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Ruling

Subject: GST and the sale of shares

Question 1

Is a goods and services tax (GST) payable by Mr A for the transfer of property title to the company?

Answer

No. The sale of the original house and land from Mr A to the company will be the sale of existing residential premises used for residential accommodation before 2 December 1998. The sale of the original property by Mr A to the company is an input taxed supply under section 40-65 of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act) and no GST is payable on the sale.

Question 2

Can the margin scheme be used to calculate GST payable on Mr A transfer of a property to the company?

Answer

No, GST does not apply. The transfer of the property will be classified as an input taxed supply and the margin scheme cannot be used on Mr A transfer of the property to the company.

Question 3

Will the sale of the shares by the company be regarded as financial supply and therefore not attracting GST?

Answer

Yes, the sale of the shares by the company is a financial supply and therefore not attracting GST.

Question 4

Can input tax credits be claimed by the company on the construction costs of the duplex property leased to the shareholders?

Answer

No. The company is leasing the residential property to the shareholders; this is an input taxed supply. Therefore, no GST is payable on the supply and no entitlement to input tax credit arises under section 11-20 of the GST Act.

Relevant facts and circumstances

You (Mr A) are not registered for GST and do not have an ABN.

In xxxx, you purchased a residential property (property).

You financed the property with a bank loan.

The property was not a new residential premises.

No GST was included in the purchase price.

The property has been occupied by you as your main residence since your purchase.

Mid xxxx, you decided to build a duplex to reside in. A Schedule of the Company's Constitution mentions that the Company will lease the duplex from year to year at a rental of $x if demanded.

Due to the small size of the land the local council did not allow you to subdivide the property. Instead the council advised you to use a company structure to build the duplex.

You incorporated a special purpose company (company) at that time you were:

· Appointed as sole director for the company.

You transferred the title of the property to the company in exchange for two ordinary shares in the company.

You paid the stamp duty in relation to the transfer of title to the company.

You, in your capacity as Director, entered into a contract with a builder to build the duplex.

You, in your capacity as Director, obtained a bank loan for the construction works.

At the end of xxxx construction of the new residential duplex premises commenced.

The duplex properties are new residential properties and are identical.

The Company's Constitution explains the company is providing a one year lease to the shareholders providing them with the exclusive rights to occupy the relevant unit.

The transfer of the title was effective before you demolished the original building.

Relevant legislative provisions

Section 9-5 of the A New Tax system (Goods and Service Tax) Act 1999

Subsection 9-30(2) of the A New Tax system (Goods and Service Tax) Act 1999

Section 11-20 of the A New Tax system (Goods and Service Tax) Act 1999

Section 23-5 of the A New Tax system (Goods and Service Tax) Act 1999

Division 188 of the A New Tax system (Goods and Service Tax) Act 1999

Subsection 40-5(1) of the A New Tax system (Goods and Service Tax) Act 1999

Subsection 40-5(2) of the A New Tax system (Goods and Service Tax) Act 1999

Subsection 40-35(1) of the A New Tax system (Goods and Service Tax) Act 1999

Subsection 40-35(2) of the A New Tax system (Goods and Service Tax) Act 1999

Section 40-65 of the A New Tax system (Goods and Service Tax) Act 1999

Section 75-5 of the A New Tax system (Goods and Service Tax) Act 1999

Section 195-1 of the A New Tax system (Goods and Service Tax) Act 1999

Reasons for decision

Question 1

Transfer of property title to company

Section 40-65 of the GST Act provides that the sale of a residential premises is input taxed unless it is a commercial residential premises or a new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term 'residential premises' is defined in section 195-1 of the GST Act to mean land or a building that is occupied or is intended to be occupied as a residence and which is capable of being occupied as a residence or for residential accommodation.

In this case, you purchased a residential property (not considered to be new residential premises) which you occupied as your primary residence. Therefore, the sale of the residence and land from you to the company will satisfy the definition of 'residential premises'. Therefore it is an input taxed supply as such no GST is payable.

Question 2

Margin Scheme

Section 75-5 of the GST Act explains the margin scheme applies to working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land, selling a stratum unit or granting or selling a long term lease.

