction Document; and

(c) any other property and assets of any kind (including, cash at bank or on deposit and debtors) created or acquired for the purposes of the Project or in the course of carrying it out, excluding property which is owned by the Owner [B] or the Developer [A], respectively, and which they (or either of them) make available to, and for the use of, the Project.

23. It is your view that these clauses refer to each of A's and B's rights, and not their joint rights or interests, and that this excludes property owned by A or B.

24. Under general law, a partnership is not a separate legal entity distinct from the individual partners who comprise the partnership. Accordingly, the partnership does not own property in its own right; title to the partnership assets is legally vested in the partners, even though an individual partner may have no separate title to specific partnership assets. This view accords with the opinion expressed by the majority (Barwick CJ., Stephen, Mason and Wilson JJ.) of the Full High Court of Australia in F.C.T. v. Everett (1980) 143 CLR 440 at 446 (Everett Case):

Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership.

25. Therefore, the Everett Case is authority that although the DA expressly states that B will have sole and continuing ownership of the Property does not mean that A does not have a beneficial interest in any partnership asset. Whilst the joint ownership of business assets is indicative of a business partnership, it does not mean that a partnership does not exist, especially as a partnership cannot own property in its own right.

26. It is the Commissioner's view that the Property became a partnership asset upon the parties entering into the DA. Whilst the parties to the DA agreed that B continued to own the Property right up to the time it was sold as subdivided Lots, the Everett Case is authority for the view that each partner has a beneficial interest in the partnership assets. This view is supported by a clause of the DA, as B must not at any time during the term of the Project invite, consider, or accept any offers from anybody other than C or A to buy or take an option to buy all or part of the Property.

27. You are of the view that the Property is not a partnership asset, as B continued to own the Property. You refer to Harvey v Harvey (1970) 120 CLR 529 (Harvey Case) to support this view, as it makes it clear no partnership asset is brought into existence simply because money is spent on it.

28. In the Harvey Case the owner of the land formed a partnership with his brother and his brother's adult sons. An oral agreement was made whereby the partnership would carry on the pastoral business on the land, and expenses, including the cost of the improvements, were to be borne and profits were to be derived between the owner and the firm equally. There was no express agreement as to whether the land would be a partnership asset, but they were not treated as such in the books of the partnership. There was also no express agreement as to how improvements were to be dealt with in the partnership accounts. In the course of the partnership the land was substantially improved.

29. The court, by a majority, held that the land did not become at law or in equity an asset of the partnership, and that the additional value of the partnership property attributable to the improvements made to it in the course of the partnership business should not be taken into account in the final accounts of the partnership. There was no general principle, the majority said, that in the absence of an agreement a partner whose property had increased in value by the expenditure of partnership money is bound to allow the partners to share in the increased value.

30. In the Harvey Case, the basis for the decision that the land did not become a partnership asset was summed up by Menzies J at 553:

With great respect to the Chief Justice, however, I cannot agree with his finding that "Fonthill" did in equity become an asset of the partnership. One thing that seems to me to be clear is that "Fonthill" was to be retained by H. H. Harvey as his own. The partnership agreement was for the working of "Fonthill" but there was never any question that H. H. Harvey should retain it and that, at the end of the partnership, it should be available for his son, Robin, who, when the partnership was established, was a boy of six. This understanding was at the basis of the partnership and to treat "Fonthill" as a partnership asset would destroy it altogether. Were "Fonthill" a partnership asset it would, in the absence of some new agreement, have to be sold upon the determination of the partnership and the proceeds made available for distribution in the course of the winding up of the partnership...

31. The facts in the Harvey Case are distinguishable from yours in that in the Harvey Case, a farming business was being conducted on the land and any improvements made to the land were in conjunction with the farming business, and the farming land was never intended to be sold at the end of the farming business and was to be retained by the owner.

32. In contrast, in your case, a business of land development is being carried on in relation to the Property. A and B are contributing equal amounts to equity and to Projects Costs in relation to development and sale of the Lots. Further, the parties intend to sell all of the Lots as part of this development and the net proceeds from the sale of the Lots are to be split equally between A and B, or to A in accordance with the DA where a Default Termination Fee is to be paid.

33. The facts in Ex Parte Coral Investments Pty Ltd (1979) Qd. R. 292 (Coral Investment Case) are considered to be closer to your arrangement. In that case, W B Campbell J. determined that there was a partnership and that the legal owner of the land was holding it in trust for itself and the other party, for the purposes of the joint business enterprise.

34. The Coral Investments Case involved the Money Lending Act 1916 (Qld) and the question of partnership was central to the decision in the case. The applicant had contracted to purchase certain land with a view to creating a multi-storied building thereon, comprising a number of home units and a commercial centre. The applicant had difficulty in obtaining finance and approached the respondent for funds to finance the erection of the building on a joint venture basis between the two parties.

35. An agreement was reached between the two parties and all the terms of that agreement were contained in a joint venture deed that included the following:

· the respondent was to advance to the joint venture all joint venture costs up to $7.6M

· interest was to be paid on the principal monies advanced by the respondent

· to secure payment of the principal monies and interest the applicant was to execute a mortgage over the land and a floating charge over its assets

· sale proceeds and other income of the joint venture were to be applied:

· firstly, by way of payment of costs of the joint venture, then

· interest on the principal moneys advanced by the respondent, then

· as to other moneys and repayment of the principal money, then

· as to division of profits as prescribed (equally).

36. In relation to the partnership question, W B Campbell J said (at 296):

Here the applicant and the respondent agreed to share both profits and losses arising from the joint venture and, although the deed provides (2.2) that nothing in it shall be construed to constitute a party a partner, agent or representative of the other party, this does not mean that a partnership does not exist between them. The moneys advanced by the respondent are to be repaid out of the profits of the joint venture, the moneys forming part of the total joint venture return are to be repaid to the respondent in the first place (12.1), although the applicant is appointed the manager under the deed the respondent has the right to remove it as such in certain circumstances, the respondent is directly involved in the conduct of the business and has the major say in the decisions of the joint venture committee (10). A construction of the deed as a whole has persuaded me that the real nature of the transaction is one of partnership. For practical reasons the applicant remained the registered proprietor of the land but articles 16.1 and 17.1 show that it holds it as trustee for itself and the respondent for the purpose of the joint business enterprise...

37. Article 16.1 of the relevant deed in the Coral Investments Case provides that 'the land remains in the name of the applicant as registered proprietor for the duration of the joint venture'. A clause of the DA has a similar effect.

38. Article 20 of the relevant deed provided that 'no party to the deed shall sell or encumber any part of the land without the consent of the other', which is similar to a clause of the DA.

39. In the present case, the Property owned by B is not to be retained by it if the DA is to be terminated. A clause of the DA provides that, in the event of termination of the DA, A will be entitled to a Default Termination Fee which takes into account the value of the unsold lots.

40. The very nature of entering into the arrangement requires the Property is to become the Property of the business being carried on by the parties. Although the definition of Project Assets provides that it includes the Property 'but without in any way affecting the Owners sole and continuing ownership of the Property', this clause, like the 'no partnership' clause, is not a matter to be determined by the parties but by the 'construction of the deed'.

