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Ruling

Subject: GST, tax law partnerships and trustee in bankruptcy

Question 1

Was a new tax law partnership formed as a result of the commercial properties vesting in the Trustee? If so, is the partnership carrying on the leasing enterprise or are the co-owners carrying on an enterprise in their own right in respect of their interest in the commercial properties?

Answer

Yes, a new tax law partnership was formed as a result of the commercial properties vesting in the Trustee. It is the partnership that is carrying on the leasing enterprise and as such, is required to be registered for the goods and services tax (GST).

Question 2

Is the Trustee required to register for the GST in his capacity as trustee in bankruptcy of the estate?

Answer

No, the Trustee is not required to register for the GST in his capacity as trustee in bankruptcy of the estate.

Question 3

Is the Trustee liable for GST on the lease of the commercial properties?

Answer

No, the Trustee is not liable for GST on the lease of the commercial properties as he is not required to be registered for GST in his capacity as trustee. The new tax law partnership is liable for GST.

Question 4

Is the Trustee liable for GST on the sale of the commercial properties?

Answer

No, the Trustee is not liable for GST on the sale of the commercial properties as he is not required to be registered for GST in his capacity as trustee. The new tax law partnership is liable for GST.

Relevant facts

· The entity (the Trustee) was appointed as trustee of a bankrupt estate.

· The bankrupt and another entity (entity B) co-own commercial properties as joint tenants and purchased the properties with joint loans.

· The bankrupt's interest in the properties vested in the Trustee pursuant to sections 58 and 116 of the Bankruptcy Act 1966. The joint tenancy between the bankrupt and entity B was severed on that date and the Trustee and entity B became tenants in common. The legal title to the properties has not been transferred to the Trustee yet. The Trustee has lodged a caveat against the properties to protect the bankrupt estate's interest.

· The bankrupt is not registered for GST. ATO records show that a partnership of the bankrupt and entity B is registered for GST.

· There is no written partnership agreement.

· The partnership has leased the commercial properties to a tenant of which entity B is the sole director and shareholder. The bankrupt is an employee of the tenant.

· There is no written lease agreement between the partnership and the tenant. The agreement in relation to the lease and rental payments is an oral one.

· The tenant pays rent including GST directly into a bank account which is in the name of the bankrupt. Property expenses and payment of the joint mortgage are also paid from this account.

· No rent has been paid directly to the Trustee. The Trustee has not taken control of the bankrupt's bank account nor has the Trustee restricted the use of the bank account.

· The Trustee wishes to sell the interest vested in him in the commercial properties to an interested party and has been negotiating with entity B in relation to the potential joint sale of the properties.

Reasons for decisions

Question 1

The term 'partnership' is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as having the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 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.

(*denotes terms that are defined in section 995-1 of the ITAA 1997).

The second limb of paragraph (a) in the above definition of partnership includes an association of persons in receipt of ordinary income or statutory income jointly. This type of partnership is referred to as a tax law partnership (an enterprise partnership) and exists only for tax purposes. Most tax law partnerships arise because property is acquired or used to derive income jointly.

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.

Paragraph 27 of GSTR 2004/6 states:

The expression 'in receipt of ordinary income…jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

Paragraphs 30 to 51 of GSTR 2004/6 explain when a tax law partnership is formed. Paragraph 30 states:

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. …

In the present case, the fact that the bankrupt and entity B were in receipt of income jointly from the lease of the commercial properties and are registered as a partnership for GST is not in dispute.

It is the Trustee's view that although the interest of the bankrupt in the commercial properties has now vested in the Trustee, the Trustee and entity B, as co-owners, are carrying on an enterprise in their own right and not in partnership for the following reasons:

· there is no agreement between the co-owners to form a partnership nor to jointly carry on an enterprise

· each co-owner makes independent decisions with regard to their interest in the commercial properties

· each co-owner's acquisition of their interest in the commercial property was made separately (i.e. the Trustee acquired the interest following appointment as trustee of a bankrupt estate)

· the Trustee is not in receipt of any rental income and has not taken possession of the commercial properties, and

· each co-owner does not act for the mutual benefit or on behalf of the other
co-owner and is primarily concerned with securing an enhanced value or return on their investment.

Paragraphs 60 to 98 of GSTR 2004/6 explain when a tax law partnership is carrying on an enterprise as opposed to an enterprise being carried on by the co-owners in their own right.

In some cases, an evaluation of all the facts and circumstances including those listed above may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership. However, we are of the view that the facts in the present case do not lead to that conclusion for the following reasons:

The Trustee was appointed to deal with all matters regarding the administration of the bankrupt's estate. When the bankrupt's interest in the commercial properties vested in the Trustee, the joint tenancy between the bankrupt and entity B was severed and the Trustee and entity B became tenants in common of those properties. The vesting of the interest in the properties in the Trustee is effectively the transfer of the interest in the properties to the Trustee.

Paragraph 219 of GSTR 2004/6 makes the point that an enterprise partnership terminates if the association of persons is no longer in receipt of income jointly and one of the circumstances that may lead to the termination of a partnership is a change of persons comprising the association of persons in receipt of income jointly. The Trustee is not the same person as the bankrupt and the association of persons in receipt of income jointly changed. The existing partnership of the bankrupt and entity B was terminated when the Trustee was appointed and the interest in the property vested in the Trustee.

