Edited version of private advice

Authorisation Number: 4140086108651

Date of advice: 24 August 2020

Ruling

Subject: GST and sale of land

Question 1

Is the joint ownership which consists of you, your spouse (person A), your in law (person B) and your sibling (person C) required to be registered for GST as per section 188-25 of A New Tax System (Goods and Services Tax) Act 1999?

Answer

No -the partnersare in receipt of ordinary income or statutory income jointly, however, it is not in the course of carrying on an enterprise and do not exceed the GST turnover threshold, therefore the partnership would not be required to be registered for GST

Question 2

Is the sale of the subdivided vacant residential land to be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act")?

Answer

No.

Question 3

Are you entitled to use the margin scheme under section 75-5 of the GST Act for the sale of the subdivided vacant residential lot?

Answer

As the sale of the lot is not a taxable supply, the value to be considered in determining the margin under Division 75 is not relevant in these circumstances.

This ruling applies for the following period:

1 July 20xx - 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1.You have made this application in your own capacity and as a party to the joint ownership comprising of yourself, Person A, Person B and Person C.

2.You are currently not registered for GST and do not hold an ABN.

3.On July 2015, you acquired land (the Property) and you hold a x interest as tenants in common.

4.The property was settled on Y.

5.The purchase of the Property was funded through borrowings of the bank.

6.The intention of the partners was to subdivide the property to construct a primary place of residence for themselves and their children.

7.In xx, an application was lodged with the xx Council ("the Council") to subdivide the Property into the four separate lots as above. The Council acknowledged the application to subdivide the Property.

8.The initial subdivision plan was not allowed by the Council because the development proposal did not ensure that the waterway corridor at the rear of the property provided environmental connectivity along the waterway.

9.The Council required a lot layout change to consider the following:

·         The corridor within a single allotment in accordance with Acceptable Outcome AO20.1 of the Waterway Corridors Overlay code.

·         To minimise the number of access points from xx, which is a major district road.

·         To provide a revised layout plan to indicate the removal of the shed on the currently proposed 2 lots because it is inappropriate and incompatible development to separate dwelling house and ancillary outbuilding on separate title.

10. After reviewing the relevant Subdivision Codes and the requirements by the Council, the Town Planner advised that the proposal to subdivide the Property into 4 lots will not work and recommended a plan for a subdivision of 3 lots. In the interest of saving time and costs, you proceeded with the plan for the subdivision of 3 lots.

11. On xx, the amended subdivision plan was approved by the Council for a reconfiguration of the Property into 3 lots. The relevant details of the 3 lots are:

·         Subdivided Lot

·         Lot 1

·         Lot 2

12. The subdivision of work was funded by the loan obtained by the Landowner.

13. The subdivided lots listed in number 11 were registered on xx and you hold a x interest as tenants in common in each of the lots.

14. Person B and Person C have constructed their main residence on lot 1 and have lived there since xx.

15. The subdivided lot was first listed for sale in xx.

16. An agent approached you to advertise Lot 2. You agreed to list it for sale in xx for the purpose of determining the value of the property as a basis for determining the split values between Lot 1 to be retained by Person B And Person C and Lot 2 to be retained by yourself and Person A. Lot 2 was subsequently removed from the market on xx.

17. Lot 2 was subsequently removed from the market on xx and was retained by you. Person A and you intend to renovate the dwelling on this lot for your daughter to live there and the renovation is currently in process.

18. On xx, the Landowner entered into a contract to sell the Subdivided Lot.

19. You did not prepare any financial accounts in respect of the ownership of the land and no income tax deduction for the acquisition or development works has been claimed.

20. You have not undertaken subdivision of property or any property development activities.

21. The sale of the subdivided lot was settled on xx for $xx.

22. For the purposes of this private ruling, your representative provided the following documentations along with your application:

·         Annexure 1.1: Settlement statement;

·         Annexure 1.2: Initial subdivision plan for four separate lots attached to the initial application to the Council;

·         Annexure 1.3 Acknowledgement of the subdivision by the Council dated xx;

·         Annexure 1.4: Final approval by the Council dated xx;

·         Annexure 1.5: Approval of the subdivision plan;

·         Annexure 1.6: Registration confirmation statements for the property located the subdivided lot;

·         Annexure 1.7: Registration confirmation statements for the property located at Lot 2;

·         Annexure 1.8: Registration confirmation statements for the property located at Lot 3.

23. In addition to the above, a copy of the contract of sale for the subdivided lot and loan document for the purchase of the Property was also obtained.

Reasons for Decision

Summary

Based on the information received, the sale of the subdivided vacant residential lot at xx is not a taxable supply and therefore, the partnership is not required to be registered for GST.

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

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

You make a taxable supply if:

(a)  you make the supply for *consideration; and

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

(c)   the supply is *connected with the indirect tax zone; and

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

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

(*denotes a term defined in the Dictionary section 195-1 of the GST Act)

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

Who is the entity making the supply of the Subdivided lot?

The Subdivided Lot is registered to four owners in which they each all hold x interest it. Therefore, we first need to determine whether the sale of it is made by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 to include (among others) an individual and a partnership.

The term 'partnership' is defined in the GST Act by reference to the definition of 'partnership' in the Income Tax Assessment Act 1997. That definition states:

partnership means:

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

(b)  a limited partnership.