41. In view of the fact that there is a sharing of proceeds from the sale of the Lots, that B is not able to sell or encumber the land without the consent of A, and A is entitled to a Default Termination Fee which takes into account the value of the unsold portion of the Lots, then using the above reasoning from the Coral Investments Case, B is holding the Property as trustee for itself and A for the purpose of the joint business enterprise.

42. Whilst the DA states that B owns the Property, the construction of the DA evidences that the Property was to be held in trust for the benefit of both A and B and therefore is indicative of the existence of a partnership.

Registration of business name

43. Based on your representations to date, there is no intention to register a business name. Although a positive factor in determining existence of a partnership, registration of a business name is not essential.

Joint bank account and power to operate it

44. Whilst the Project Account is to be opened in the name of B, the DA provides:

(a) the Management Committee (i.e. A and B jointly) authorises the opening and operation of bank accounts for the project

(b) A's Initial Contribution, A's and B's contributions to Project Costs and the proceeds from the sale of Lots must be deposited to the Project Account

(d) cheques drawn from the Project Account must be signed jointly by one representative of Project Manager and a Committee Member that is not an associate of Project Manager.

45. Although the Project Account is to be opened solely in B's name, and not in joint names, the Project Account is to be used by A and B only for the Project and requires all cheques in relation to the Project to be signed jointly by a representative from B and C. Whilst the Project Account is to be opened in the name of the B, all funds deposited into the Project Account that is used to pay all Project Costs come equally from A and B. Further, whilst all Project Costs are to be paid by B from the Project Account, any withholding of Project Cost Claims must be resolved firstly between B and C, and if no agreement is reached via the Disputes Clause. Therefore, whilst the Project Account must be solely in the name of B, B does not have sole control of the account which supports that the parties are conducting a business in partnership.

46. You advised that these measures are normal internal controls and are not indicative of a partnership. However, we disagree and think that an entity's normal internal controls would not give a creditor authority to sign cheques drawn on the entity's bank account.

Extent to which parties involved in the conduct of business

47. You advised A has only a minor contribution to the Project, i.e. to pay to the B 50% of the Project Costs and attend the Committee Management meetings for a few hours a month at the most.

48. The DA evidences that the 'contribution' A is providing, aside from the equity and to Project Costs, is as a member of the Management Committee. A clause of the DA sets out functions and duties of the Management Committee that clearly shows the importance of this committee to how the development, and therefore the conduct of the business, is to be carried out and implemented.

49. The DA includes the following in relation to the conduct of the business.

(a) A and B will each hold a 50% Project Interest for the life of the Projectand are each liable for 50% of the Project Costs

(b) A and B will jointly appoint C as the Project's exclusive Project Manager and Selling Agent

(c) A and B must establish the Management Committee to manage the Project. A and B each contribute two Management Committee members, and quorum of the Management Committee must include at least two committee members, at least one of each of whom represents each of A and B, and A and B will have one vote

(d) all decisions (except where otherwise specified) must be made or passed by unanimous resolution of the Management Committee members present at the meeting

(e) the Management Committee may act for and bind A and B in regard to any matter in relation to the Project including the Sale of Lots. A Committee Member's vote will be binding on A and B appointing that Committee Member

(f) the functions and duties of the Management Committee are to maintain day to day management and control of the Project and its operation

(g) the Management Committee must:

(i) agree on the Sale Price for each Lot

(ii) take out all insurance required by law or that the Committee Members determine is or would be prudent for an entity carrying on a project like the Project, or that is otherwise desirable or necessary

(iii) approve and adopt the business plan, budget and Project Program, including any revisions, and

(iv) approve the making of the payments referred to in the clauses (Development Fee to A and balance of the gross proceeds from the Sale of the Lots to B) in accordance with the Budget and Business Plan.

50. These factors demonstrate that A has extensive, and not minor, involvement in the business, including equal input into the most significant decisions and actions of the business. Thus, these indicate the existence of a partnership between A and B.

Extent of capital contributions

51. A clause of the DA states:

(a) A and B are each making equivalent equity contributions to the Project

(b) B's equity contribution is the Property, and

52. The DA is silent as to any return of this equity contribution to A.

53. The sharing by the parties of contributions to assets and capital weighs in favour of the existence of a partnership. Thus, that A and B make equal equity contributions is indicative of the existence of a partnership.

Entitlements to a share of net profits

54. A clause of the DA states that A is to receive an amount equal to 50% of the Net Proceeds (Development Fee) in consideration for and in recognition of the A's contribution to the Project. Whilst the amount received by A is referred to as a Development Fee, it is calculated as a 50% share of the net profits of the business. It is the Commissioner's view that A is entitled to 50% of the net profits of the business, as they are putting in an equivalent equity contribution of $x million to the Project and is liable to contribute 50% of the Project Costs. Further support for this view is obtained from the following:

(a) the Business Plan states 'Net sales proceeds after payment of all project costs would be split 50/50 between the A and B as joint venture partners.'

(b) B is to receive the balance of the gross proceeds from the Sale of that Lot as revenue arising from the sale of the Lots.

(c) there is no evidence in either the DA or the PMESAA that A is to perform any development services, or fee for service, in return for payment by B of a Development Fee.

55. Whether the clauses of the DA that refers to 'net proceeds' or 'gross proceeds' is not considered relevant, as it is clear from Annexure C that it could equally be described as 'net profit' or a 'share of the profits'. The quantum of the share of profits that each party receives is tied to the successful development, subdivision and sale of Lots resulting from carrying out this Project. Thus, the Development Fee paid to A is in fact A's share of the profits of the Project.

56. This view is supported by the relevant clauses dealing with Termination of the DA. A clause provides that upon termination of the DA, A will be entitled to the Default Termination Fee to be calculated and paid in accordance with a clause of the DA. The formula in this clause takes into account the market value of the Project Assets, the Net Proceeds from the Sale of Lots and costs incurred and unpaid at the Default Termination Date.

57. It is your view that B pays the Developer a Development Fee and that the fee is not a share of profits from development of the land. We do not agree with your view for the reasons set out above.

Business records

58. A clause of the DA provides that A and B must carry out the Project in accordance with the Business Plan, the Budget and the Project Program, and any revisions that has been approved by the Management Committee. A business plan and business records, budgets and financial statements are kept to determine the profit which will be distinct from their other activities, so that one can ascertain the respective share of profits.

59. The requirement to keep these business records, separate from the other activities of both A and B, is indicative of the existence of a partnership.

Trading in joint names and public recognition of the partnership

60. Whilst there does not appear to be any evidence that A and B are trading in joint names, there is evidence that there is public acknowledgement, if not public recognition, of a partnership:

(a) the 'Business Plan' states that binding the development structure model will be two agreements between B and the project development partner. The model includes a special purpose vehicle that will partner B in developing the project and also be the legal entity for its equity contribution (participation fee) to the development project. The relationship between project partners will be governed by a DA. The Project Manager will be acting under the instruction of the joint venture partners.

(b) B's website includes the following statement:

2018 - Following an extensive procurement process B entered into a joint development partnership with the C Group

61. As A and B assert they are not in partnership, it is reasonable to expect that there would not be public recognition of a partnership. Accordingly, this aspect is to be given less weighting in determining if a partnership is indicated.

