Edited version of private ruling

Authorisation Number: 1011478281229

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Ruling

Subject: goods and services tax and property subdivisions

Question 1

Is GST payable on the partners' sale of property C?

Answer

Yes

Question 2

If GST is payable on the partners' sale of property C, can the margin scheme be used to calculate GST on the sale?

Answer

The partnership of the two partners (the partnership) can use the margin scheme to calculate GST on its sale of property C provided that:

· the partnership and the purchaser agree in writing that the margin scheme will be used; and

· the Commissioner extends the time in which the partnership and the purchaser can make such an agreement to the date they enter into the agreement.

Otherwise, the margin scheme cannot be used.

If the partnership enters into a written agreement with the purchaser to use the margin scheme, the partnership will need to make a written request to the Australian Taxation Office (ATO) to allow it and the purchaser to make the agreement on the date on which these parties entered into the agreement.

Question 3

Will GST be payable on the partners' sale of property Z?

Answer

No

Question 4

If GST is payable on the partners' sale of property Z, can the margin scheme be used to calculate GST on the sale?

Answer

As GST is not payable on the partners' sale of property Z, the margin scheme is not applicable.

Relevant facts and circumstances

Property A

The partners purchased a vacant block of land located in Australia (property A) after 30 June 2000.

There was no mention of GST in the contract for the sale of property A to the partners.

The partners did not inherit property A from a deceased person.

The partners did not buy additional land to add to property A.

The partners borrowed money to finance their purchase of property A

The intention was to subdivide property A into two blocks, relocate two old houses to the blocks and rent the houses out as long term investments.

In a certain year, property A was subdivided. The two lots created from the subdivision were property B and property C. An old house was relocated to property B and rented out. Property C was left vacant.

The partners did not have a business organisation in relation to the subdivision of property A.

The partners did not need to do anything to property A to get approval to subdivide it.

The partners did not borrow money to finance their subdivision of property A. There were very little costs in subdividing the land.

Property B was sold a number of years ago.

In a certain year, the partners sold property C. The partners and the purchaser did not agree in writing that the margin scheme would be used.

Property C was sold at market value.

The original contract for the sale of property C by the partners fell through. The intending purchaser under that contract had requested an extension of the settlement date of about a certain amount of time and this extension was given. Because of this extension, the intending purchaser under that contract paid some rent to the partners for this property.

Property C was never used to conduct the affairs of the particular business

Property C was recorded in the balance sheets of the partnership from a certain date.

Property X

The partners are now considering subdividing the block they currently live on (property X) and selling a section of the block.

Property X is located in Australia.

The partners purchased property X on a certain date.

The partners did not buy additional land to add to property X.

The partners borrowed money to finance their purchase of property X.

The partners built a house on property X. The partners borrowed money to build the house. The partners live in the house.

The block to be sold will be property Z. The block to be retained will be property Y.

The area of land that is to form property Z has the following things on it which are used in the particular business:

· machinery

· a shelter

· a shed

Property Z will be sold as vacant land.

The land that is to form property Y contains the house and a large work shed. The partnership runs its particular business from the work shed.

The partners will not have a business organisation in relation to the subdivision of property X. They will organise the subdivision and do most of the work themselves.

The partners will borrow money to finance the subdivision of property X. The subdivision is expected to cost a certain amount of money to connect power and water to the block.

To date, the partnership has not claimed any income tax deductions or input tax credits in relation to the property X land or the house on this land.

The partners will not claim income tax deductions for the interest on borrowings to be used to finance the subdivision of property X.

The partners will not develop property X to a level beyond that necessary to secure Council approval for the subdivision.

The partners will not erect any buildings on property Y or property Z.

The partners will sell property Z at market value.

Property X has not been recorded in the partnership books as an asset.

The partners did not charge any rent to the partnership for the partnership's use of property X.

Other facts

At the time of purchase of property A, one of the partners was a sole trader operating a certain business.

This partner was registered for GST for a certain period.

The other partner was not registered for GST.

Due to the substantial growth in the business in certain years, the partners decided to start a long term investment plan whereby they purchased a number of rental properties. The intention was to hold these properties as long term investments.

During certain years, due to the business growth, the partners decided to move the business to a partnership as both partners were working in the business full time.

The partnership has been registered for GST since a certain date.

From a certain date, the rentals were recorded in the partnership's financial statements and shown as assets of the partnership. The reason they were on the balance sheets of the partnership was to help in keeping an accurate record of the rental properties, in particular, keeping record of holding costs of land and rental properties not available for rent.

