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Ruling

Subject: GST and supply of residential premises

Question 1

In the event that the supplier of the Property is registered or required to be registered for GST, will the supply of the interest in the Property be a taxable supply?

Answer

Yes.

Question 2

Is the supply of the interest in the Property made by the Company in any capacity?

Answer

No.

Question 3

Will the Receivers be liable under Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for any GST payable on the supply of the Property?

Answer

No.

Question 4

If no, will the Receivers be liable under Division 105 of the GST Act for any GST payable on the supply of the Property?

Answer

No, the Receivers will not be liable under Division 105 of the GST Act for any GST payable on the supply of the Property.

Relevant facts and circumstances

A Pty Ltd and the B Trust (Partners) entered into a Partnership Agreement. The purpose of the Partnership was stated to acquire real property with a view to building an investment portfolio of property. Under the Partnership Agreement, the Company was appointed to hold the legal title to the Property and to enter into all contractual arrangements with third parties on behalf of the Partners. The Partners were to remain the beneficial owners of the Property.

The Property was purchased by the Company as a trustee. The Company purchased the Property as vacant land and subsequently, X residential units have been built on the land.

The individual Partners are not currently registered for GST. However, the Partnership has been registered for GST for some time. The Company has been registered for GST for over one year.

The Bank is the holder of:

· a registered mortgage over the Property) given in favour of the Bank by the Company; and

· a registered fixed and floating charge given by the Company in favour of the Bank over the whole of its present and future assets and undertaking (Security).

Due to the Company being in default of the Security, the Bank made demand in writing upon the Company for payment of moneys secured by the Security, and the Company has made no payment to the Bank in response to such demand. The Security became immediately enforceable and the Bank appointed the Receivers as Receiver and Manager of the Property.

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 40-65

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

A New Tax System (Goods and Services Tax) Act 1999. section 40-75

Corporations Act 2001 section 9

Reasons for decision

Question 1

Summary

Where the supplier is registered, the sale of the Property will be a taxable supply as it is a supply of new residential premises.

Detailed reasoning

In accordance with section 9-5 of the GST Act, you make a taxable supply if:

· You make the supply for consideration;

· The supply is made in the course or furtherance of an enterprise that you carry on; and

· The supply is connected with Australia; and

· You are registered or required to be registered.

However, a supply is not a taxable supply to the extent it is GST-free or input taxed.

In this case the real property supplied is located in Australia. The supply will be made for cash consideration and made by an entity in the course of carrying on its enterprise. Where the supplier is registered or required to be registered for GST, the requirements in section 9-5 of the GST Act will be met and the supply will be a taxable supply for GST purposes unless the supply is GST-free or input taxed.

Residential premises

A sale of real property is input taxed if it meets the requirements of section 40-65 of the GST Act:

(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) 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:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Our view is that it is real property's physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

To be used for 'residential accommodation' or to be 'occupied as a residence', premises don't have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. The definition of residential premises cited in section 195-1 of the GST Act requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.

The physical characteristics common to residential premises that provide accommodation are:

· the premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

· the premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics mentioned above. These often, but not always, include:

· The purpose or context of the premises' use is for personal accommodation, rather than another purpose, such as for a business.

· The tasks of day to day living, such as, preparing food, cleaning and laundering, are performed by the occupant or by others under private arrangements.

· The status of the occupant is most commonly that of owner, tenant or lessee. Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.

· The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.

It is your understanding that Y of the units on the Property are currently occupied and will be occupied at the time of the supply for the purposes of the first test of the definition. The units currently untenanted have the physical characteristics of residential premises, as set out above. The latter three units contain a kitchen, bathrooms and bedrooms. We agree with your synopsis that the units meet the definition/s of residential premises in section 195-1 of the GST Act.

New residential premises

While the sale of residential premises is an input taxed supply, the sale of new residential premises by a registered entity in the course or furtherance of an enterprise it carries on, is a taxable supply.The definition of new residential premises is in part set out in subsections 40-75(1) and 40-75(2) of the GST Act:

Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b) if paragraph (1)(b) applies - the premises were last *substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

You state that the property was acquired as vacant land. The X units are not considered to be a replacement for the dwelling that was demolished prior to the acquisition, but new residential premises by virtue of paragraph 40-75(1)(a) of the GST Act. For the purposes of paragraph 40-75(1)(a), it is the Commissioner's view that the residential premises referred to are the land and the residential building on that land (that is, you look at the land and a building as a 'package'). This is because the definition of 'residential premises' specifically refers to land or a building in the context of residential occupation, and vacant land by itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence.