62. You advised as to the formation of a GLP that A would be undisclosed to most third party entities, except possibly banks and external finance providers.

Conclusion

63. Subsections 8(1) and (3) of the Partnership Act provide that, of themselves, neither common ownership of property creates a partnership, nor the receipt of a share of the profits of a business makes the recipient a partner.

64. However, based on the DA entered into between the parties and other information provided to date, and with regard to the above factors and consistent with the requirements of subsection 7(2) of the Partnership Act, the evidence is that the parties are/will be carrying on a business (to develop, subdivide and sell land) with a view to sharing in the net profits arising from the sale of the Lots.

65. It is therefore the Commissioner's view that the relationship between A and B is that of a GLP. Thus, the Commissioner considers that the operations to be entered into and carried out by A and B, in terms materially identical to the terms of the DA, constitute a partnership as defined in subsection 995-1(1).

Question 2

Does the land owned by B become trading stock of the GLP upon entering into the DA under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Property owned by B will become trading stock of the GLP when the DA is entered into.

Detailed reasoning

66. B held the Property as a CGT asset before entering into the DA.

67. The Commissioner is of the view that the Property became a partnership asset when the parties entered into the DA.

68. As B is an entity that is exempt from income tax there will be no CGT consequences for entering into the DA or for the Property becoming a partnership asset.

69. It is the Commissioner's view that the date the parties entered into the DA is when B changed its intention and committed themselves, and the relevant Property, to be part of the property development business.

70. It therefore has to be determined whether the Property upon becoming a partnership asset became trading stock of the GLP.

71. Subsection 70-10(1) provides that trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) livestock.

72. The High Court has accepted that land can be trading stock (see Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (1978) 138 CLR 210, which considered the meaning of trading stock in the ITAA 1936.

73. The Commissioner's view on when land is treated as trading stock is set out in Taxation Determination TD 92/124, which states:

1. Land is treated as trading stock for income tax purposes if:

- It is held for the purpose of resale; and

- A business activity which involves dealing in land has commenced.

2. Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

Held for the purpose of resale

74. Land is to be treated as trading stock if it is held for the purposes of resale. This issue was discussed by Finn J in R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation 2006 ATC 4472 at 4480:

The significance of this case for present purposes is that it is authority for the propositions that (i) land acquired for the purpose of development, subdivision (or strata division) and sale by allotments (or lots) can constitute trading stock of a business having that purpose irrespective of whether the land has been so developed and subdivided; and (ii) that business will be carried on for so long as the taxpayer engaged in the effectuation of the purpose of development, etc of the land. The emphasis in St Hubert's Island on the need to have the relevant intention of sale at the time of acquisition of the property in question is, though' without significance for s 70-10 purposes which as I have earlier noted links the intention or purpose of sale with the purpose (or purposes) for which the property is held. (Italics are from the original.)

75. Land will be held for the purpose of sale where the sale of land is a normal operation in the course of carrying on a business.

76. The Commissioner accepts that B held the Property as a capital asset from the time of acquisition. A and B entered into the DA for the purposes of carrying out the Project. The 'Property' means the development of the Property and the marketing and sale of the lots.

77. It is therefore the Commissioner's view that upon entry into the DA the Property would then be 'held' for the purpose of resale, regardless of the fact the Property would not, at that time, be in the condition to be sold into Lots.

Business activity has commenced

78. TD 92/124 provides that a business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

79. As determined earlier, the Commissioner is satisfied that both A and B have entered into a business through the GLP for the purpose of developing the Property.

80. Upon entry into the DA, required both A and B to carry out or do certain activities, functions and duties that included carrying out the Project, formation of a Management Committee, appointing C as the Project Manager, entering into the PMESAA and the sale of the Lots. It is the Commissioner's view that by entering into the DA and the PMESAA a business activity commenced and was designed to lead to the sale of the Lots.

Question 3

If the GLP holds the Property as trading stock, can the GLP elect to hold the Property at market value under section 70-45 of the ITAA 1997?

Summary

81. In working out the net profit of the partnership, the partnership can elect to value the Property at the end of an income year at its market selling value under subsection 70-45(1).

Detailed reasoning

82. As it is the Commissioner's view that the Property is trading stock of the GLP, under subsection 70-45(1), the GLP is able to elect to value the trading stock at the end of the income year at its:

(a) cost

(b) market selling value, or

Note: An item's market selling value at a particular time may not be the same as its market value.

83. The GLP is only required to make this election at the end of the income year.

84. The choices given to a taxpayer in valuing trading stock on hand are clearly explained by Fullagar J in Australasian Jam Co Pty Ltd v FC of T 10 ATD 217; (1953) 88 CLR 23:

The section in terms allows to the taxpayer considerable freedom of choice. He may adopt one method of valuation for one part of his stock, and another method for another part. And he is not bound to adhere from year to year to any method of valuation for any part of his stock: he may change the basis as to the whole or any part of his stock from year to year at will. On the other hand, the section is imperative in that it requires him to adopt for each article of his stock one or other of the three prescribed bases of valuation. He is not at liberty to adopt some other basis of his own.

85. Market selling value does not mean the amount realisable as the result of a break up or forced sale but contemplates a sale or sales in the ordinary course of the taxpayer's business.

86. In Australasian Jam Co Pty Ltd v FC of T (at 221), Fullagar J in discussing the expression 'market selling value', said:

But it is not to be supposed that the expression 'market selling value' contemplates a sale on the most disadvantageous terms conceivable. It contemplates, in my opinion, a sale or sales in the ordinary course of the company's business - such sales as are in fact effected. Such expressions in such provisions must be interpreted in a common sense way with due regard to business realities, and it may well be - it is not necessary to decide the point - that, in arriving at market selling value, it is legitimate to make allowance for the fact that normal selling will take place over a period. But the supposition of a forced sale on one particular day seems to me to have no relation to business reality.

87. Subsection 70-45(1A) excludes from an item's market selling value any GST input tax credit to which the taxpayer would be entitled if the taxpayer had acquired the item at the end of the income year solely for a creditable purpose.

Question 4

If B retains ownership of the Property, how is the net income or loss of the GLP to be calculated?

Summary

The net income of the GLP is to be calculated in accordance with section 90 of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

88. 'Ownership' is not defined in either of the Income Tax Assessment Acts, although the meaning of 'ownership interest in land' is set out in paragraph 118-130(1)(a) as 'you have a legal or equitable interest in it or a right to occupy it'.

89. This accords with the Full High Court of Australia view expressed in the Everett Case:

Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership.

90. It is your view that B will retain ownership of the Property. However, it is the Commissioner's view that B only retains legal ownership of the Property and upon entering into the DA the Property became a partnership asset. As previously expressed, a partnership is not a separate legal entity distinct from the individual partners who comprise the partnership. Accordingly, a partnership cannot own property in its own right. Title to the partnership assets is legally vested in the partners, even though an individual partner may have no separate title to specific partnership assets.

91. As determined previously, the Property became trading stock of the GLP upon entering into the DA.

92. Section 90 of the ITAA 1936 states:

net income, in relation to a partnership, means the assessable income of the partnership calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions except deductions allowable under section 290-150 or Division 30 it the ITAA 1997.