In this case it has been determined that you made an input taxed supply when you transferred the property to the company. As the margin scheme only applies where an entity makes a taxable supply of real property a consideration of the margin scheme is not relevant in this instance.

Question 3

Sale of shares

The sale of shares issued under a company title arrangement is not the supply of an interest in real property. What is being supplied is an interest in the shares of the company that entitles the holder to an exclusive right of occupancy.

This concept is explained in paragraph 44 of Goods and Services Tax Ruling GSTR 2003/3 'Goods and services tax: when is a sale of real property a sale of new residential premises?' provides the definition of a company title it states:

Company title means:

A type of title for multi-occupancy buildings (usually home units), common before the introduction of strata title. Under company title, a company owns the building, and the company's shares are divided into a number of blocks or classes, each block or class entitling the owner of the shares to exclusive occupation of a particular part of the building. This right of exclusive occupation is not a proprietary interest in the freehold, but is rather a contractual right against the company or sometimes a right to be granted a lease.

Company title in respect of real property is the formation of a company to own the allotment and the grant of shares in that company to persons seeking to acquire residences within that allotment. Those shares carry with them rights of occupation but the company is the legal beneficial owner of the land and the individuals' shares confer rights against the company. Therefore, the supply of shares in a company is not a supply of the underlying assets of the company. The supply will be subject to GST where it meets the conditions of a taxable supply set down in section 9-5 of the GST Act. This section states:

9-5 Taxable supplies

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 under section 195 of the GST Act.

In accordance with the above section the supply will be a taxable supply to the extent that it is not GST-free or input taxed.

Subsection 9-30(2) of the GST Act provides that a supply will be considered as input taxed if it is input taxed under Division 40 of the GST Act.

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. This means that the financial supply provider cannot charge GST on the supply and cannot claim input tax credits for the GST paid on the things it acquires for the purpose of providing that supply.

Subsection 40-5(2) of the GST Act provides that 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Regulation 40-5.08 of the GST Regulations provides a supply is a financial supply if it is mentioned as a financial supply in regulation 40-5.09 of the GST Regulations.

The transfer of an interest in shares by a shareholder to a third party is covered by item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.

Securities, including

· a debenture described in paragraph (a), (b), (c) (d) or (f) of the definition of debenture in section 9 of the Corporations Law; and

· a document issued by an individual that would be debenture if it were issued by a body corporate

A scheme described in paragraph (e), (i) or (m) of the definition of managed investment scheme in section 9 of the corporations Law; and

The capital of a partnership or trust

Therefore, when selling the shares the company is making a financial supply which will be input taxed under subsection 40-5(1) of the GST Act.

Note: A financial supply is input taxed, no GST is payable on such supplies and no entitlement to input tax credit arises.

Question 4

Company - Input tax credits for construction costs

Under subsection 40-35(1) of the GST Act, a supply of premises by way of lease hire or licence is input taxed if it is a supply of residential premises.

In this case, the shareholders are bound by the terms of the company's constitution and as outlined in a schedule of the company's constitution they are leasing their respective units on a year to year basis at a rental of $x per annum, if demanded by the Company. This clause provides each shareholder with the exclusive right to occupation and possession of the relevant unit.

From the facts, the company, as current owner of the residential property units is generating revenue from those units by leasing the residential premises which are intended to be occupied as a residence by its shareholders.

In this situation, the company does not have a GST liability on the supply of the lease nor is there an entitlement to an input tax credit for the acquisition of the construction costs.

Under section 11-20 of the GST Act, an entity is entitled to an input taxed credit for any creditable acquisition that it makes.

Among other things an entity makes a creditable acquisition under section 11-5 of the GST Act, if it acquires a thing partly or solely for a creditable purpose.

Under section 11-15 of the GST Act you acquire a thing for a creditable purpose to the extent that you are carrying on an enterprise. However, the thing is not acquire for a creditable purpose to the extent that it would be input taxed or if it was acquired for a private or domestic nature.

In this case, the company acquired the duplex to make input taxed supplies of residential premises. Therefore, the company is not considered to have acquired the duplex for a creditable purpose. As such no input tax credits are available on the construction costs.