In certain years, the particular business went through a significant downturn in trading. Due to a large downturn in the cash flow, the partners found it difficult to meet their investment commitments and they were under pressure from the bank to put all properties on the market for sale.

The partners are still under significant pressure from the bank to reduce their commitments as quickly as possible. All the property they hold is on the market for sale. However, due to the current economic situation, there is not a lot of demand.

There is no written partnership agreement.

The partnership has never been a member of a GST group or participant in a GST joint venture.

Reasons for decisions

Question 1

Summary

The sale of property C was a supply made in the course or furtherance of a property subdivision enterprise carried on by the partnership.

GST is payable on this sale as all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Detailed reasoning

You are liable for GST on taxable supplies that you make.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you carry on and

· the supply is *connected with Australia; and

· 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, starting at section 195-1 of the GST Act.

Before we determine whether the sale of property C was a taxable supply, we must first determine who sold the property - the partnership or the partners in their respective individual capacities.

Property C was recorded in the balance sheets of the partnership. Hence, we consider that the partnership sold property C.

The partnership's sale of property C satisfied the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. That is, the sale was a supply made for consideration. Additionally, the supply was connected with Australia, as the property is located in Australia, and the partnership was registered for GST at the time of sale.

There are no provisions of the GST Act or any other Act under which the partnership's sale of property C could have been GST-free or input taxed.

Therefore, what remains to be determined is whether the partnership's sale of property C was a supply made in the course or furtherance of an enterprise that it carried on.

Paragraph 9-5(b) of the GST Act

In accordance with section 9-20 of the GST Act, an enterprise includes:

· an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act)

· an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act)

· an activity or series of activities done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

We do not consider that the partnership carried on a leasing enterprise from property C as the partnership did not lease out this property on a regular or continuous basis. Therefore, the partnership's sale of property C was not a supply made in the course or furtherance of a leasing enterprise carried on by the partnership.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the ATO view on the meaning of enterprise for ABN purposes.

In accordance with paragraph 1 of Goods and Services Tax Determination GSTD 2006/6, MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999.

Paragraph 265 of MT 2006/1 lists factors that assist in determining whether a property subdivision activity is an enterprise. It states:

· 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

· there is a change of purpose for which the land is held;

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

· there is a coherent plan for the subdivision of the land;

· there is a business organisation - for example a manager, office and letterhead;

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

· buildings have been erected on the land.

There was no change in purpose for which the land that formed property A was held.

The partnership did not purchase additional land to add to property A.

Property C was recorded in the balance sheets of the partnership.

The partnership had a coherent plan for the subdivision of property A.

The partnership did not have a business organisation in relation to its subdivision of property A.

The partnership borrowed money to finance its purchase of property A.

The partnership did not borrow money to finance its subdivision of property A.

The partnership did not need to do anything to property A to get Council approval for the subdivision of this property. The partnership erected a house on one of the properties created from the subdivision of property A - property B. Hence, there was a level of development of this lot beyond that necessary to secure council approval for the subdivision.

Several of the factors set out in paragraph 265 of MT 2006/1 are present in this case.

Hence, we consider that the partnership's activity of subdividing property A was an adventure or concern in the nature of trade or a business. Therefore, this activity was a property subdivision enterprise. Hence, the sale of property C was a supply made by the partnership in the course or furtherance of an enterprise that the partnership carried on. Therefore, the requirement of paragraph 9-5(b) of the GST Act was satisfied.

As all of the requirements of section 9-5 of the GST Act were satisfied, the partnership's sale of property C was a taxable supply, and therefore, GST is payable by the partnership on this sale.

Question 2

Summary

The partnership can use the margin scheme to calculate GST on its sale of property C provided that:

· the partnership and the purchaser agree in writing that the margin scheme will be used; and

· the Commissioner extends the time in which the partnership and the purchaser can make such an agreement to the date the partnership and the purchaser enter into the agreement.

Otherwise, the margin scheme cannot be used.

If the partnership enters into a written agreement with the purchaser to use the margin scheme, the partnership will need to make a written request to the ATO to allow the partnership to make the agreement on the date on which the partnership and the purchaser enter into the agreement.

Detailed reasoning

In accordance with subsection 75-5(1) of the GST Act, the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act sets out time limits for entering into the written agreement that the margin scheme is to apply. It states:

The agreement must be made:

· on or before the making of the supply: or

· within such further period as the Commissioner allows.

In accordance with subsection 75-5(2) of the GST Act, the margin scheme does not apply if you acquire the entire interest through a supply that was ineligible for the margin scheme.