93. It is therefore necessary for the GLP to determine the assessable income of the partnership. 'Assessable income' has the meaning given by sections 6-5, 6-10, 6-15, 17-10 and 17-30. In ascertaining the assessable income of the partnership requires consideration of at least sections 6-5, 8-1, 10-5 and 70-35.

Question 5

Is the GLP required to be registered for GST purposes?

Summary

The GLP is required to be registered for GST.

Detailed reasoning

94. Applying paragraph 184-1(1)(e) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the GLP is an entity in its own right for GST purposes. This means that, for GST purposes the GLP is to be treated separately from its two partners, A and B.

Voluntarily Register for GST

95. Under section 23-10 of the GST Act, you can voluntarily register for GST if you are carrying on an enterprise. This is regardless of whether or not your GST turnover is at or below the registration turnover threshold.

96. Under paragraph 9-20(1)(a) of the GST Act, an enterprise includes an activity or activities done 'in the form of a business'. As established in Question 1, it is our view the parties have come together to form a GLP to carry on a business to develop, subdivide and sell land with a view to sharing in the profits. Therefore, the Commissioner is satisfied that you are carrying on an enterprise for the purposes of paragraph 9-20(1)(a) and you may voluntarily register for GST.

97. The GLP can register for GST from the time it undertakes activities in the commencement of its enterprise. Paragraph 17 of GSTR 2003/13 (Goods and services tax: general law partnerships) states:

The execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time.

98. We consider the GLP was formed and the enterprise commenced at least by the date of execution of the DA. However, if you can establish that the GLP was formed and the enterprise commenced before the date the DA was executed, then you may choose to register from the earlier time. For example, if you established that the partnership enterprise commenced at the time A and B commenced preparatory steps toward the Project, such as conducting due diligence and seeking planning approvals, you may choose to retrospectively register for GST from that time.

Required to be registered

99. Section 23-5 of the GST Act sets out who is required to be registered. It states

You are required to be registered under this Act if:

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

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

100. As discussed above the Commissioner is satisfied that you are carrying on an enterprise for the purposes of paragraph 9-20(1)(a) of the GST Act.

Turnover threshold

101. Section 23-15 of the GST Act specifies the registration turnover threshold. It states:

Your registration turnover threshold (unless you are a non-profit body) is:

(a) $50,000; or

(b) Such higher amount as the regulations specify.

102. Regulation 23-15.01 of the GST Regulations prescribes a higher registration turnover threshold of $75,000.

103. Your 'current GST turnover' and your 'projected GST turnover' are relevant to whether you have a GST turnover that meets, or exceeds a turnover threshold.

104. Paragraph 17 of GSTR 2001/7 (Goods and services tax: meaning of GST turnover, including the effect of section 188-25 of the GST Act on projected GST turnover) states:

Under subsection 188-10(1), you meet a particular turnover threshold if your projected GST turnover is at or above the threshold. You also meet a turnover threshold if your current GST turnover is at or above the turnover threshold and it is not possible to conclude that your projected GST turnover is below the threshold. This will occur if your projected GST turnover is also above the relevant threshold, or if your circumstances are such that it is not possible to calculate a projected GST turnover. In either of these situations, the Commissioner cannot be satisfied that your projected GST turnover is below the turnover threshold.

105. You will be required to register for GST if your current or projected GST turnover is above the turnover threshold.

106. In relation to current GST turnover, subsection 188-15(1) of the GST Act states:

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

107. In relation to projected GST turnover, subsection 188-20(1) of the GST Act states:

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are input taxed; or

(b) (b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

108. Paragraph 62 of GSTR 2003/13 states:

Where its projected GST turnover meets the registration turnover threshold, a partnership is required to be registered upon formation. The registration turnover threshold is $75,000 (or a higher amount as specified in the GST regulations).

109. There are supplies that are excluded from the calculation of projected GST turnover. In relation to supplies constituting the transfer of ownership of capital assets, paragraph

110. 188-25(a) of the GST Act states:

In working out your projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours...

111. As the subdivided Lots are revenue assets, not capital assets, the supplies are not disregarded from the calculation of your projected GST turnover.

112. Based on the information provided in your Business Plan, your projected GST turnover will exceed $75,000 12 months before you expect to sell the first Lot (given that the sale of the first Lot will be the first supply that must be taken into account). This will be the time when your GST turnover meets the registration turnover threshold for the purposes of paragraph 23-5(b) of the GST Act. If you have not voluntarily registered for GST by this time, then you will be required to be registered for GST at this time.

Question 6

Is the GLP entitled to input tax credits (ITCs) under subsection 11-5 of the GST Act in relation to the acquisition of Land and the services for which the following amounts are paid:

(a) Development Fee

(b) Project Costs

(d) Offshore Selling Agent Fee.

Summary

The GLP is only entitled to claim ITCs for creditable acquisitions that it makes in the course of carrying on its property development enterprise and when it possesses valid tax invoices issued by the supplier.

Detailed reasoning

113. The GLP is only entitled to ITCs for creditable acquisitions that it makes in the course of carrying on its property development enterprise. However, the entitlement to claim ITCs is subject to a time limit.

114. Section 11-20 of the GST Act states:

you are entitled to an ITC for any creditable acquisition that you make.

115. Section 11-5 of the GST Act provides that you make a creditable acquisition if all of the following criteria are satisfied:

(a) you acquire anything solely or partly for a creditable purpose (i.e. to the extent you acquire the thing in carrying on your enterprise except to the extent the acquisition relates to making input taxed supplies or is of a private or domestic nature);

(b) the supply to you was a taxable supply;

(d) you are registered or required to be registered.

116. To be a creditable acquisition, paragraph 11-5(a) of the GST Act requires you to acquire anything solely or partly for a creditable purpose. The 'you' refers to the actual entity that made the acquisition.

117. Entitlement to any ITCs by the GLP will be subject to time limits as per Division 93 of the GST Act.

The Land

118. The GLP acquires the land when B supplies it in exchange for its partnership interest in the GLP. In relation to partners supplying land as capital contributions to a partnership, paragraph 17 of GSTR 2009/1 (Goods and services tax: general law partnerships and the margin scheme) states:

Real property becomes partnership property when the partners make an in kind capital contribution of the property to the partnership, or the real property is acquired by the partners in their capacity as partners in the partnership.

119. Paragraph 72 of GSTR 2003/13 states:

Where a registered partner enters into the partnership and makes an in kind capital contribution in the course or furtherance of their own enterprise, the in kind capital contribution is a supply that may be taxable, input taxed or GST-free. A capital contribution of money or digital currency is not a supply.

120. The Commissioner considers your situation to be analogous to the example in paragraphs 73 to 74 of GSTR 2003/13 where 'Sydney' represents B (contribution of land).

121. Where the supply of the land meets all the requirements of section 9-5 of the GST Act, the supply of the land to the GLP will be a taxable supply.

122. In this respect, it is noted that in a clause of the DA, B warrants to A that:

· it acquired the land from x after 1 July 2000

· the consideration for B's acquisition of the land was $x (inclusive of GST), and

· B and the former owner agreed to apply the margin scheme.

123. Where B supplies the land to the GLP and applies the margin scheme then section 75-20 of the GST Act provides that the acquisition is not a creditable acquisition if the supply was a taxable supply under the margin scheme. This means there is no entitlement to an ITC.

