Edited version of private ruling

Authorisation Number: 1011833135766

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Ruling

Subject: GST and property development

Question 1

Can all of the GST credits included in the construction costs be claimed when only some of the units will be sold on completion?

Answer

No, all of the GST credits included in the construction costs of the units cannot be claimed.

Question 2

Is there any GST payable when the units are transferred to the separate discretionary trusts?

Answer

Yes, GST is payable on the transfer of the units to the separate discretionary trusts.

Relevant facts and circumstances

You propose to undertake a property development project with your brother. The project will involve the construction of a block of units with the sale of units to cover the costs of the project.

You and your brother are planning to set up separate discretionary trusts.

The trusts will undertake the project under a joint venture arrangement. You and your brother, on behalf of your separate trusts, intend to enter into a joint venture agreement which will outline in writing how the project will be undertaken and how the remaining units will be split at the end.

You advise that the trusts will be separately registered for GST but you have not advised if the trusts will be registered as participants in a GST joint venture.

As yet, you have not settled on a property and any improvements on the property (for example, an old house) will be demolished.

When the property is acquired it will be held in the names of the trusts.

No funds will be borrowed for the purchase of the property. However, you and your brother do intend to borrow the construction costs.

You and your brother have not been involved in any other property developments in the past and, as a result, you intend to engage, an unrelated entity, to carry out the project.

When the project is completed, you and your brother intend to sell units to cover the construction costs and transfer units to your trust and your brother's trust. The retained units will be rented for more than five years before being sold.

As the value of the units will vary there will probably be some monetary adjustment between you and your brother.

Reasons for decision

Question 1

Summary

The entity which is carrying on the enterprise of property development will be entitled to claim all of the GST credits included in the construction costs of the units to be sold but only a portion of the GST credits that relate to the construction costs of the other units. This is because not all of the construction costs for the units are being acquired for a creditable purpose.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to claim GST credits for any creditable acquisition that you make.

The word 'you', as used in the GST legislation, applies to entities (individuals, companies, partnerships, etc) generally and as such, it is only an entity that is entitled to claim a creditable acquisition.

You have advised that the trusts will undertake the project under a joint venture arrangement.

However, under subsection 184-1(1A) of the GST Act a non-entity joint venture is not an entity for GST purposes unless the joint venture applies to be approved as a GST joint venture under Division 51 of the GST Act (see additional information below).

As a non-entity joint venture is not an entity it cannot make taxable supplies or creditable acquisitions. However, each participant in the joint venture (for example, individual, trust, partnership or company, etc) is an entity for GST purposes.

This means that, where a joint venture arrangement is not approved as a GST joint venture or where the arrangement is not in the nature of a partnership, each participant may need to individually account for GST on their share of any taxable supplies and claim GST credits on their share of any creditable acquisitions, if all of the requirements to do so are satisfied.

Therefore, as it is still unclear which entity (for example, joint venture or partnership) is undertaking the project, the following advice is provided in respect of the entity or entities that will be carrying on the enterprise of property development.

As stated previously, the entity will be entitled to claim a GST credit for any creditable acquisition that it makes.

Under section 11-5 of the GST Act the entity makes a creditable acquisition if:

· the entity acquires anything solely or partly for a creditable purpose

· the supply of the thing to the entity is a taxable supply

· the entity provides, or is liable to provide, consideration for the supply, and

· the entity is registered or required to be registered for GST.

To be entitled to claim GST credits all of the above requirements must be satisfied by the entity at the time that the acquisition is made.

The first requirement to be satisfied is that the entity makes an acquisition for a creditable purpose.

According to subsection 11-15(1) of the GST Act, an entity acquires a thing for a creditable purpose, to the extent that it acquires that thing in carrying on its enterprise.

In this case, the acquisitions, being the construction costs, are acquired in carrying on the entity's enterprise of property development.

However, paragraph 11-15(2)(a) of the GST Act provides that an acquisition is not made for a creditable purpose to the extent that it relates to making supplies that would be input taxed.

Of relevance to this case, is subsection 40-35(1) of the GST Act which provides that the supply of residential premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed but only to the extent that the premises are to be used predominantly for residential accommodation.

From the facts provided, it is clear, that the units to be constructed would constitute residential premises and the fact that the units to be retained will be rented out for five years means that they satisfy the requirement that they be used predominantly for residential accommodation.

Therefore, as the retained units will be used for making input taxed supplies (that is, residential rent) there is generally no entitlement to GST credits on the construction costs of these units as they are not being made for a creditable purpose.

