Edited version of private ruling

Authorisation Number: 1011705710395

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Ruling

Subject: GST and input tax credits

Question 1

Is the Partnership entitled to claim input tax credits in respect of the acquisitions made in constructing and operating the Resort?

Answer

No. The Partnership is not entitled to claim input tax credits in respect of the acquisitions made in constructing the Resort.

No. The Partnership is not entitled to claim input tax credits in respect of operating the Resort.

Question 2

Does the Partnership control the Resort for the purposes of providing accommodation to members of the public, via the Resort Manager?

Answer

No. The Partnership does not control the Resort for the purposes of providing accommodation to the public via the Resort Manager.

Question 3

Does the Resort constitute commercial residential premises for the purposes of section 195-1 of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act)?

Answer

No. The Resort does not constitute commercial residential premises for the purposes of section 195-1 of the GST Act.

Question 4

Is the provision of accommodation in the Resort by the Resort Operator to members of the public a taxable supply by the Partnership pursuant to section 9-5 and not an input taxed supply pursuant to subsection 40-35(1)?

Answer

No. The provision of accommodation in the Resort by the Resort Operator to members of the public is not a taxable supply by the Partnership pursuant to section 9-5 of the GST Act but rather is an input taxed supply by the individual owners of the villas pursuant to subsection 40-35(1) of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A is involved in property development.

Company A, external investors (Investors) and a Unit Trust in which each of Company A and the Investors held units jointly acquired an existing business as tenants in common, including the freehold interest in the land on which the Business was operated (Land) as a GST-free supply of a going concern.

A partnership consisting of Company A, the Unit Trust and the Investors (collectively, the Partners) was registered for goods and services tax (GST). This relationship was documented in a Joint Venture Agreement (Previous Joint Venture Agreement).

The following development process was anticipated:

a) operating the business for a short period;

b) developing the Land after the business had ceased by constructing a number of stand alone accommodation units (villas) and associated common facilities (collectively, the Resort);

c) partitioning the Land such that each took relevant subdivided interests in the land, being the respective villas allocated to each of the partners and a proportionate interest in the common facilities;

d) varying the terms of the Partnership (Joint Venture) such that appropriate arrangements were made for the operation of the Resort post completion of the development; and

e) separately holding or disposing of their villas over time, but with them being made available to the public for short term rental accommodation as part of the Resort by the Joint Venture.

Construction of the Resort and component villas subsequently commenced and the Land was subdivided and partition occurred such that the Partners transferred proportionate interests in the villas between themselves with the result that each took full title in their respective villa(s) and retained proportionate interest in the common facilities .

Company B is the strata company in respect of the common areas (common property) and makes the common property available to the Partnership under an agreement with the Resort Manager.

While construction had commenced, at partition, none of the villas had been completed.

The resort comprises the residential villas, a tennis court, gymnasium, swimming pool and spa, manager's accommodation, maintenance facilities and storerooms, reception area and administration office.

The basis on which the resort will be managed has been documented in the Joint Venture Resort Management Agreement.

The key features of the Joint Venture Resort Management Agreement are:

a) it supplements, but does not replace the Previous Joint Venture Agreement - the Agreement prevails in respect of the operation and management of the Resort;

b) the objective of the Partnership is to undertake the 'Resort Management' which is defined to be the ongoing management of the Resort and it's individual component villas, including the appointment of a suitably qualified Resort Manager;

c) each partner grants control over its villa to the Partnership for the purposes of the Agreement, namely the resort management, being the provision of accommodation to the public via the Resort Manager;

d) the profit of the operation of the Resort is determined at the collective/Partnership level and distribution to individual Partners of their share of that collective profit is determined by reference to the financial performance of their respective Joint Venture Interest;

e) to allow the Partnership to act on a single collective basis, a Nominee is appointed; and

f) on behalf of the Partnership, the Nominee appoints the Resort Manager to manage and operate the Resort.

Pursuant to the Agreement, the Partnership appointed Company C under a Management Agreement to manage the Resort on behalf of the Partnership.

Company B appointed the Resort Manager as caretaker and manager of the Common Property.

Under the Management Agreement, the Joint Venture grants complete operational control of the resort to Company C which will make it available to the public and provide accommodation for and on behalf of the Partnership.

The villas will not be leased/licensed by the Partnership to Company C.