In this case the newly created block of vacant land is not residential premises that could have been replaced as per paragraph 40-75(1)(c) of the GST Act. It follows that the X units built subsequently on the vacant land acquired are new residential premises.

You have submitted that, taking into consideration the time it would take to build the X residential units now situated on the land, the premises cannot have been used for making input taxed supplies of residential rental for a period of at least five years. We agree with your assertion, therefore the subsequent supplies of the Property will be taxable supplies should the supplier be registered or required to be registered.

Finally on this issue, we draw your attention to adjustments that may be required due to changes in the use of the Property over time, i.e. supplied as both residential premises (input taxed) and new residential premises (taxable).

Broadly, an entity may need to make an adjustment in relation to input tax credits it has previously claimed if it has used its property differently from the way it originally planned. For example if the entity rented out new residential premises that it originally planned to sell for which it had claimed input tax credits, it would need to make an adjustment. The input tax credits previously claimed in relation to the construction or development of the residential premises may have been too much in view of actual use. Conversely, an adjustment will also arise if the entity originally planned to rent out but instead sold 'new residential premises' that formed part of its business.

Question 2

Summary

We consider that the Company would make a supply of the Property in its role as trustee however this outcome is moderated by the appointment of the Receivers.

Detailed reasoning

As you have stated in your submission, it is necessary to ascertain which entity will make a supply of the Property. The Partners appointed a manager, the Company, to:

· hold legal title to the Property; and

· enter into all contractual arrangements with third parties on behalf of the Partners.

The Partners retained beneficial ownership of the Property. The role of the Company is not immediately discernible; as you state there are discrepancies in the documentation that there are four possible roles that the Company may have:

· Company is an agent for the Partnership; or

· Company holds the Property on trust for the Partnership; or

· Company holds the Property on trust for the Partnership and concurrently acts as an agent for the Partnership; or

· Company supplies the Property in its own right.

1. Company is an agent for the Partnership

The Commissioner's view on agency is set out in the Goods and Services Tax public ruling GSTR 2000/37 'Goods and services tax: agency relationships and the application of the law' which at paragraph 28 provides a non-exhaustive list of characteristics which can be used to determine whether a party is an agent under an agency relationship. The paragraph states:

In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

Any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party

Clause 2.1(b) of the Partnership Agreement expressly states that the Company 'will hold any Partnership Assets it acquires as agent for the Partners'. Further clause 2.1(d) gives the Company the authority to enter into all contracts and other legal relations with third parties on behalf of the Partnership, relating to the operation of the Partnership.

Any exercise of the authority that you are given to enter into legal relations with a third party

It is your understanding that the Company entered into legal relations with builders and other relevant trades' people in order to construct the residential units located on the Property. As the Partnership is the beneficial owner of the Property, it is possible that the Company entered into legal relations with these third parties on behalf of the Partnership.

Whether you bear any significant commercial risk

Pursuant to clause 2.5 of the Partnership Agreement, the Company is entitled at all times to be indemnified from the Partnership Assets against all loss and liability of any kind in respect of or arising out of the Company acting as the Partners' agent to conduct the Partnership. This indicates that the Company does not bear any significant commercial risk. The Company is the legal owner of the Property (as per the Sales Contract) and as a result could be considered to bear commercial risk in regards to the Property.

Whether you act in your own name

You are unaware of any other activities that the Company conducts in its own name however the Company was empowered by the Partners to enter contracts etc to develop the Property in its own name.

Whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party

Under the Partnership Agreement, the Company is not entitled to charge a fee for its services.

Whether you decide the price of things that you might sell to third parties

It is your understanding that as the Company must deal with any Partnership Assets as the Partners direct (clause 2.2 of the Partnership Agreement), the Partners and not the Company, will determine the price of the Property.

Finally, in the relevant documentation about the business relationship, the description used by the parties and the conduct of the parties help indicate that an agency arrangement may exist. The Partnership Agreement clearly provides that the Company will act as the Partnership's agent. However, as a general rule, agents do not usually have formal legal title to real property on behalf of the real property's beneficial owners or the power to enter into contracts in their own name.