124. To apply the margin scheme B and GLP will be required to have agreed in writing that the margin scheme is to apply. In accordance with subsection 75-5(1) of the GST Act the parties to the GLP have agreed in writing to apply the margin scheme for the transfer of the land by B to the GLP.

125. For completeness, in the example at paragraphs 73 to 74 of GSTR 2003/13, 'Kate' represents A (contribution of money), in exchange for its interest in the GLP. Applying paragraph 72 of GSTR 2003/13, the GLP will not be entitled to claim ITCs on the $xM capital contribution from A as this was a supply of money.

Development Fee

126. Whether the clauses of the DA refers to 'net proceeds' or 'gross proceeds' is not considered relevant, as it is clear from Annexure C in the DA that it could equally be described as 'net profit' or a 'share of the profits'. The quantum of the share of profits that each party receives is tied to the successful development, subdivision and sale of Lots resulting from carrying out this Project. Thus, the Development Fee paid to A is in fact A's share of the profits of the Project.

127. Although the DA requires A to invoice B for 50% of the net proceeds of the sales, we do not consider this to be for a taxable supply because all the elements of section 9-5 of the GST Act are not met. Rather, the fee is the share of profits from the GLP.

128. Section 11-5 of the GST requires a creditable acquisition to be from the supply of a taxable supply. As we consider there to be no taxable supply, the GLP is not entitled to ITCs in relation to payment of the Development Fee to A.

Project Costs and Fees (excluding selling and off-shore selling agent fees)

129. As set in the two Agreements:

· B will appoint C as the Project's exclusive Project Manager and Selling Agent. On settlement of each block C will receive a Project Management Fee and Selling Fee. C will also receive an Administration Fee during the course of the development, and

· C will initially incur 100% of all of the project costs and will invoice A and B for reimbursement of the costs.

130. Upon entry into the DA, the GLP will work to carry out and complete the development and sales of the lots. To assist, C has been appointed to be the Project Manager. C will be required to:

(a) (zoning) obtain any zoning or re-zoning of the property (if not already obtained) required to enable the Project to be carried out in accordance with all Government Agency requirements and planning schemes;

(b) (development) plan and design the development and subdivision of the property, including the stages in which the property will be developed and the timing of that development;

(d) (works) arrange for:

(i) all construction works, earthworks and civil works to be carried out;

(ii) all roads and other infrastructure (including Landscaping) to be constructed in accordance with all Government Agency requirements;

(iii) any contamination which may be found on the property and which is required to be removed as a condition of developing the property as a residential subdivision to be removed;

(iv) all underground water, electricity, sewerage, gas, telephone and technology services to be provided to each Lot;

(v) all Landscaping and servicing of the property and each lot;

(e) (compliance) comply with all conditions of any rezoning, development or subdivision approval concerning the property;

131. Project Costs are defined very widely in the DA, including all costs of establishing and carrying out the Project and the sale of the Lots including:

(a) all fees, costs, charges and expenses B and A incur in:

(i) carrying out and managing the Project;

(ii) managing and operating the Project; and

(iii) selling the lots,

including

(iv) the cost of obtaining and satisfying the conditions of the Subdivision Approval;

(v) if applicable, the cost of seeking to have a Contested Condition amended or deleted in accordance with clause 3.6;

(vi) the cost of obtaining each Development Approval;

(vii) subject to paragraph (f) of this definition, Holding Costs in respect of the Property; and

(viii) the cost of maintaining the Property;

(d) Community Development and Public Relations Costs; and

(e) anything else which is specified in a Transaction Document to be a 'Project Cost,

As specified in the Budget but excluding:

(f) all fees, costs, charges and expenses the Owner incurred in acquiring the Property; and

(g) Holding Costs assessed in respect of a period before the Participation Fee Payment Date.

132. A clause of the PMESAA requires the payments made by C as the Project Manager for services such as the works to be reimbursed by the GLP. The costs incurred in acquiring the works are included in calculating the profit or loss of the GLP.

133. The supply of services by C to the GLP in relation to the above costs will be creditable acquisitions of the GLP. The issuing of the tax invoice for project cost claims to the GLP will give rise to entitlement to claim an ITC for those creditable acquisitions.

GLP Acquisitions from other suppliers

134. Although the vast majority of services acquired for the Project are acquired by C as the Project Manager, there are some which may have been acquired by the GLP, or one of its partners on its behalf from a supplier other than C.

135. Where an entity makes supplies and acquisitions in the capacity as partner, GSTR 2003/13 provides the states:

Supplies and acquisitions in the capacity as partner

27. As an entity, a general law partnership may register for GST, is liable for GST on taxable supplies that it makes, and is entitled to input tax for creditable acquisitions it makes.

28. Supplies and acquisitions that are made by or on behalf of partners in their capacity as partners are treated as supplies and acquisitions by the partnership. This position is confirmed by subsection 184-5(1) which provides:

For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner:

(a) is taken to be a supply, acquisition or importation made by the partnership; and

(b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.

136. Therefore, the GLP will be entitled to claim ITCs for acquisitions made by either A or B for and on behalf of the GLP. Paragraph 30 of GSTR 2003/13 lists some of the following factors which may indicate whether an acquisition is made by a partner in that capacity:

· the acquisition is used in the enterprise of the partnership;

· the acquisition is made with the consent of the partners;

· the acquisition is paid for out of partnership profits from a partnership account; and

· the invoice or tax invoice shows the firm or business name, or the names of all the partners as recipient.

137. If the above indicators are present, then acquisitions made by A and B for and on behalf of the GLP will be treated as creditable acquisitions of the GLP for which it will be entitled to ITCs. For example, if A acquired architect's plans for which the invoice was issued to the GLP then the GLP would be entitled to ITCs for that creditable acquisition.

138. As discussed earlier, the definition of 'carrying on an enterprise' in subsection 195-1 of the GST Act includes 'doing anything in the course of the commencement or termination of the enterprise'.

139. The GLP will be entitled to claim ITCs for all creditable acquisitions it makes in the preparatory phase of the Project, such as the costs of obtaining planning approvals, architectural and design services.

140. Provided you possess valid tax invoices issued by the suppliers, the GLP may also claim ITCs for ongoing creditable acquisitions including:

· the cost of maintaining the Property

· the Administration Fee

· Community Development and Public Relations Costs, and

· anything else which is specified in the Transaction Document to be a Project Cost.

Holding Costs

141. Holding Costs are defined in the DA to include:

all water rates, council rates, land tax and other Taxes, fees, costs charges (including statutory charges) and expenses B has to pay or incur arising from or in connection with its ownership of the Property but excludes any amounts relating to the use of the Property by the B or anyone else, including, by way of example only, water consumption charges.

142. The above definition refers to only B paying the Holding Costs. As discussed previously, B may have made those acquisitions in its capacity as a partner of the GLP, for and on behalf of the GLP. The GLP will only be entitled to claim ITCs in relation to creditable acquisitions for which the GLP possesses a valid tax invoice.

Selling Fee and Offshore Selling Agents Fee

143. The Selling Fee is payment to C pursuant to the PMESAA for their services in selling the lots. Provided the GLP possesses valid tax invoices the GLP is entitled to claim ITCs because those services were acquired in the course of its enterprise. The same applies to the Offshore Selling Agents Fee because although those agents may be located outside of the *indirect tax zone, paragraph 9-5(c) of the GST Act is fulfilled because the subject matter of the supplies (the lots) are located in Australia.