The Management Agreement includes the following information:

a) Company C (the 'Operator' in terms of the Management Agreement) is appointed by the Partnership/ Joint Venture to operate and manage the Resort;

b) Company C offers accommodation in the Resort to members of the public on behalf of the Partnership/Joint Venture;

c) the Partnership/Joint Venture authorises Company C to exercise certain rights on behalf of the Partnership/Joint Venture;

d) the Partnership/Joint Venture bears the cost of operating the Resort via the fees payable to Company C and by Company C being authorised to expend funds it holds on trust for the Partnership/Joint Venture; and

e) the Partnership/Joint Venture is obliged to provide Company C with quiet enjoyment of the Resort to facilitate its management activities but subject to the Partnership/Joint Ventures' right to occupy the resort's component villas on an agreed basis.

Net income will be allocated between the Partners based on the relative performance of their Joint Venture interests, that is, each Partner's share of the collective performance is determined by reference to the individual performance of its villa.

Individual Partners may choose to occupy their villas from time to time when not making them available to the public via Company C but are subject to various fees and charges if and when they elect to do this.

The Partnership has claimed input tax credits in respect of the construction of the resort.

Permanent occupation of the Villas is prohibited by the local government zoning of the property as 'Tourism'.

Your Contentions

Because the partners jointly acquired the Land (prior to partition) and will jointly derive the income from the operation of the Resort (post partition), you consider the Partners carry on a Partnership for GST purposes such that the Partnership is the relevant taxpayer that will make supplies of accommodation in the Resort.

You consider that the resort as held and operated by the Partnership is held and operated as commercial residential premises.

On the basis that the Partnership makes taxable supplies of accommodation in commercial residential premises, you consider that all acquisition in the construction of the Resort and its subsequent operation relate solely to the making of taxable supplies and to no extent to the making of input taxed supplies for the purposes of section 11-15 of the GST Act.

As those acquisitions were/will be made by the Partnership in the course of carrying on its enterprise (that is, the development and operation of the Resort), the Partnership has made/will make those acquisitions solely for a creditable purpose.

As a result, those acquisitions are prima facie creditable acquisitions under section 11-5 of the GST Act and the Partnership is entitled to claim input tax credits in full.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(1),

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35,

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

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

The following is our response to the questions outlined in your private ruling application. We have examined the arrangements entered into by the syndicate members from inception and our response will follow a transactional approach in order to capture the various transactions entered into and the GST consequences arising therefrom.

An entity is entitled to claim input tax credits for creditable acquisitions that it makes.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

a) you acquire anything solely or partly for a *creditable purpose; and

b) the supply of the thing to you is a *taxable supply; and

c) you provide, or are liable to provide, *consideration for the supply; and

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

[the terms marked with an * are defined in section 195-1 of the GST Act.]

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection

11-15(2) you do not acquire the thing for a creditable purpose to the extent that:

a) the acquisition relates to making supplies that would be input taxed; or

b) the acquisition is of a private or domestic nature.

Goods and Services Tax Ruling GSTR 2008/1 outlines when an entity acquires anything or imports goods solely or partly for a creditable purpose and explains that it is firstly necessary to identify the enterprise that is being carried on, and secondly to determine whether there is a connection between the acquisition and the enterprise.

In your case, it is necessary to determine the nature of the arrangement between the syndicate members in order to clarify who is entitled to input tax credits on the construction costs of the Resort.

The intention of the syndicate members from inception is outlined in the initial Joint Venture Agreement.

The purchase of a syndicate interest entitled each member to:

1. Ownership of a strata titled resort villa; and

2. A unit / units in the Unit Trust.

Once all the syndicate interests were purchased by investors, the participants agreed to form an unincorporated joint venture and proceeded in buying and operating the business for a short period as anticipated. The business then ceased, the assets disposed of and development of the resort and villas commenced.

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

A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the ITAA 1997. The 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, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. This type of partnership is a general law partnership.

In your case, we do not consider that the association of syndicate members is a general law partnership. This is because the objective of the syndicate members is the partition of the land acquired and not a view to profit. Upon completion of the development and partitioning, the syndicate members will enter into another arrangement for the management of the development for the benefit of the members to enable them to earn a return on their investment.

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 partnership as a tax law partnership.

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.

Paragraphs 49 to 51 of Goods and Services Tax Ruling GSTR 2004/2, Goods and services tax: What is a joint venture for GST purposes?, considers the meaning of a joint entitlement to income.

49. Receipt of income jointly connotes a joint entitlement to income rather than a mere sharing of gross income. For example, a joint venture agreement may provide for one of the participants to receive the proceeds from the sale of the participants' shares of the product of the joint venture, on behalf of the other participants. Even though the participants, under the terms of the agreement, may share in the amount received, they are entitled to their respective contractual shares of the product severally rather than jointly.