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

Paragraph 17 of Goods and Services Tax Ruling 2003/13 (Goods and services tax: general law partnerships) (GSTR 2003/13) states:

17. A partnership is formed when two or more entities commence carrying on a business as partners. Whether and from what date a general law partnership exists are questions of fact. They are determined having regard to the partnership agreement and the circumstances surrounding the partnership's formation. The execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time.

Given the facts of this case we do not consider you and the other 3 co-owners are carrying on a business and as such do not fall within the scope first limb of paragraph (a) in the definition of a 'partnership' referred to as a general law partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership, which exists for tax purposes only.

At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

However, the GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes.

Goods and Services Tax Ruling GSTR 2004/6 explains how GST applies to transactions involving tax law partnerships and co-owners of property.

Paragraph 25 and 30 of GSTR 2004/6 states:

Receipt of income

25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income.

Formation of a tax law partnership

Time of association approach

30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach.

Furthermore, Paragraph 40 of GSTR 2004/6 states:

40. Two or more entities may enter into a single agreement to purchase property for leasing purposes. The entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.

Example 1 at paragraphs 42 and 43 of GSTR 2004/6 is about the formation of a tax law partnership:

42. Raymond and Julie, neither of whom are registered for GST, purchase an industrial shed as joint tenants, with the sole purpose of leasing it. The purchase is funded by joint borrowings.

43. As Raymond and Julie act jointly in relation to the acquisition and leasing of the property, they are in a tax law partnership. The partnership is formed when Raymond and Julie enter into the agreement to acquire the industrial shed.

Your representative contends that the arrangement between yourself and the 3 other co-owners is a joint ownership and that a partnership does not exist. This claim is made on the basis that the joint owners do not carry on a business and are not in receipt of income jointly.

In applying the principles contained in GSTR 2004/6 to your circumstances, we consider that you meet the criteria of the second limb and therefore, a tax law partnership exists. This is because, similar to Example 1, there is an association (existence of a mutual or common purpose) between yourself and the 3 other co-owners whereby each of you have an entitlement to receive income jointly (as one entity) from the sale of this subdivided lot.

As this is an arrangement between family members, you may not have an agreement which determines your mutual rights and obligation. However, the activities of purchase of the property and subsequent sale of the subdivided lot are for your mutual benefit.

Therefore, we consider that the partnership is formed when you entered into the agreement to purchase the Property.

In addition to the above, as evidenced by the land title provided which is referenced as Annexure 1.6, the subdivided lot is registered to all 4 co-owners equally. Therefore, you would not have been able to sell the lot without the consent of the 3 other co-owners and this is reflected on the contract of sale which all 4 names are listed on it.

Hence, we need to consider if the requirements of section 9-5 are met by the partnership.

Taxable supply

In your case, the partnership in which you are one of the partners has sold the subdivided lot for the consideration and is connected with the indirect tax zone as the lot is situated in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied.

Accordingly, we must determine whether:

(a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

Whether the sale is made in the course or furtherance of an enterprise that you on

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on what activities will amount to an enterprise.

Accordingly, we must determine if the sale of the subdivided lot satisfies paragraphs 9-5(b) of the GST Act as this will affect your registration requirement in paragraph 9-5(d).

Subsection 9-20(1) in part defines enterprise as:

(1)  An enterprise is an activity, or series of activities, done:

(a)  in the form of a *business; or

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

The question of whether an entity is carrying on an enterprise is examined in Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1).

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade.

·         A business encompasses trade engaged in on a regular basis.

·         An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

From the partnership perspective, the activity of subdivision and sale of the subdivided lot is an isolated transaction.

In accordance to paragraph 263 of MT 2006/1 the activities in this situation are not an enterprise

in that they are not of a revenue nature in the form of a business or in the form of an adventure or

concern in the nature of trade. The partnership activities in relation to the sale of the subdivided lot is a 'one off' undertaking for which there was no commercial purpose in mind as the primary intention was to construct for family members.

Based on the facts presented, in this instance, it is our view that this undertaking is a mere realisation of a capital asset.

However, in the future if the partnership or you carry on a similar type of activity, we may consider that an enterprise exists.

As you are a partner in this partnership, any distribution received does not constitute a supply therefore, there will be no GST consequences for you.

GST registration

Section 188-25 of the GST Act provides that in working out your projected GST turnover you should disregard:

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

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of capital assets is not defined in the GST Act. Goods and Services Ruling GSTR 2001/7 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

As we have established that there is no enterprise being conducted as it was a mere realisation of a capital asset, the partnership itself will not be required to be registered for GST.

Based on the limited information we have on you; you will need to determine whether your GST turnover meets the registration turnover threshold.

Per subsection 23-15(2), the current registration turnover threshold is $75,000 for non-profit entities.

Pursuant to subsection 188-10(1) of the GST Act, you have a GST turnover that meets a particular turnover if:

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

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

Given that you are not currently registered for GST, your current GST turnover will be nil. As such, your projected GST turnover must be determined.

Subsection 188-20(1) of the GST Act provides that your projected GST turnover is the sum of the values of all the supplies that you have made, or are likely to make, during the current month and the next 11 months, 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

(c)   supplies that are not made in connection with an enterprise that you carry on.

Therefore, if you meet the requirements listed above, you will be required to register as soon as practical.

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