2. Company holds the Property on trust for the Partnership

As evidenced by the Transfer Form, the Company holds legal title to the Property. The Sales Contract states that the Company purchased the Property as a trustee. The Recitals to the Partnership Agreement also state 'The Parties intend that the Partners will beneficially own the Property in their Respective Shares, but the Manager will be appointed by the Partners to hold the legal title to the Property'. The concept of 'trust' is not defined in the GST Act, the Commissioner in the Miscellaneous Tax public ruling MT 2006/1 'The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' at paragraph 68 views a trust as follows:

'Trust' is not a defined term. It can be described as:

An obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes.

A trust itself is not a legal person and therefore must be represented by the trustee for the trust. For further information on trustees, see paragraphs 71 to 83 of this Ruling.

In the current case, legal and beneficial ownership of the Property rest with different entities, indicating the likelihood of some form of trust arrangement. Therefore, it is important to discover whether the trust structure is a 'standard' trust in which the trustee is liable for reporting and paying the trust's GST liabilities or, alternately, if the structure is a bare trust in which case the trustee is not carrying on an enterprise.

Paragraphs 11 and 12 of the Goods and Service Tax public ruling GSTR 2008/3, 'Goods and services tax: dealings in real property by bare trusts' set some parameters on how to distinguish trusts from bare trusts:

11. An entity (B) that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is to be used in its enterprise to be acquired by another entity (T) to hold on a bare trust for B - that is, subject to an obligation to transfer legal title to the asset to B, or to a third party if B so directs, and with no other active duties to perform.

12. Alternatively, the trust may not strictly be a bare trust, because the trustee has minor active duties to perform, but nevertheless the trustee is required to act at the direction of the beneficiary in dealing with title to the trust property. Where this Ruling refers to 'bare trusts' it should also be taken to refer to trusts of this kind which may not strictly fall within accepted definitions of bare trusts but share similar features. The key point is that the trustee only acts at the direction of the beneficiary in respect of the relevant dealings in the trust property and has no independent role in respect of the trust property.

Paragraph 37 of GSTR 2008/3 further refines the presumed role of a bare trustee:

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

Clause 2.1 of the Partnership Agreement effectively grants the Company significant powers, exceeding '… only minor active duties …':

2.1 The Partners and the Manager agree that:

· the Partners will nominate the Manager to hold all Partnership Assets;

· the Manager will hold any Partnership Assets it acquires as agent for the Partners and the absolute beneficial ownership of such Property shall at all times belong to the Partners in their Respective Shares;

· the Manager is hereby authorised by the Partners to deal with and give good title to such of the Partnership Assets it may from time to time need to transfer to third parties in the course of operating the Partnership;

· the Partners nominate and authorise the Manager to enter into all contracts and other legal relations with third parties on behalf of the Partnership, relating to the operation of the Partnership;

· the Manager will hold any Partnership Assets it acquires in the course of acting as agent of the Partnership, as agent for the Partners and any income or other gains generated by the Partnership will be held by the Manager absolutely for the benefit of the Partners in their Respective Shares; and

· the Manager will operate the Partnership solely and absolutely for the benefit of the Partners.

Further, the recitals to the Partnership Agreement indicate the Partner's desire to appoint the Company as a project manager, rather than as a passive trustee. On balance we consider that if a trust does exist, it is a usual trust structure rather than a bare trust, given the scope of activities that the Company is required to carry out.

3. Company holds the Property on trust for the Partnership and concurrently acts as an agent for the Partnership

It is accepted that a legal person, including a company, can have a number of different roles or act in different capacities. In each of these roles or capacities, the person is taken to be a different entity under subsection 184-1(3) of the GST Act. As provided above, under the Partnership Agreement the Company is nominated to hold the Property as agent for the Partners. The Company also has legal title to the Property. Therefore, it is necessary to determine whether the Company acts in two different capacities concurrently when dealing with the Property - as both trustee and as agent.

As noted above, Clause 2.1 of the Partnership Agreement provides that the Company has a large enough range of defined tasks and powers to ensure that it is more than simply a bare trustee. Further it maintains legal title to the Property, a factor that indicates that within the bounds of its constituted authority, it may dispose of the Property in its own right much in the way that a trustee could. Clause 2.1 makes references to the Company as agent. The Partners have also made reference to the Company as a project manager that is engaged to develop the Property by constructing a residential unit development and is given powers to enter into all contractual arrangements etc.

