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Ruling

Subject: GST consequences of termination of joint venture

Question 1

Will the termination of the Joint Venture (JV) and transfer of legal title of 8 Lots with strata titled accommodation units from Entity A, the land owner, to Entity B give rise to a taxable supply subject to GST for the JV, Entity A or Entity B?

Answers

Yes, the JV (which is a tax law partnership (TLP) for GST purposes) will have a GST liability.

Question 2

Can the JV use the Margin Scheme to calculate the GST on any taxable supplies to Entity B or Entity A arising in the above circumstances?

Answers

Yes, unless, in accordance with subsection 75-10 (3) of the GST Act, the supply by TLP is ineligible for the margin scheme.

Question 3

Should GST on any taxable supply made by the JV be calculated based on either the cost or market value of the development only, or the cost or market value of the development and the land?

Answers

The value of the consideration that TLP receives for its supply is GST exclusive market value of the properties when supplied to Entity A and Entity B.

Relevant facts and circumstances

In yyyy, Entity A acquired the property located in Australia.

Entity A has obtained a certificate of valuation from a licensed property valuer valuing the property at 1 July 2000.

Some years later, Entity B and Entity A entered into a JV for the purpose of developing and selling the property. Entity A was appointed project manager with the objective of managing the development and sale of the units.

The most relevant clauses of the JV Agreement (Agreement) provide:

· A clause requires Entity B to pay a participation fee.

· A clause requires Entity A to make its interest in the Land available to the Joint Venture but without there being any change in legal or beneficial ownership of the Land.

· Under a clause, each party will then have a specified interest in the JV.

· Under a clause, the Joint Venture Assets shall be deemed to be divided so that they are owned by each Joint Venture Party severally (and neither jointly nor jointly and severally) in proportion to their respective Percentage Interest.

· A clause requires both parties to make further cash contributions to fund further development costs.

· A clause entitles Entity A to a project management fee.

· Under a clause, the proceeds from the sale of units are to be applied to pay any GST, then any unpaid JV costs, with the remainder being split between both parties on a specified bass.

· A clause states that apart from another clause, nothing in the agreement shall make a Party the partner of any other Party nor, except as expressly provided in this agreement, constitute any Party the agent or legal representative of any other or create any fiduciary relationship between them.

· Under a clause, the Joint Venture Parties acknowledge that a tax law partnership for income tax and GST purposes will be created between them by the JV agreement.

The development consists of strata titled lots made up of accommodation units, an office/reception, and other commercial areas such as a cafe, and a day spa.

The JV was registered for GST purposes as a partnership, but not as a GST JV.

By the time the units were completed the global financial crisis had emerged and there was a significant downturn in the property market. Even after dropping the selling price of the units the project manager was unable to attract any genuine buyers with the only offers received being too low to take seriously.

As a result the JV entered into a management agreement with Entity A, commencing on ddmmyyyy to manage the resort and lease out the holiday units until they could be sold. The intention has always been to sell the properties as soon as possible, subject to obtaining reasonable offers. The manager has been actively marketing the properties.

However, as it has become clear that the units would not be able to be sold for some time and the holding period of the development would need to be extended beyond expectations, Entity A and Entity B are proposing to spilt the units and terminate the JV.

It is proposed that the parties will enter into a deed to terminate the JV and Entity A will transfer title of some of the accommodation units to Entity B, with the remaining units being retained by Entity A. The partners will not provide any formal consideration on the allocation of the units.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 72-10

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(3)

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Under the JV Agreement, Entity A and Entity B have formed an association, to develop and sell the property.

The development consists of strata titled lots made up of accommodation units, an office/reception, a cafe, and a day spa. The scale of the activities undertaken indicates that there was on an enterprise of property development being carried on by Entity A and Entity B.

The JV Agreement states that the parties are not partners.

A Partnership under section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) has the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA).

Section 995-1 of the ITAA defines a partnership 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 the definition refers to an association of persons carrying on business as partners. We refer to this type of partnership as a general law partnership as per paragraph 9 of Goods and Services Tax Ruling 2004/6 tax law partnerships and co-owners of property (GSTR 2004/6).

A clause of the Agreement states that the parties are not partners. However:

· there is a formal written agreement in place which sets out the rights and obligations of the parties

· both parties have funded the acquisition and development of the land n equal proportions,

· both parties have agreed to appoint Entity A as project manager to manage the development,

· both parties are entitled to a specified percentage of the sales proceeds from the development, after payment of any JV GST liability and JV expenses,

· income was paid into, and expenses paid from, a joint bank account.

As explained in paragraphs 61-62 of GSTR 2004/6, these factors indicate that the partnership is carrying on the property development enterprise.

The parties have acknowledged, in a clause, that a tax law partnership (TLP) for income tax and GST purposes will be created between them by the JV agreement.

Paragraph 30 of GSTR 2004/6 explains 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. Accordingly, the TLP commenced on ddmmyyyy, when Entity B and Entity A entered into a JV for the purpose of developing and selling the property.

Entity A and Entity B have contributed land and cash respectively to the TLP. In doing so, they have each acquired a specified interest in the assets of the TLP, including the land. Although Entity A still has legal title to the land, it holds that title on behalf of the partnership.

Therefore, as explained in paragraph 234 of GSTR 2004/6, the sale of the properties to the co-owners will be a supply by the TLP and not by the co-owners. Therefore, the TLP will have a GST liability on the sale of the properties.

Question 2

Goods and Services Tax Ruling 2009/1 general law partnerships and the margin scheme (GSTR 2009/1) explains how Division 75 of the GST Act applies to a general law partnership and its partners. Although the ruling applies to general law partnerships, the principles have equal application to tax law partnerships.

As explained in paragraph 35 of GSTR 2009/1, the Commissioner accepts that the supply of real property as a capital contribution is a sale and, therefore, accords with the meaning of 'selling' for the purposes of subsection 75-5(1). Therefore margin scheme provisions can be applied to a capital contribution of real property to the TLP.

Similarly, unless, in accordance with subsection 75-10(3) of the GST Act, the supply by TLP is ineligible for the margin scheme, the margin scheme can be applied to the supply of the property by the TLP.

Question 3

Should GST on any taxable supply made by the JV be calculated based on either the cost or market value of the development only, or the cost or market value of the development and the land? ie is the consideration received for the supply of the units the development costs only, development costs and land costs, market value.

Paragraph 136 of GSTR 2004/6 explains that partners are associates for GST purposes.

Paragraph 139 of GSTR 2004/6 explains that, as per section 72-10 of the GST Act, the value of the consideration that TLP receives for its supply is the GST exclusive market value of the properties when supplied to Entity A and Entity B.