50. The distinction between a partnership and a joint venture was observed in the decision of the Supreme Court of NSW in A.R.M. Constructions Pty Ltd and Others v.Federal Commissioner of Taxation. ^F24 In that case, Yeldham J stated:

...I am clearly of the opinion that...there was merely a joint venture between the appellants to construct buildings, in contrast to an agreement to make profits for sharing, and it was the intention of the parties at all material times to retain the units and town houses so erected, except to the extent that sales might be necessary to repay moneys borrowed from lending institutions...In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could thereafter go their own respective ways. Their expressed intention so to do was duly manifested in what they thereafter did and achieved, and their agreement constituted in law something in the nature of a joint venture to construct the building, in contrast to an agreement to make profits for sharing, inter se. The only partnership for tax purposes related to such rental income as was received jointly before the date of the deed of partition...^F25

You consider that, because the syndicate members jointly acquired the Land (prior to partition) and will, in your opinion, jointly derive the income from the operation of the resort (post partition), the syndicate members carry on a Partnership for GST purposes.

Regarding the construction and operation of the Resort, we do not consider that the arrangement entered into by the syndicate members is a tax law partnership. Rather, the syndicate members are co-owners or tenants in common of the subject property.

This view is supported by the contents of the documents entered into between the syndicate members and supplied to the syndicate members.

Further, the requirement for each syndicate member to enter into the Joint Venture Resort Management Agreement is additional evidence of the syndicate members being co-owners or tenants in common.

In addition, there is no joint entitlement to income on operation of the Resort. Rather, each syndicate member's entitlement to income is based on the financial performance of each participant's interest (reflecting the profit of that interest having regard to the costs payable in respect of that interest and the revenue generated from the interest).

It is clear that the project envisages two distinct stages:

1. Partition of the land and construction of the villas.

2. A rental arrangement which will provide a return on the buyer's investment.

Goods and Services Tax Ruling GSTR 2009/2, Goods and services tax: partitioning of land, considers the GST consequences of the partitioning of real property among joint tenants or tenants in common (co-owners).

The term 'partition' is not used or defined in the GST Act. It is defined for the purpose of this ruling by reference to its ordinary and property law meanings.

The Macquarie Dictionary provides the following definition:

8. Law:

a) a division of property among joint owners or tenants in common or a sale of such property followed by a division of the proceeds.

b) A division of real property held in co-ownership…

The term is also defined at paragraph 1501 of the Australian Encyclopaedia of Forms and Precedents which states:

Partition is one of a variety of means of determining the co-ownership of property. It is an equitable remedy which terminates such co-ownership by effecting a physical division of the property owned by the co-owners and conferring separate estates in fee simple to each co-owner in accordance with the respective values of each party's new parcel.

For the purposes of GSTR 2009/2, the term partition refers to either:

§ the division of land and the transfer of the divided parts between the co-owners; or

§ if the land is already divided and held by the co-owners, the transfer of the divided parts between the co-owners.

so that one or more co-owners become the owner in severalty of a specifically ascertained part(s) of the land.

A partition of land may be effected by either an agreement between the co-owners (partition by agreement) or as a result of a court order (court ordered partition).

In this case, the partition of the Land is by agreement.

Under a partition by agreement, co-owned property may be divided and each co-owner contemporaneously transfers or conveys their respective interest or share in the part of the land being taken by the other.

The transfer or conveyance by each co-owner of their respective interest in or right over the land to be taken by the other co-owners in severalty is a supply as defined in subsection 9-10(1) of the GST Act. However, a co-owner does not make a supply of its own interest in the land that it is to take in severalty.

It is the Commissioner's view that if land is applied or intended to be applied in an enterprise carried on by a co-owner, a supply of that co-owners interest in the land under a partition by agreement is in connection with the enterprise and is a supply in the course or furtherance of the enterprise.

The GST Act does not require that an asset must be applied primarily or principally in carrying on the enterprise for the supply of an asset to be in the course or furtherance of an enterprise. Accordingly, a connection between the supply of the interest in land under a partition and the enterprise carried on by the co-owners exists if, at the time of the supply, the land is applied in carrying on the enterprise to a minor or secondary extent.

Further, the Commissioner considers that, under a partition by agreement, each co-owner makes a supply of land for consideration. In the absence of an owelty payment, the consideration received is entirely non-monetary in that each co-owner gives up their interests in parts of the land in return for the same from other co-owners.

The consideration for a co-owner transferring their interest in land to other co-owners is the transfer or conveyance made by the other co-owners of their respective interests in another part of the land to the first co-owner. The transfer or conveyance by the co-owners together with any owelty money paid or payable is consideration received by the first co-owner for the supply of their interest to the others.