As noted above, the existence of separate legal and beneficial owners of real property in the first instance lend weight to the argument that the Company acts as a trustee in all its dealings with the Property. Further the Company can enter into contracts in respect of the Property in its own name. While the Partnership Agreement places some limitations on the extent of the Company's actions as would be expected in an agency relationship, this type of restriction is also common in trusts where the relevant trust deed restricts and defines the trustee's role.

On balance we consider that the Company acts as a trustee only, rather than as a trustee and concurrent agent.

4. Company supplies the Property in its own right.

While the Company has a reasonable degree of freedom to carry out its designated activities, it is still constrained by the Partnership Agreement. The fact that the Partners retain beneficial ownership over the Property is indicative that the Company is not supplying the Property in its own right.

On balance we believe that a trust structure exists with the Company being the trustee. As such the Company would supply the interest in the Property in that capacity (as trustee of the trust) rather than supplying the Property in its own right, if not for the appointment of the Receivers (see discussion below).

Question 3

Summary

The Receivers will not be liable under Division 58 of the GST Act for any GST payable on the supply of the Property.

Detailed reasoning

A representative of an incapacitated entity is defined in section 195-1 of the GST Act as:

(a) a trustee in bankruptcy; or

(b) a *liquidator; or

(c) a receiver; or

(ca) a controller (within the meaning of section 9 of the Corporations Act 2001); or

(d) an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Act 2001; or

(e) a person appointed, or authorised, under an *Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable; or

(f) an administrator of a deed of company arrangement executed by the entity.

Paragraph (ca) of the definition of a 'representative' includes a 'controller (within the meaning of section 9 of the Corporations Act 2001)'.

Section 9 of the Corporations Act 2001 defines a 'controller' as follows:

· controller, in relation to the property of a corporation, means:

· a receiver, or receiver and manager, of that property; or

· anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge;

· and has the meaning affected by paragraph 434F(b) (which deals with 2 or more persons appointed as controllers).

A receiver and manager of the property of a corporation falls within paragraph (a) of the definition of a 'controller', it follows that the Receivers are controllers and therefore a representative of an incapacitated entity for GST purposes.

Division 58 of the GST Act sets out the application of GST law to transactions made within the ambit of a representative's responsibilities. In most cases GST related liabilities and entitlements are allocated to the representative for any transaction within the scope of the representative's authority. Subsection 58-5(1) of the GST Act gives effect to this principle:

(1) Subject to this Division, any supply, acquisition or importation by an entity in the capacity of a representative of another entity that is an incapacitated entity is taken to be a supply, acquisition or importation by the other entity.

Subsection 58-10 sets out the general rule for GST liabilities and entitlements:

(1) A *representative of an *incapacitated entity:

(a) is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a *taxable supply or a *taxable importation; and

(b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a *creditable acquisition or a *creditable importation; and

(c) has any *adjustment that the incapacitated entity would, but for this section or section 48-50, have;

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

There are exceptions to this general rule that are invoked where there is grouping, reverse charging and certain supplies of vouchers; these exceptions are not present in the current case. Normally the Receivers would be responsible for any supply of the Property under Division 58 of the GST Act; however, in this instance Division 105 of the GST Act overrides the possible application of Division 58 (see discussion below).

Question 4

Summary

The Bank as appointers of the Receivers will be liable under Division 105 of the GST Act for any GST payable on the supply of the Property.

Detailed reasoning

It is the Commissioner's view that where Division 105 of the GST Act is applicable it operates to the exclusion of Division 58 of the GST Act. Division 105 of the GST Act is a very specific provision. It ensures that a creditor's supply of a debtor's property to a third entity in satisfaction of the debtor's debt to creditor is:

· treated as if the supply was made by the debtor; and

· accounted for by the creditor.

The Bank held both a mortgage over the Property and a fixed and floating charge over the Company's present and future assets. The Company defaulted and subsequently the Bank issued a demand for moneys secured by the Security. No payment was made and the Bank appointed the Receivers.

The Commissioner views this type of arrangement as the appointment of a creditor's agent as opposed to the appointment of Receivers and Managers. It follows that a supply of the Property in these circumstances will be a supply of another entity's property to a third party as envisaged in Division 105 of the GST Act.

In terms of the transfer of real property, the Company will usually be named as the vendor on the contract for sale of land and consequent transfer form. However, given the requirements of Division 105 and the absence of an agreement under Subdivision 153-B of the GST Act, it is the creditor that will have to account for any GST liability arising from the supply of the Property.