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Ruling

Subject: GST and lease of part of property held jointly

Question

Is the lease of part of the property as agricultural land subject to GST by each co-owner in their individual capacities or by the tax law partnership?

Answer

The lease of part of the property as agricultural land is not being supplied by each co-owner in their individual capacities but by the tax law partnership. However this supply will not be subject to GST as the tax law partnership is not required to be registered for GST.

Relevant facts and circumstances

The co-owners (you) are not registered jointly as a tax law partnership.

One of the co-owners is registered for GST as a sole trader operating an enterprise.

The other co-owner is not registered for GST.

You purchased a property as tenants in common. One co-owner's share is 1% and the other co-owner's share is 99%. You purchased this property for your enjoyment.

You jointly made the decision to buy the property. The property was purchased with joint funds that were received from the sale of a previous residential property that was held as joint tenants.

You are living on one part of the property. The other part is agricultural land which consisted of a farm and has natives and bushes on it. The property is on one title. You made a joint decision to lease this part of the property as you stated that you would not use this part of the property and would not have the time to keep it as a farm. If you kept this part it would only be a hobby farm.

You jointly entered into and signed a lease agreement with a tenant. The lease income is a certain amount per year plus part of rates and land tax (if any). You advised that this would not exceed $75,000 per year.

The lease income was to be received jointly and was to be placed into a joint bank account.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

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

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10.

Reasons for decision

GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 a term defined in the GST Act)

All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply.

We need to determine firstly which entity is making the supply. The issue that needs to be considered is whether each co-owner in their individual capacities is making a supply when part of the property is leased or whether the co-owners are making a supply jointly as a partnership.

A partnership is defined in section 195-1 of the GST Act as:

(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) reflects the general law definition of a partnership, whereas the second limb of paragraph (a) generally reflects tax law partnerships.

A general law partnership is an association of persons carrying on business in common with a view of profit. In this case, the co-owners are not currently carrying on any business together with a view to making a profit and accordingly are not considered to be in a general law partnership.

Tax law partnerships exist only for tax purposes. They generally arise because property is acquired or used to derive income jointly. In most cases, property is used to derive rental income jointly. Goods and Services Tax Ruling GSTR 2004/6 (which is available from the Australian Taxation Office (ATO) website at www.ato.gov.au) considers the issue of tax law partnerships and co-owners of property.

Paragraph 25 of GSTR 2004/6 provides:

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.

Further, GSTR 2004/6 at paragraph 27 also 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.

In this case, a joint decision was made to commence to lease part of the property from which lease income was to be received jointly. Furthermore, the property was acquired with joint funds and the lease agreement was entered into jointly. As decisions are made jointly for the mutual benefit of all the co-owners, it is considered that there has been a joint commencement of an activity for an income producing purpose which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. As such it is considered that there is a formation of a tax law partnership. Accordingly, the entity making the supply when part of the property is leased is considered to be made by the co-owners jointly as a tax law partnership rather than each co-owner in their own individual capacities.

Therefore, as the co-owners in their own right are not making the supply then the co-owners in their individual capacities, whether or not registered for GST will not have a GST liability. However, we need to determine whether the tax law partnership entity that is making the supply will have a GST liability by considering whether the supply is a taxable supply under section 9-5 of the GST Act.

Based on the information that you have provided, the supply of part of the property will be for consideration and is connected with Australia as the property is located in Australia. Therefore, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

We now need to determine whether you as a tax law partnership are making the supply of part of the property in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and if so, whether you as a tax law partnership are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Enterprise

The term 'carrying on' is defined in section 195-1 of the GST Act which states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

The term 'enterprise' is explained in section 9-20 of the GST Act. According to paragraph 9-20(1)(c) of the GST Act, an 'enterprise' is 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 7 of Goods and Services Tax Determination GSTD 2000/9 (which is also available from the ATO website at www.ato.gov.au) explains:

7. The letting of a property is an activity in the nature of a lease, licence or other grant of an interest in property. If it is done on a regular and continuous basis, the activity will meet the definition of enterprise.

In your case, you have jointly leased part of the property. You advised that this part is agricultural land which consists of a farm, natives and bushes. You as a tax law partnership are therefore carrying on an enterprise of leasing this part of the property. The activity of leasing the property is considered to be made in the course or furtherance of a leasing enterprise. Therefore, paragraph 9-5(b) of the GST Act is satisfied.

Registration requirement

The tax law partnership is not registered for GST. Therefore, we will now consider whether you, as a tax law partnership, are required to be registered for GST with regards to the leasing of part of the property under paragraph 9-5(d) of the GST Act.

Section 23-5 of the GST Act provides that you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

Section 188-10 of the GST Act provides that your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

In your situation, the registration turnover threshold is met when your current and projected GST turnover is equal to or greater than $75,000. The current GST turnover is the sum of the value of all supplies made in a particular month plus the previous 11 months. The projected GST turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

Based on the information that you have provided, your current and projected GST turnover consisting of the lease income is well below $75,000.

Consequently, your GST turnover will not meet the registration turnover threshold and you are not required to be registered for GST.

As you are not registered, nor required to be registered for GST, the requirement in paragraph 9-5(d) of the GST Act will not be satisfied.

Conclusion

All the requirements of section 9-5 of the GST Act are not fully met because the tax law partnership is not registered nor required to be registered for GST under paragraph 9-5(d) of the GST Act. Therefore the lease of part of the property as agricultural land will not be a taxable supply. The lease income will not be subject to GST.