Edited version of private advice

Authorisation Number: 1052102504336

Date of advice: 30 March 2023

Ruling

Subject: Taxable supply

Question

Will the in-specie distribution of the properties, be taxable supplies in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The in-specie distribution of the properties will not be taxable supplies in accordance with section 9-5 of the GST Act.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

The date this notice of decision is issued.

Relevant facts and circumstances

The Self-Managed Superannuation Fund (SMSF) holds an Australian Business Number (ABN) and is registered for goods and services tax (GST).

The SMSF built two residential properties in XXXX and XXXX.

The properties are residential premises and have been leased since construction.

The SMSF has remitted GST on the rental income received in relation to the properties and have claimed input tax credits in relation to the construction costs of the properties.

The SMSF is intending to do an in-specie distribution of the properties to the two members of the fund.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 72-5

A New Tax System (Goods and Services Tax) Act 1999 section 72-25

Reasons for decision

Under section 9-5, an entity makes a taxable supply where the supply:

1. is made for consideration; and
2. is made in the course or furtherance of an enterprise being carried on; and
3. is connected with the indirect tax zone; and
4. is made by a supplier who is 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.

Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation).

Subsection 40-65(2) provides that 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.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the ATO view on how subdivision 40-B and subdivision 40-C apply to supplies of residential premises.

Paragraph 9 of GSTR 2012/5 provides the requirement in sections 40-35, 40-65 and 40-70 that premises be residential premises to be used predominately for residential accommodation (regardless of the term of occupation) is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

Paragraph 10 of GSTR 2012/5 states that the requirement for residential premises to be used predominately for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

Paragraph 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

In this case, the properties to be distributed to the members are townhouses which meet the definition of residential premises. The properties have been leased since being constructed in XXXX and XXXX.

Division 72 ensures that a supply to, or an acquisition from, an associate without consideration are brought within the GST system, and that supplies to your associates for inadequate consideration are properly valued for GST purposes.

Section 72-25 provides that the fact a supply to or from your associate is without consideration does not stop the supply from being any of the following for the purposes of the GST law:

a)    a GST-free supply;

b)    a supply that is input taxed;

c)    a financial supply.

Even though the supply of the properties will be to associates, for no consideration, the characteristics of the supplies does not change under Division 72.

Therefore, the distribution of the properties by the SMSF do not meet the requirements of a taxable supply under section 9-5 as they are input taxed supplies of residential premises.

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