Question 7

In relation to the sale of each Lot, is the GLP:

(a) making a taxable supply under section 9-5 of the GST Act?

(b) entitled to apply the margin scheme under Division 75 of the GST Act when transferring the land to the GLP?

Summary

Your entitlement to apply the margin scheme to the supplies that you make will be subject to whether the supply of land by B to the GLP was under the margin scheme.

Detailed reasoning

Taxable Supply

144. You have advised that x Lots will be sold with residential buildings on them, whereas x will be sold as vacant Lots.

145. Section 9-5 of the GST Act 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;

(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.

146. Subsection 40-65 of the GST Act provides:

(1) A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

New Residential Premises

147. Paragraph 40-75(1)(a) of the GST Act defines 'new residential premises' as those which 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.

148. As the dwellings you will sell on the Lots constitute new residential premises, their sales will attract GST.

149. For the sale of the new residential premises and the vacant Lots to attract GST, all the elements of section 9-5 of the GST Act must be met. As has been established above, the GLP will be selling the x Lots in the course of carrying on its property development enterprise. Each element of section 9-5 is discussed below in applying GLP's situation:

You make the supply for consideration

150. The Lots will be sold for monetary consideration.

The supply is made in the course or furtherance of an enterprise that you carry on

151. The GLP is carrying on a property development enterprise.

The supply is connected with the indirect tax zone

152. The Lots are located in Australia.

You are registered, or required to be registered for GST

153. The GLP is required to be registered.

154. As all elements of section 9 are fulfilled, the sale of all of the Lots will attract GST.

Margin Scheme

155. Subsection 75-5(1) of the GST Act states:

(1) The *margin scheme applies in working out the amount of GST on a taxable *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a stratum unit;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

156. As discussed in Question 6, a clause of the DA warrants that B and the former owner agreed to apply the margin scheme.

157. Where B has supplied the land to the GLP using the margin scheme in exchange for its interest in the GLP, then the GLP will be eligible under subsection 75-5(3) to use the margin scheme in making supplies of the Lots to third party purchasers. In accordance with section 75-5(1), it must be agreed in writing between the GLP and the recipient of the Lots if the margin scheme is to be applied to the supply of the lots.

158. Guidance is provided in GSTR 2009/1 on how the margin is calculated if a GLP supplies on or after 17 March 2005 real property that was acquired from its partners by way of capital contribution. Paragraphs 68 to 70 state:

68. If, on or after 17 March 2005, the partnership supplies real property under the margin scheme that was acquired from a partner or its partners by way of capital contribution, the margin for the supply is calculated under subsection 75-11(7), unless the other provisions in section 75-11 apply. Subsection 75-11(7) applies because a partnership and its partners are associates.

69. As section 75-11 takes precedence, subsections 75-10(2) and 75-10(3) do not apply.

70. Under subsection 75-11(7) the margin for the supply is the amount by which the consideration for the supply exceeds:

· an approved valuation of the real property as at 1 July 2000 - if the acquisition was made before 1 July 2000; or

· the GST inclusive market value of the real property at the time of its acquisition - if the acquisition was made on or after 1 July 2000.

159. Alternatively, where B treats the supply to the GLP as taxable without applying the margin scheme in exchange for its interest in the GLP, the GLP will be ineligible under subsection 75-5(3) of the GST Act to apply the margin scheme to supplies of Lots it makes to third parties.

Entity B

Question 8

If B is taken to transfer the land to the GLP, is B:

(a) making a taxable supply under section 9-5 of the GST Act?

(b) making an input taxed financial supply under Division 40 of the GST Regulations?

Summary

(a) Taxable supply

As established above, the supply of the land by B to the GLP is a taxable supply in exchange for its interest in the GLP. This is consistent with the example in paragraphs 71 to 74 of GSTR 2003/13.

(b) Input taxed or GST-free

Division 40 of the GST Act provides the rules for the supplies that are specifically input taxed under the Act. The supply of the land by B is not a supply covered in Division 40 of the GST Act. It therefore remains a taxable supply.

This is consistent with the reasoning used in relation to 'Sydney' in the example in paragraphs 73 to 74 of GSTR 2003/13.

(c) Margin Scheme

The supply of land by B to the GLP as a capital contribution is not an ineligible supply for the margin scheme under subsection 75-5(3) of the GST Act.

Detailed reasoning

160. As discussed in Question 7, under a clause of the DA, B warrants to A that B applied the margin scheme when it acquired the land.

161. Paragraphs 34 to 48 of GSTR 2009/1 provide guidance and confirm that a supply of real property as a capital contribution to a general law partnership in exchange for an interest in the partnership is a supply by way of sale under subsection 75-5(1) of the GST Act, such that the real property supplied to the GLP becomes partnership property.

162. The Commissioner accepts that the supply of real property as a capital contribution is a sale and, therefore, accords with the meaning of 'selling' for the purposes of subsection

163. 75-5(1) of the GST Act. The margin scheme provisions can be applied to a capital contribution of real property to a general law partnership in exchange for an interest in the partnership.

164. The fact that the real property contributed is a supply for non-monetary consideration (an interest in the partnership) does not preclude the supply from being a sale for the purposes of the margin scheme. For the purposes of the margin scheme, the consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or both.

165. For real property transactions 'consideration' may be regarded as anything that 'moves' the transfer. In Re Navakumar v. Commissioner of State Revenue (Taxation) [2007] VCAT at 43 Deputy President McNamara of the Victorian Civil and Administrative Tribunal said:

Consideration is a very wide concept. In Equity consideration generally denotes something of significant value, at common law something purely nominal such as $1, a peppercorn or a chocolate wrapper may constitute consideration. In revenue law the meaning of consideration is wider still, it is that which 'moves' the conveyance or transfer. See Archibald Howie Pty Ltd v. Commissioner of Stamp Duties (NSW ) (1948) 77CLR 143, 152 per Dixon J.

166. Also, the fact that the contributing partner has a beneficial interest in the real property that is partnership property does not mean that the real property has not been supplied to the partnership. For GST purposes, a partnership is a separate entity, and the supplies and acquisitions made by partners as partners are treated as supplies or acquisitions made by the partnership.

167. Consistent with this, the Commissioner takes the view that a partnership, through the acts of a partner in the capacity of partner, may enter into transactions with a partner in its own capacity. Thus, when a partnership acquires real property contributed by a partner in its own capacity, the property becomes partnership property.

168. A partner may contribute real property to a partnership upon formation of the partnership or alternatively, during the course of the operation of a partnership.

169. Where a partner contributes real property upon formation of the partnership, the contribution is for consideration equal to the value of the relevant proportion of the initial interest that the partner obtains in the partnership. It is expected that ordinarily the value of this initial interest that the partner obtains in the partnership would be reflected by the value of the property contributed.

170. In the circumstances described in paragraphs 41 to 43 of GSTR 2009/1 the contribution of the real property is a supply for GST purposes and will be a taxable supply if the requirements of section 9-5 of the GST Act are met.