The value of the consideration is the sum of the GST inclusive market value of all the other co-owners' interests in the part of the land acquired by a co-owner plus any owelty money received in respect of the partition.

The Commissioner considers that the transfer of an interest in a part of the land by a co-owner is 'in connection with', 'in response to' or 'for the inducement of' the supply by each of the other co-owners of their respective interests in a part of the land.

In your case, partition occurred such that the syndicate members transferred proportionate interests in the villas between themselves with the result that each took full title in their respective villa(s) and retained a proportionate interest in the common facilities.

At this time, in accordance with the Investor Agreement and the Joint Venture Agreement, each individual partner took possession of its own separate parcel as an investment property with the expectation that they will each build a villa to be made available for rent as part of the Resort.

The villas were in varying stages of completion at this time (20% to 60% complete). Each co-owner gave up their interests in parts of the Land in return for the same by the other co-owners.

The GST treatment of the transfers depends on the GST status of each party. The supplies are subject to GST if they are taxable supplies under section 9-5 of the GST Act.

Further, co-owners who are registered for GST will be entitled to input tax credits on creditable acquisitions made in constructing their villas until the date of partitioning. Goods and services acquired post partition for the completion of the villa will not be for a creditable purpose as each syndicate member will be supplying their villa for the purposes of making an input taxed supply of residential premises when the operator, on behalf of each co-owner, offers their villa for rental accommodation.

Post partition - The Joint Venture Resort Management Agreement

The Joint Venture Agreement (the first agreement between the syndicate members) made provision for the acquisition of the land, establishment of the Joint Venture, construction of the villas and development of the Resort. It also required the syndicate members to agree on the basis upon which the Resort would operate for the provision of accommodation to the public once completed.

Post partition, the syndicate members agreed the basis on which the Resort would be managed and this was documented in the Joint Venture Resort Management Agreement.

It is clear from the recitals that the agreement to which all syndicate members are a party, is the second step in the business relationship between the parties. Each participant has agreed individually to become a party to the agreement in order to manage the development as a Resort.

The relationship between the syndicate members is described as one of joint venturers only and limited to carrying out the objectives set out in the Joint Venture Resort Management Agreement.

The syndicate members are not considered to be in partnership and the obligations and liabilities of the participants arising out of or in connection with the Joint Venture are several and not joint and must be borne by each of them severally in their respective interest.

The Joint Venture Resort Management Agreement provides that the Participants agree to continue to associate themselves in an unincorporated joint venture according to the terms and conditions contained in the agreement, to regulate the rights and obligations of the participants in respect of the resort management and provide a framework within which the resort management is carried out.

The objective of the Joint Venture is to undertake the resort management.

The Nominee is the representative and agent of the participants collectively in respect of the Joint Venture.

The functions of the Nominee include, amongst other things and on behalf of the participants:

a) the appointment of the Operator of the Resort under the Joint Venture Resort Management Agreement; and

b) to administer that appointment and deal with the Operator of the Resort on behalf of the Participants,

on the basis that:

(i) the Operator will receive all income and pay all expenditure arising from the operation of the Resort on behalf of the Participants with any net proceeds to be deposited in the Joint Venture's nominated bank account; and

(ii) each Participant's respective share of income must be determined by reference to the

relevant income derived from the letting of that Participant's Villa; and

(iii) costs and expenditure must be reported for each Villa by the Operator and apportioned to each Participant in accordance with that Participants Interest.

Company C was appointed as the Operator of the resort.

The Resort Management Agreement, entered into between Company C and the Joint Venture, governs the operation and management of the resort.

The responsibilities of the Operator are contained in the Resort Management Agreement.

Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises, states the Commissioners view on the meaning of paragraphs (a), (e) and (f) of the definition of commercial residential premises.

'Commercial residential premises' is defined in section 195-1 of the GST Act and includes:

§ at paragraph (a) a hotel, motel, inn, hostel or boarding house.

§ anything similar to residential premises described in paragraphs (a) to (e).

The meaning of 'similar to' is discussed in paragraphs 78 to 80 of GSTR 2000/20.

78. Paragraph (f) broadens the definition of commercial residential premises. The purpose of paragraph (f) is to include residential premises that, while not in themselves covered by paragraphs (a), (b) or (e), exhibit characteristics that place them on a similar footing to those premises that are covered .

This means that a 'similar establishment' must have sufficient characteristics in common with the class of premises described, to allow them to be classed with them, rather than with premises of another kind.