After the appointment of the Trustee, the commercial properties continued to be leased, that is, a leasing enterprise was carried on and income was derived. Although no rental payments have been paid directly to the Trustee, the Trustee has an entitlement to the income. Paragraph 25 of GSTR 2004/6 explains that to be in receipt of income jointly, it is not necessary to have actually received the income. There is receipt of income jointly if there is a joint entitlement to income.

Consequently, a new tax law partnership was formed comprising the Trustee and entity B. It is irrelevant that there is no agreement to form a partnership. As explained in paragraph 223 of GSTR 2004/6, unlike general law partnerships, a tax law partnership does not involve a partnership agreement.

In accordance with subsection 184-5(1) of the GST Act, supplies made by, or on behalf of, partners in a partnership in their capacities as partners are taken to be supplies made by the partnership.

Paragraph 234 of the GSTR 2004/6 states:

Any sale of a property or interest in a property which is used in carrying on an enterprise by a partnership is a supply by the partnership and not by the co-owners. There are GST consequences if the partnership is registered. For instance, the supply may be a taxable supply if the requirements of section 9-5 are met, or the supply of a going concern that is GST-free if it meets the requirements of section 38-325.

As such, the supply of the properties by way of lease is made by the Trustee in his capacity as partner in the new partnership. Consequently, the supply of the rental properties is made by the new tax law partnership.

GST registration and cancellation

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make. 'You' applies to entities including partnerships for GST purposes.

Section 9-5 of the 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 Australia; 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 terms that are defined in section 195-1 of the GST Act)

A 'supply' is any form of supply whatsoever and includes a grant, assignment or surrender of real property (paragraph 9-10(2)(d) of the GST Act).

An 'enterprise' includes 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).

For there to be a taxable supply, all the requirements of section 9-5 of the GST Act must be satisfied.

In the present case, the supply of the commercial premises by way of lease is for consideration, the supply is made in the course of the leasing enterprise that the new partnership carries on and the properties are located in Australia. However, the partnership is not registered for GST. It is, therefore, necessary to consider whether it is required to be registered for GST.

Section 23-5 of the GST Act provides that an entity that carries on an enterprise and whose GST turnover meets the registration turnover threshold is required to be registered. The registration turnover threshold is $75,000. From the facts provided in this case, the partnership's GST turnover meets the registration turnover threshold and as such, it is required to be registered for GST. Therefore, the new partnership is making a taxable supply when it leases the commercial premises to the tenant.

As the new tax law partnership was formed when the Trustee was appointed, it is required to be registered from that date. As such, the partnership is required to apply for registration with a date of effect from the date it commenced its leasing enterprise.

On that date the previous tax law partnership comprising the bankrupt and entity B was terminated. Paragraphs 226 to 241 of GSTR 2004/6 provide the GST consequences of termination of a partnership.

Under section 25-50 of the GST Act, a partnership must apply for cancellation of its registration within 21 days after the day of ceasing to carry on its enterprise. In this case, the previous partnership is required to apply for cancellation of its registration with a date of effect from the date the partnership was terminated.

Question 2

Of relevance to this question is Division 58 of the GST Act which applies to representatives of incapacitated entities.

A representative of an incapacitated entity is defined in section 195-1 of the GST Act to include a trustee in bankruptcy.

The definition of incapacitated entity in section 195-1 of the GST Act includes an individual who is a bankrupt or an entity that has a representative.

Under section 58-20 of the GST Act, a representative of an incapacitated entity is required to be registered for GST in that capacity if the incapacitated entity is registered or required to be registered.

In the present case, the bankrupt, as an individual, was not registered for GST prior to bankruptcy. It was the partnership in which he was a partner that was registered for GST. In order to determine whether the Trustee is required to be registered for GST in that capacity, it is necessary to determine whether the bankrupt, as an individual, was required to be registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it carries on an enterprise and its GST turnover meets the registration turnover threshold.

Section 9-20 of the GST Act defines what constitutes an enterprise. Paragraph 9-20(2)(a) of the GST Act provides that an enterprise does not include activities done by a person as an employee. The bankrupt, in this case, is an employee of the tenant. As partner of the partnership, it was the partnership that was carrying on the leasing enterprise and not the partner.

Activities undertaken by an employee are the activities of the entity to whom that individual provides work or services and not of the individual. This is made clear by the note to that paragraph in the legislation.

The bankrupt, as an employee of the tenant was not carrying on an enterprise prior to bankruptcy and as such, was not required to be registered for GST.

Therefore, the Trustee is not required to register for the GST in his capacity as trustee in bankruptcy of the estate.

Question 3

The Trustee is not liable for GST on the lease of the commercial properties as the Trustee is not required to be registered for GST in his capacity as trustee. The new tax law partnership is liable for GST, as it is the entity making the supply of commercial properties by way of lease.

See detailed reasoning in Questions 1 and 2 above.

Question 4

The Trustee is not liable for GST on the sale of the commercial properties as he is not required to be registered for GST in his capacity as trustee. The new tax law partnership is liable for GST where the sale of the interests in the properties satisfies the requirements for a taxable supply under section 9-5 of the GST Act.

See detailed reasoning in Questions 1 and 2 above.