However, you have advised that these units will be transferred on completion to the separate discretionary trusts. As determined in Question 2 below, the transfer by each separate trust of their interest in each of the units to the other trust to enable sole ownership of these units to occur is a taxable supply.

As such, that proportion of the construction costs that relate to the interests being transferred will also be considered to be made for a creditable purpose.

Those construction costs that relate to the interests in each unit that is being retained by each trust will not be for a creditable purpose because they relate to making supplies that are input taxed and as such, cannot be creditable acquisitions.

As the remaining construction costs are being made for a creditable purpose, they will satisfy the first requirement of section 11-5 of the GST Act.

Accordingly, if the other requirements of section 11-5 of the GST Act are also satisfied, the entity will be entitled to claim GST credits but only in relation to the construction costs of the units to be sold and a proportion of the construction costs of the other units.

Notwithstanding the above information, there is no entitlement to a GST credit unless the entity making the creditable acquisition holds a valid tax invoice for that acquisition. One of the requirements for a valid tax invoice is that the tax invoice lists the entity as the recipient of the supply.

Please note, where an acquisition is only partly creditable, the amount of the GST credit to which the entity is entitled to claim will depend on the extent of creditable purpose of that acquisition. The term 'extent of creditable purpose' is defined in subsection 11-30(3) of the GST Act as the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.

Further guidance on determining the extent of creditable purpose for claiming GST credits is contained in Goods and Services Tax Ruling GSTR 2006/4 but generally any claim for GST credits where an acquisition is only partly creditable will need to be apportioned on a fair and reasonable basis which is able to be substantiated.

Question 2

Summary

The entity carrying on the enterprise of property development will be liable for GST on the transfer of the units to the separate discretionary trusts. This is because the transfer satisfies all of the requirements to be a taxable supply.

Detailed reasoning

According to section 9-40 of the GST Act it is only the entity that is making a taxable supply that is liable to pay GST on that supply.

Therefore, the entity which will be carrying on the enterprise of property development will only be liable for GST if the transfer of the units to the separate discretionary trusts is a taxable supply.

Section 9-5 of the GST Act provides that the entity makes a taxable supply if:

· the entity makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· the entity 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.

You have advised that, on completion of the project, units will be sold to cover the construction costs of the project and of the remaining units will be transferred to your trust and your brother's trust. If necessary, there may also be a monetary adjustment.

The sale of the units will be a taxable supply and thus, subject to GST because all of the requirements of section 9-5 of the GST Act will be satisfied and the supply of the units, being new residential premises, will not be GST-free or input taxed.

In respect of the remaining units, a transfer of co-owned property so that each co-owner becomes the owner in severalty of a specifically ascertained part of the property is referred to as partitioning.

It is also recognised under partitioning that, in some cases, an amount of money (called 'owelty' or 'equality' money) may need to be made by one co-owner to the other co-owner(s) to take account of any differences in the value of the portions of the property that they receive.

Guidance on the GST consequences of the partitioning of real property is contained in Goods and Services Tax Ruling 2009/2.

In particular, paragraph 161 of GSTR 2009/2 states:

Under a partition the transfer by each participant in a joint venture of their interests in the land is a taxable supply provided all the requirements of section 9-5 are met. It makes no difference whether the joint venture is a GST joint venture or not.

Therefore, it is necessary to determine if all of the requirements of section 9-5 of the GST are satisfied in relation to the transfer of the units to the separate discretionary trusts. If they are all satisfied then the transfer will be a taxable supply and thus, subject to GST.

From the information provided, the transfer is connected with Australia and the entity will be required to be registered for GST. Therefore, it is now necessary to determine if there is a supply for consideration and if that supply has been made in the course or furtherance of an enterprise that the entity carries on.

The existence of a 'supply' is an essential element in determining whether a transaction is a taxable supply under section 9-5 of the GST Act.

The term 'supply' is broadly defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. This wide definition of the term 'supply' includes the transfer or conveyance of an interest in or right over land by a co-owner. However, a co-owner, or a participant in a joint venture arrangement, does not make a supply of its own interest in the land that it is to take in severalty.

The term 'consideration' is defined in section 9-15 of the GST Act and extends beyond payments to include such things as acts and forbearances. This means that consideration is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in-kind' form and includes acts, forbearances, and goods or property.

As outlined in paragraph 86 of GSTR 2009/2, 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.

In addition, paragraph 97 of GSTR 2009/2 provides that 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.