The characteristics of commercial residential premises are set out in paragraph 83 of GSTR 2000/20 and refer to the common meaning of the terms 'hotel, motel, inn, hostel or boarding house' as they are generally understood. At the same time they are broad enough to include premises that are considered 'similar' to these. The test is one of fact and degree.

The main characteristics are:

I. Commercial intention;

II. Multiple occupancy;

III. Holding out to the public;

IV. Accommodation is the main purpose;

V. Central Management;

VI. Management offers accommodation in its own right;

VII. Services offered;

VIII. Status of guests.

We accept that the resort has a commercial purpose or character and that the villas will be rented on a regular basis to individuals. This is supported by the zoning of the property which is for tourism. Further, individuals may not occupy the villas for a period greater than three months.

We also accept that the villas are held out to the public and that accommodation is the main purpose. This is supported by the website and marketing material.

You have advised that the Resort has a manager's residence, reception and administration office which supports the conclusion that the resort is centrally managed.

Services offered - It is evident from the Agreement entered into with the Operator of the Resort that services such as cleaning, changing linen and provision of in-house films are just some of the services offered to guests.

Status of guests - It is evident from the marketing material that those who hire accommodation have the status of guests.

Management offers accommodation in its own right - to meet this criterion, management must have control of the premises as a whole, whether or not they own the property or any part of it and lets them in its own right, rather than as an agent.

Paragraph 104 of GSTR 2000/20 states:

This is of particular relevance to strata titled premises. The question of whether or not you have control of the premises may be examined by looking at whose right you are conferring when you let a room to a guest. You control premises if you hold a lease or licence or other right to occupation, and are conferring your right to a guest. An agreement or arrangement that allows you to let premises on the owner's behalf is not the same. Instead, you are conferring the owner's right to occupancy, as their agent.

Paragraph 124 goes on further to say that where accommodation of different styles is managed and let centrally and offered by an entity across a range of locations and not through an agent for others, the various premises must be classified using the characteristics that each premises exhibits. However, where separately titled adjacent cottages or villas are combined and then offered for letting by an entity, they can form commercial residential premises.

A joint venture is not an entity and cannot itself make supplies or acquisitions. Therefore, each participant must individually account for GST and input tax credits on their taxable supplies and creditable acquisitions.

In your case, each syndicate member must enter into the Joint Venture Resort Management Agreement for management of the resort. The agreement provides that each participant must make their Villa and their share of the joint venture assets available to the Joint Venture to the extent of its interest for the purposes of the Joint Venture as set out in the Agreement.

The participants appoint a Nominee as their representative and agent in respect of the Joint Venture who will undertake the functions of appointing a Strata Manager and Resort Operator.

The Resort Operator is responsible for the operation and management of the Resort on behalf of the Joint Venture, represented by the Nominee as representative and agent of the syndicate members.

It would appear from the contents of the Resort Management Agreement that this is a fee for service arrangement and that the Operator does not exert sufficient control over the villas and common property to rent them out as principal in their own right.

Further, the Joint Venture Resort Management Agreement provides support for the view that it is the individual syndicate members, in their own right, who are providing their villas for the purpose of holiday accommodation. This is arranged by the Resort Operator on behalf of each syndicate member with the Nominee, acting as agent for each individual syndicate member.

A number of clauses, extracted from the Joint Venture Resort Management Agreement, support our understanding of the arrangement entered into by the participants.

The Resort Management Agreement further supports the view that it is the individual syndicate members, in their own right, who are providing their villas to the operator for the purpose of holiday accommodation.

A clause in the Resort Management Agreement outlines the use of the Resort by syndicate members. Although syndicate members must give a period of notice to the Operator regarding the use of their villa during peak periods (as would be expected when managing a commercial tourism operation), there is no restriction on the use of the villas during these peak periods when it is expected that rentals would be at a premium.

This arrangement is consistent with the view that it is the individual owners who control the management and operation of their villa. This would not be consistent with a commercial arrangement whereby an entity consolidates the properties and rents them out in their own right.

Conclusion

Where parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. However, in determining whether the documentation represents the substance and reality of the transaction, regard must also be had to the surrounding facts and circumstances.

On balance, we consider that it is the individual syndicate members who exercise control over the management and operation of the rental of their villa and it is the syndicate members who are supplying accommodation as principal in their own right.

The supply of accommodation by the Owner, through the Operator (as agent) is an input taxed supply of residential premises under subsection 40-35(1) of the GST Act.

Individual syndicate members will therefore not be making creditable acquisitions as their individual villas will be used by the Resort Operator for the purpose of making input taxed supplies of residential accommodation on their behalf.