Edited version of private ruling

Authorisation Number: 1011841788044

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Ruling

Subject: GST and property development

Question

Is the draft Development Agreement between entity A and entity B a joint venture agreement for goods and services tax (GST) purposes?

Advice

No, the draft Development Agreement between entity A and entity B is not a joint venture agreement for GST purposes.

Relevant facts

Entity A (you) is a development company and is registered for GST.

You have entered into a Development Agreement with entity B in regard to the development of a land located in Australia. Entity B is the owner of the land. The developed land will be sold after the development.

You have provided a copy of the draft Development Agreement. The draft Development Agreement provides the following:

· The intent of the parties is to develop and obtain a material change of use and reconfiguration of the lands and sell the development lots for a profit substantially in accordance with this agreement;

· The parties acknowledge and agree that they will equally fund the project to the point of commencement of construction of the subdivision of the land. Application is to be made by the parties for finance approval for the development land unless the management committee determines otherwise;

· All funds received including the development loan (from time to time) shall be deposited into an account called the 'Development Account';

· Upon completion of the sale of each respective development lot the proceeds of sale shall be distributed as follows:

(a) Firstly, in payment to the financier of the development loan the amount required by that financier in order to discharge its mortgage over the land;

(b) Secondly, in payment of any outstanding project costs in relation to those development lots;

(c) The balance in the following proportions:

(i) Entity A as to 50% share;

(ii) Entity B as to a 50% share.

· The parties must share any loss sustained in the project in the following proportions:

(a) Entity A as to a 50% share; and

(b) Entity B as to a 50% share.

Reasons for decision

Division 51 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) makes provision for the approval of certain entities engaged in a joint venture to become a GST Joint venture. A GST joint venture is defined in section 195 of the GST Act to be an entity that meets the criteria set out in section 51-5 of the GST Act.

Subsection 51-5(1) of the GST Act provides that two or more entities may become the participants in a GST joint venture if:

(a) the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the regulations; and

(b) the joint venture is not a partnership; and

(c) (Repealed by No 74 of 2010)

(d) each of those entities satisfies the participation requirements for that GST joint venture; and

(e) each of those entities agrees in writing to the formation of the joint venture as a GST joint venture; and

(ea) one of those entities, or another entity, is nominated, in that agreement, to be the joint venture operator of the joint venture; and

(eb) the nominated joint venture operator notifies the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture; and

(f) if the nominated joint venture operator is not a party to the joint venture agreement - the nominated joint venture operator satisfies the requirements of paragraphs 51-10(c) and (f).

Such a joint venture is a GST joint venture.

Subregulation 51-5.01(1)(f) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) sets out the specified purposes for GST joint ventures that are involved in the construction industry. It provides that the design, or building, or maintenance, of residential or commercial premises is a specified purpose.

Goods and Services Tax Ruling GSTR 2004/2 provides guidance on joint venture for GST purposes (available at www.ato.gov.au).

Entities engaged in a joint venture may become participants in a GST joint venture under Division 51 of the GST Act if the participation requirements are satisfied. The nominated joint venture operator then deals with the GST liabilities and entitlements arising from its dealings, in the course of activities for which the joint venture was entered into, on behalf of the participants in the joint venture. The requirements of a GST joint venture are stated in paragraphs 8 and 9 of GSTR 2004/2.

Under paragraph 11 of GSTR 2004/2, we consider that a joint venture is an arrangement between two or more parties, characterised by the following features:

· 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 a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture.

As stated in paragraph 21 of GSTR 2004/2, in the context of the GST Act, we do not think the term joint venture is intended to cover arrangements, including partnerships, under which parties carry on a venture together with a view to sharing profits. In such circumstances the ordinary provisions of the GST Act apply.

The sharing of product or output not profit is discussed in paragraphs 31 to 33 of GSTR 2004/2 which state:

Sharing of product or output not profit

31. A key characteristic of a joint venture for GST purposes, as outlined above, and reflected in the definition of 'non-entity joint venture', is that each participant receives an agreed share of the product or output to its own account, rather than a share of jointly earned profit. An example of sharing of product or output is where a land owner and builder enter into a joint venture to build a block of 12 strata title units and on completion the landowner is to retain units 1 to 8 and the builder is to take units 9 to 12.

32. Each participant can deal with their share of the product or output in their own right.

33. If the participants share profits or the proceeds of sale of the product, rather than sharing the product, the arrangement is not a joint venture. However, the participants may agree that the product is to be sold collectively by another entity, or by one of the participants, on behalf of each of the participants. This does not mean that the participants are sharing in the proceeds of the sale or that there is a joint profit to share. Rather, the entity that sells each participant's share of the product sells on behalf of that participant. Each participant records the GST on the sale of their share in their individual business activity statement.

Referring to the draft Development Agreement, the intention of the two parties is to develop the land, share the cost of the development and sell the developed lots for a profit. The balance of the proceeds of the sale will be distributed equally between you and the land owner that is each will receive a 50% share of the profit balance.

In this instance, as the feature of sharing of product or output is not present, the draft Development Agreement is not a joint venture agreement for GST purposes.