In respect of joint ventures, paragraph 163 of GSTR 2009/2 states:

For each participant in a joint venture to obtain their share of the land, it is necessary for each participant to mutually convey their interest in the land to the other. This is a supply that is made for consideration.

Therefore, the entity is making a supply for consideration when it transfers the units to the individual discretionary trusts.

In relation to whether that supply is being made in the course or furtherance of an enterprise that the entity carries on, the facts in this case show that the entity is carrying on an enterprise of property development.

In addition, paragraph 57 of GSTR 2009/2 states:

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-owner's interest in the land under a partition by agreement or court order for co-owners to effect a partition is in connection with the enterprise and is a supply in the course or furtherance of that enterprise.

Therefore, the transfer of the remaining units to the separate discretionary trusts is a supply made in connection with the enterprise of property development being carried on by the entity.

In addition, the supply of the units, being new residential premises, will not be GST-free or input taxed.

As all of the requirements of section 9-5 of the GST Act are satisfied, the entity will be liable for GST on the transfer of the units.

Notwithstanding the above, subsection 51-30(2) of the GST Act provides that a supply that the joint venture operator makes under a GST joint venture arrangement is treated as if it were not a taxable supply if:

· it is made to another entity that is a participant in the joint venture, and

· the participant acquired the thing supplied for consumption, use or supply in the course of the activities for which the joint venture was entered into.

As outlined in paragraphs 164 to 169 of GSTR 2009/2, the Commissioner considers that the acquisition of residential premises by a participant under a partition, for the purpose of the participant subsequently selling, retaining, or renting is not an acquisition 'for consumption, use or supply in the course for which the joint venture was entered into'.

Therefore, even if the entity undertaking the project is in a GST joint venture arrangement, subsection 51-30(2) of the GST Act will not apply to treat the transfer of the units as if they were not a taxable supply.

It should also be noted that, if the entity carrying on the enterprise of property development is a partnership, the transfer of the units will still be subject to GST but GST will be payable on the whole transfer rather than just on the interests acquired by each co-owner.

This is because the GST Act treats a partnership as an entity separate from its individual partners. As such, it is the partnership that makes an in specie distribution of the whole of the relevant partnership property to the acquiring partner, irrespective of how the legal title to the property is held by the partners.

Furthermore, if the enterprise is being conducted by a partnership, the partnership will be entitled to claim all of the GST credits on the construction costs of the units.

Additional Information on GST Joint Ventures

Goods and Services Tax Ruling GSTR 2004/2 sets out the features that the Commissioner considers characterise an arrangement as a joint venture for GST purposes and also provides guidance on how to distinguish a partnership from a joint venture.

Whether or not an arrangement is a joint venture or a partnership is based on a consideration of all of the facts and circumstances in each case. However, it should be noted that, the fact that an arrangement is referred to as a joint venture does not, by itself, make it a joint venture.

This is because, in some cases, when all of the facts and circumstances are considered and not just the terminology used, the arrangement being undertaken may be more in the nature of a partnership than a joint venture.

The features of a joint venture, as outlined in paragraph 11 of GSTR 2004/2, are:

· a sharing of product or output, rather than sale proceeds or profits

· a contractual agreement between the participants

· joint control

· a specific economic project, and

· cost sharing.

For the Commissioner to be satisfied that a joint venture exists for GST purposes, the first feature, sharing of product or output, must be present.

An arrangement under which the parties carry on a venture together with a view to sharing sale proceeds or profits is more in the nature of a partnership than a joint venture.

Entities engaged in a joint venture can have it approved as a GST joint venture under Division 51 of the GST Act if all of the requirements for approval are satisfied.

Once the joint venture is approved, it is the nominated joint venture operator that is entitled to claim the GST credits, rather than the participants, in relation to any creditable acquisitions acquired in respect of the activities that the joint venture has entered into.

In addition, for the Commissioner to approve two or more entities as participants in a GST joint venture, the joint venture must not be a partnership and each of the entities must satisfy the participation requirements for that GST joint venture.

Under section 51-10 of the GST Act, an entity satisfies the participation requirements for a GST joint venture or a proposed joint venture, if the entity:

· participates in, or intends to participate in, the joint venture

· is a party to a joint venture agreement with all the other entities participating in, or intending to participate in, the joint venture

· is registered for GST, and

· accounts on the same basis as all those other participants.

Furthermore, to be eligible to be registered as a GST joint venture the participants must apply in the approved form. This form, the 'GST joint venture - notification of forming, changing or cancelling' form is available on our website www.ato.gov.au.

However, an application to form a GST joint venture will not be approved unless all of the requirements of a GST joint venture are satisfied.