171. In accordance with subsection 75-5(1) of the GST Act the parties to the GLP have agreed in writing to apply the margin scheme for the transfer of the land by B to the GLP.

Question 9

Is B entitled to input tax credits under subsection 11-5 of the GST Act for acquisitions in relation to:

(a) reimbursement of the Project Manager project costs?

(b) payments of the Development Fee to A?

Summary

B is not entitled to input tax credits under section 11-5 of the GST Act for acquisitions in relation to:

(a) the reimbursement of C's Project Costs.

(b) the payments made to A that is referred to as the Development Fee.

Detailed reasoning

Project Costs

172. As discussed in Question 6, the supply of services by C to the GLP in relation to the Project Costs will be creditable acquisitions of the GLP. The issuing of the tax invoice to the GLP for project cost properly incurred in accordance with the PMESSA will give the GLP an entitlement to claim ITCs for those creditable acquisitions.

Development Fee

173. As previously discussed at both Question 1 and Question 6, the Development Fee paid to A is in fact A's share of the profits of the Project.

174. Section 11-5 of the GST Act requires a creditable acquisition to be from the supply of a taxable supply. As we consider there to be no taxable supply, there is no entitlement to an ITC.

Entity A

Question 10

Is A entitled to claim a deduction for the Participation Fee paid to B pursuant to the DA, under section 8-1 of the ITAA 1997?

Summary

A is not entitled to a deduction under section 8-1 for the Participation Fee paid to B pursuant to the DA. The Participation Fee is capital in nature and thus excluded from deductibility under paragraph 8-1(2)(a).

Detailed reasoning

175. Section 8-1 states:

(1) You can deduct from your assessable income for any loss or outgoing to the extent that:

a) it is incurred in gaining or producing your assessable income; or

b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

a) it is a loss or outgoing of capital, or of a capital nature; or

b) it is a loss or outgoing of a private or domestic nature; or

c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

d) a provision of this Act prevents you from deducting it.

(3) A loss or outgoing that you can deduct under this section is called a general deduction.

Capital or of a capital nature

176. The Commissioner notes the cases you have referred to in your Application that discuss the capital, or of a capital nature, and therefore has not included them in this section.

177. As set out above, the Commissioner is of the view that A and B have established a GLP on entering into the DA, and the Participation Fee paid is stated to be A's equity contribution to the Project.

Character of advantage sought

178. Again the Commissioner notes the cases cited by you in your Application that discuss the character of advantage sought and therefore has not included them.

179. According to paragraph 67 of TR 2011/6, the character of the advantage sought provides important direction and is the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself.

180. Paragraph 18 of TR 2011/6 states that capital expenditure that has the essential character of business expenditure also includes expenditure on activities that prepare for the commencement of the business.

181. The payment of the Participation Fee is an initial outlay by A to bring into existence a GLP between A and B. As stated in a clause of the DA, A's equity contribution is the Participation Fee.

182. Therefore, the character of the Participation Fee is one of capital or of a capital nature, being the right to receive payment of the Development Fee. A clause of the DA advises that B is to pay from the gross proceeds from the sale of a Lot to A an amount equal to 50% of the Net Profits (called the Development Fee) in consideration for and in recognition of A's contribution to the Project. The DA does not require A to provide any services to justify the payment of the so called Development Fee.

183. A has stated in the Application that the Participation Fee is not an initial outlay by A to bring into existence a joint venture, tax law partnership or GLP. A advised that it acquired a right to participate in the Project, undertake development on the Land, and receive a Development Fee in relation to the sale of individual lots. The advantage is nothing more than a right to receive fees from land development activities, being the business conducted by the C Group of companies.

184. If the Commissioner is to entertain that the payment of the Participation Fee is for the right to receive the fees, the Commissioner is of the view that the Participation Fee is still not deductible under section 8-1, again because it is capital in nature.

185. TR 2011/6 states at paragraph 46 that a taxpayer cannot deduct expenditure they incur to the extent that it is in relation to a lease or other legal or equitable right.

186. Subsection 108-5(1) defines a CGT asset as any kind of property, or a legal or equitable right that is not property.

187. Subsection 10-5(2) states:

To avoid doubt, these are CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

(b) goodwill or an interest in it;

(d) an interest in a partnership that is not covered by paragraph (c).

Note1: Examples of CGT assets are:

· land and buildings;

· shares in a company and units in a unit trust;

· options;

· debts owed to you;

· a right to enforce a contractual obligation;

· foreign currency.

188. Note 1 includes a right to enforce a contractual obligation as a CGT asset. A has stated that it considers the payment of the Participation Fee resulted in A acquiring a right to receive fees from land development activities. This right to receive fees is enforceable through the DA. If the DA is to be terminated, a clause of the DA states that A will be entitled to the Default Termination Fee to be calculated and paid in accordance with a clause of the DA.

189. A clause of the DA states that no other fees are payable to A as a consequence of the termination of this agreement.

190. These clauses show that A have an enforceable right to the payment of fees so the Participation Fee payable by A will not be deductible under section 8-1.

The manner in which the expenditure is to be used, relied upon or enjoyed

191. According to Dixon J in Sun Newspapers, when considering the manner in which the expenditure is to be enjoyed, regard must be had to the recurrent nature of the returns it produces and how long it will likely endure.

192. In this case, the advantage sought by A from paying the Participation Fee is to receive 50% of the Net Proceeds from the sale of the Lots that has been called the Development Fee. This income and the rights under the DA will cease on the Project Completion Date.

The means adopted to obtain it

193. Again the Commissioner notes the cases cited by you in the Application that discuss the means adopted to obtain it and therefore has not included them.

194. The Commissioner has determined that the payment of the Participation Fee is a one off payment to secure entry into the GLP with B.

195. The DA does not require A to provide any services to the Project to derive the Development Fee, apart from a minor contribution to the Project which you have advised as paying to B 50% of the Project Costs and attend the management meetings 'for a few hours a month at the most'.

196. However, despite the minor contribution that A makes to the Project, a clause of the DA provides that A is to receive an amount equal to 50% of the Net Proceeds (Development Fee) in consideration for and in recognition of A's contribution to the Project.

197. Furthermore, whilst not determinative, the fact that the payment is made as a lump sum indicates that the payment was made as a once and for all payment, i.e. for a capital purpose.

Application to Taxpayer

198. From considering each of the above factors, the Commissioner is of the view that A is not entitled to claim a deduction under section 8-1 on payment of the Participation Fee because it is expenditure incurred to acquire an interest in the GLP. Therefore, the expenditure is considered capital, or capital in nature.

Question 11

Does A derive assessable income under section 6-5 of the ITAA 1997 when, pursuant to the DA, B pays A 50% of the net proceeds from the sale of each Lot?

Summary

It is the Commissioner's view that A and B entered into a GLP upon entering into the DA. Pursuant to paragraph 92(1)(a) of the ITAA 1936, the assessable income of a partner in a partnership shall include so much of the individual interest of the partner in the net income of the partnership of the income year as is attributable to a period when the partner was a resident. Therefore, A has to include in its assessable income its 50% share of the net income of the partnership for the relevant income year, pursuant to section 10-5 and not section 6-5.

Detailed reasoning

199. A has paid a Participation Fee to B. As set out earlier, the Commissioner is of the view that the Participation Fee is A's equity contribution on entry into the GLP.