A supply is ineligible for the margin scheme in the circumstances set out in subsection 75-5(3) of the GST Act. These circumstances are as follows:

(a) the supply is a taxable supply on which the GST was worked out without applying the margin scheme.

(b) it is a supply of a thing you acquired by inheriting it from a deceased person, and the deceased person has acquired all of it through a supply that was ineligible for the margin scheme.

(c) certain circumstances where you were a member of a GST group.

(d) certain circumstances where you were a participant of a GST joint venture.

The partnership's sale of property C was a sale of a freehold interest in land.

The sale of property C was taxable.

The supply of the freehold interest to the partnership was not a taxable supply.

The partnership did not acquire its freehold interest by inheriting it from a deceased person.

The partnership has never been a member of a GST group or a participant in a GST joint venture.

Hence, the supply of the freehold interest in property C to the partnership was not ineligible for the margin scheme.

However, the partnership and the purchaser did not agree in writing that the margin scheme would apply. Hence, the partnership is not currently able to use the margin scheme to calculate GST on its sale of property C.

However, if the partnership and the purchaser agree in writing that the margin scheme is to apply to the sale, the partnership may apply to the Commissioner for an extension of time for making the agreement. If the Commissioner extends the time in which the partnership and the purchaser can make such an agreement to the date they enter into the agreement, the partnership can then use the margin scheme to calculate GST on the sale of property C.

Goods and Services Tax Ruling GSTR 2006/8 sets out the rules for the margin scheme:

This publication can be found on the ATO website www.ato.gov.au.

Question 3

Summary

GST will not be payable on the sale of property Z as the sale of this property will not be a supply made in the course or furtherance of an enterprise carried on by the sellers.

Detailed reasoning

Before we determine whether GST is payable on the sale of property Z, we must first determine who will sell the property for GST purposes - the partnership or instead the partners in their respective individual capacities.

Property X has not been recorded in the partnership books as an asset.

The partnership has not claimed income tax deductions or input tax credits in respect of the property X land.

There is no written partnership agreement.

Hence, we consider that property X is not a partnership asset, and therefore, the sale of property Z will not be a supply made by the partnership. Therefore, the sale of property Z will be by the partners in their respective individual capacities.

Paragraph 9-5(b) of the GST Act

The sale of property Z will not be a supply made in the course or furtherance of a particular business carried on by the supplier as the partnership carried on this business and the partnership will not be the supplier of the property.

We shall now consider whether the partners' subdivision of property X will be a property subdivision enterprise/s.

There was no change in purpose for which property X was held.

The partners did not purchase additional land to add to property X.

The property X land has not been recorded in the partnership books as an asset.

The partners had a coherent plan for the subdivision of property X

The partners will not have a business organisation in relation to the subdivision of property X.

The partners borrowed money to finance their purchase of property X. The partners will borrow money to finance their subdivision of this property.

The partners will not claim income tax deductions for interest on money borrowed to defray subdivision costs for property X.

The partners will not develop property X beyond the level that is necessary to secure Council approval for the subdivision.

The partners will not erect buildings on property Y and property Z.

Only two of the factors in paragraph 265 of MT 2006/1 are present in this case. We do not consider that the presence of these two factors is sufficient to conclude that the subdivision activity is a business/businesses or an adventure or concern in the nature or trade/adventures or concerns in the nature of trade. Hence, the partners' subdivision of this property will not be an enterprise/enterprises. Therefore, the partners' sale of property Z will not be a supply or supplies made in the course or furtherance of a property subdivision enterprise/property subdivision enterprises carried on by the suppliers.

We shall now consider whether the partners' sale of property Z will be a supply/supplies made in the course or furtherance of an enterprise/enterprises of supplying a licence/s to use the property.

In accordance with paragraph 9-20(2)(c) of the GST Act, an activity or series of activities done by an individual without a reasonable expectation of profit or gain is not an enterprise.

The partners are individuals. They supplied to the partnership a licence to use property X in the particular business. However, the partners did not charge the partnership anything for this licence. Based on the information provided, the partners had no reasonable expectation of making a profit or gain from this licence. Therefore, the sale of property Z will not be a supply made in the course or furtherance of a property licensing enterprise carried on by the partners.

We do not consider that the partners will sell property Z in the course or furtherance of any enterprise. Therefore, the requirement of paragraph 9-5(b) of the GST Act will not be satisfied.

As not all of the requirements of section 9-5 of the GST Act will be satisfied, the sale of property Z by the partners will not be a taxable supply. Hence, GST will not be payable on the sale of this property.

Question 4

As GST is not payable on the sale of property Z, the margin scheme is not applicable.