200. Pursuant to a clause of the DA, A is entitled to an amount equal to 50% of the net proceeds from the sale of each lot that has been called a Development Fee.

201. As it is the Commissioner's view that the Property is the trading stock of the GLP, the partnership will need to determine what is the net income of the partnership? This is because paragraph 92(1)(a) of the ITAA 1936 states that 'The assessable income of a partner in a partnership shall include so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident.' Hence, once the net income of the partnership has been determined, each partner is to include their 50% interest in the net income of the partnership in their assessable income and personal income tax return for the relevant income year. Further, the inclusion of assessable income for a partner is pursuant to section 10-5 and not section 6-5.

Question 12

Is the Participation Fee paid by A pursuant to the DA:

(a) a taxable supply under section 9-5 of the GST Act, and

(b) consideration for the supply?

Summary

The Participation Fee paid is an input taxed supply for GST purposes. However, it is consideration for an interest in the GLP. A as partner is making a financial supply-acquisition supply.

Detailed reasoning

General Law Partnership as a financial supply provider

202. For the purposes of Subdivision 40-A of the GST Regulations, a general law partnership is a financial supply provider. We consider that the partnership entity creates an interest in the partnership in making the supply of that interest. This is a consequence of the acceptance of a partnership as an entity, and the fact that partners may act in the capacity of partners. Therefore, the GLP is a financial supply provider under sub-regulation 40-5.06(1)(b) of the GST Regulations.

203. Sub-regulation 40-5.09(1) of the GST Regulations and Item 10(d) of the table in

204. sub-regulation 40-5.09(3) of the GST Regulations provides that the provision, acquisition or disposal of an interest in or under 'the capital of a partnership or trust' is an input taxed financial supply, if all the other requirements are satisfied.

205. The GLP supplies an interest in the partnership to A. This is an input taxed supply, and therefore excluded under section 9-5 of the GST Act as a taxable supply. The payment of the participation fee by A is not in respect of a taxable supply.

206. The obligations that each partner undertakes, including capital contributions, or the promise to provide labour, skills or services in the conduct of the partnership business, are consideration for the supply of interests in the partnership. The consideration for the supply of the interest in the GLP is the Participation fee.

207. Sub-regulation 40-5.06(2) of the GST Regulations specifies that the entity acquiring a financial interest is also the financial supply provider in relation to that interest. As a result, in acquiring an interest, a partner may also make a financial supply. GSTR 2002/2 refers to this as an acquisition-supply.

Entity C

Question 13

Is C:

(a) entitled to claim a deduction under section 8-1 of the ITAA 1997 in the year it incurs Project Costs pursuant to the Project Management and Exclusive Selling Agency Agreement (PMESAA)?

(b) required to return assessable income under section 6-5 of the ITAA 1997 amounts received as reimbursements from the Project Account for Project Costs?

Summary

(a) C is entitled to claim a deduction under subsection 8-1(1) in the year it incurs Project Costs pursuant to the PMESAA.

(b) C is required to return assessable income under section 6-5 amounts received as reimbursements from the Project Account for Project Costs. In addition, C is to receive a Project Management Fee, Selling Fee and Administration Fee based on a percentage of the sale price of each lot. That is, for agreeing to incur and pay all Project Costs, C is to receive fees based on the sale price of each lot. The derivation of these three fees is considered to be income according to ordinary concepts. C is therefore required to include such fees in its assessable income in the income year it is derived.

Detailed reasoning

Section 8-1 deduction

208. Section 8-1 is quoted above.

209. C has been appointed as the Project Manager for the Project to carry out the Project Management Services and to be the exclusive selling agent. It is unclear whether this appointment is to be solely by B or jointly by the B and A.

210. C is to receive a Project Management Fee and a Selling Fee that is an aggregate amount equal to 2.25% (plus GST on that amount) of the sale price of each lot. C will also receive an Administration Fee of 1% (plus GST on that amount) of the total sales price of all lots sold in the Project payable in accordance with Clause x of the PMESAA. 'Project Costs' means all costs of establishing and carrying out the Project and the sale of the lots.

211. Pursuant to the PMESAA, B authorises and directs C to incur and pay all Project Costs in the course of gaining or producing its income as a manager. In turn, B agreed to reimburse C from the Project Account all Project Costs incurred by it in accordance with the PMESAA. Whilst it was agreed that the Project Costs are to be paid to C by B, A and B are each liable for 50% of the Project Costs.

212. C agreed to be the Project Manager and to provide Project Management Services and to sell and procure the sale of Lots as the exclusive selling agent. For agreeing to incur all the Project Costs, C is to be reimbursed the Project Costs and to be paid a Project Management Fee, Selling Fee and Administration Fee. The incurring of all Project Costs is considered to be an outgoing incurring in gaining these three fees and therefore deductible under subsection 8-1(1).

Section 6-5 assessable income

213. Subsection 6-5(1) deals with receipts of ordinary income. It states:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

214. Subsection 6-5(2) provides that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources.

215. There is no specific guidance on what is meant by 'ordinary concepts'. Typical examples of income include salaries, wages, proceeds of carrying on a business, rent, interest, and dividends.

216. The reference to 'income according to ordinary concepts' can be traced to the judgment of Jordan J of the NSW Supreme Court in Scott v C of T (NSW) (1935) 3 ATD 142, concerning the Income Tax (Management) Act 1928. His Honour stated (at 144-145):

The word ' Income ' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts.

217. C is authorised to incur and pay all Project Costs and to be reimbursed such Project Costs from the funds in the Project Account. Project Costs means all costs of establishing and carrying out the Project and the Sale of the lots. Whilst C is to be reimbursed all the Project Costs, C is to receive a Project Management Fee, Selling Fee and Administration Fee based on a percentage of the sale price of each lot. That is, for agreeing to incur and pay all Project Costs, C is to receive fees based on the sale price of each Lot. The derivation of these three fees is considered to be income according to ordinary concepts. C is therefore required to include such fees in its assessable income in the income year it is derived.

218. Whilst a reimbursement of an outgoing could be considered a recoupment under subsection 20-25(1), and an assessable recoupment under subsection 20-20(3), an amount is not an assessable recoupment to the extent that it is ordinary income.

Question 14

Is C entitled to ITCs under section 11-5 of the GST Act for Project Costs it incurs pursuant to the PMESAA?

Summary

C is entitled to ITCs under section 11-5 of the GST Act for Project Costs it incurs pursuant to the PMESAA.

Detailed reasoning

219. Section 11-5 is quoted above.

220. C is a broad acre land developer. C has been contracted by A and B to be the project's exclusive Project Manager and selling agent.

221. On settlement of each Lot C will receive a Project Management Fee and Selling Fee. C will also receive an Administration Fee during the course of the development.

222. C will initially incur all Project Costs for the development. They will then claim reimbursement of these from the GLP.

223. The Project Costs incurred by C are required for them to earn their fees during and at the completion of the development.

224. These acquisitions are for a creditable purpose in the course of carrying on their enterprise, and not for making supplies that would be input taxed or of a private or domestic nature.

225. Therefore, C is entitled to claim ITCs on Project Costs for acquisitions made in accordance with the PMESAA.

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