Edited version of your private ruling

Authorisation Number: 1012520262044

Ruling

Subject: GST and Tax law Partnership

Question 1

If the Commissioner considers that the arrangement between A and B constitutes a partnership, is A as a co-owner and not the partnership carrying on an enterprise of leasing the assets held in co-ownership under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, A as a co-owner and not the partnership is carrying on an enterprise of leasing the assets held in co-ownership under section 9-20 of the GST Act.

Question 2

If A is carrying on an enterprise of leasing the assets in its own right as a co-owner, can it report the GST payable and input tax credit claimable in its own business activity statement (BAS) in relation to its enterprise?

Answer

Yes, A can report the GST payable and input tax credit claimable in its BAS in relation to the enterprise.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

A is a fund that invests in, develops and operates Australian commercial properties and carries on an enterprise of developing and leasing commercial properties.

A is registered for goods and services tax (GST)

A entered into a transaction whereby it will acquire a 50% ownership interest in various shopping centres (the Properties) from B.

The remaining 50% ownership interest in the Properties is held by B. The interests in the Properties were previously wholly-held by B.

The Commissioner has issued a private ruling confirming that the arrangement between A and B constitutes a partnership under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

As part of the acquisition A will hold 50% ownership in land, leases, plant and equipment and buildings.

A entered into a Co-owners' Agreement, a Development Management Services Agreement and a Property Management Services Agreement with B.

A and B (collectively, the co-owners) hold their interests in the Properties and associated leases as "tenants in common". The applicant has stated that each owner will be registered on title according to its respective interest in the land and will have several liability and not joint liability.

The co-owners appointed a Property Manager under the Property Management Services Agreement.

The co-owners entered into the Development Management Services Agreement under which a Development Manager will be appointed.

The Co-owners' Agreement asserts that nothing in this agreement will be regarded as constituting a partnership between the co-owners.

All the expenses in respect of the Properties will be payable by A and B in the proportion of their interest in the Properties.

The Property Management Services Agreement and the Development Management Services Agreement both assert that the rights, obligations and the liability of each co-owner under these agreements are several in proportion to their Interest (and not joint or joint and several).

The Property Manager will make all payments to A and B separately in accordance with their ownership interest with each relevant property.

The Property Manager will keep and manage one set of business records on a property-by-property basis and make available the information in that format to each co-owner separately.

Co-owners will receive a report on a property-by-property business and each co-owner will then separately ascertain its share of the revenue and expenses for reporting purposes.

A will keep separate records in relation to its interest of the Properties.

A and B will have joint building and public liability insurance policies in relation to the Centres; however, each Co-owner will be separately disclosed and identified as tenants-in-common under the policy.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(c)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 31-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 184-1(1)

Reasons for decision

Question 1

Summary

A as a co-owner and not the partnership is carrying on an enterprise of leasing the assets held in co-ownership under section 9-20 of the GST Act.

Detailed reasoning

The GST Act widely defines what it means to be carrying on an enterprise. Paragraph 9-20(1)(c) of the GST Act specifically provides that an activity, or series of activities, done on a regular basis, in the form of a lease, licence or other grant of an interest in property, constitutes an enterprise. Therefore, the leasing of the property satisfies the definition of carrying on an enterprise under the GST legislation.

The definition of entity under subsection 184-1(1) of the GST Act includes 'a partnership'. For GST purposes, the definition which is given to the term 'partnership' is the same as under the Income Tax Assessment Act 1997. The GST Act treats the partnership as an entity separate from its partners.

The co-ownership arrangement entered between A and B has been considered as a partnership and is commonly referred to as a tax law partnership.

Paragraph 60 of Goods and Services Tax Ruling: GSTR 2004/6 explains that a tax law partnership is capable of carrying on an enterprise and may make supplies or acquisitions in carrying on its enterprise. Supplies and acquisitions made by or on behalf of a partner in the partnership as partners are taken to be supplies and acquisitions made by the partnership.

However, paragraph 66 of the GSTR 2004/6 outlines a number of factors that point to an enterprise being carried on by each co-owner in their own right and not by a tax law partnership. These factors are:

· the co-owner is registered for GST in its own right in relation to a broader enterprise and acquires an interest in the property in carrying on that enterprise.

You informed that A acquired a 50% interest in the Properties. A is registered for GST in its own right and has acquired the interest in the Properties in the course of its broader property development and leasing enterprise.

· there is an agreement between the co-owners not to form a partnership or to jointly carry on an enterprise.

The Co-owners' Agreement confirms that the agreement will not be regarded as a partnership between the co-owners.

· each co-owner makes independent decisions with regard to the acquisition of an interest in income producing property.

A sought advice from specialist consultants in making its decision to acquire the interest in the Properties and satisfied itself as to various matters regarding the condition of the Properties. The decision to acquire the interest was made independently.

· each co-owner's acquisition of their interest in property is made separately.

A has contributed its capital separately from B to acquire its interest in the Properties.

· any borrowings by a co-owner are to fund the acquisition of their interest in the income producing property only; the co-owners do not fund the acquisition of each of their interest out of joint funds or borrowings.

There will be no joint funding or borrowing with B in respect of funding the acquisition of A's interest or the ongoing development and leasing of A's interest.

· the co-owners act independently of each other in making decisions about their respective investments.

You explained that holding the Properties as a tenant in common and not jointly, allows A as part of its enterprise to continue to manage its investment including the ability to separately sell each or all of its interest in the Properties should the right opportunity be presented to A.

· each co-owner acts independently with respect to the appointment of a manager or agent, even though the same manager or agent is usually appointed to act on behalf of all the co-owners.

The decision to appoint the current Property Manager was made as part of the overall acquisition process and independently.

· the gross rental income may be paid into a single trust account operated by a property manager or agent and operating expenses may be met from this trust account. The income is not paid into and the expenses are not paid out of a joint account in the name of the co-owners.

All the income from the Properties will be collected by the Centre Manager of each Property and distributed to A and B in the proportion of their interest in the Properties, as per Co-owners' Agreement. The expenses also will be payable by A and B in the proportion of their interest in the Properties.

· the manager or agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income from the trust account to the co-owners on a regular basis.

The Property Manager will maintain a separate trust account and all the income and expenses relating to the relevant property are recorded in the trust account. The Property Manager will make all payments to A and B separately in accordance with their ownership interest with each relevant property.

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

The co-owners are not expected to deal with third parties or on behalf of the other co-owners. They will only have direct dealings with the Property Manager in relation to the operation of the relevant shopping centre.

· property is held as tenants in common, rather than as joint tenants.

A and B hold their interests in the Properties and the associated leases as tenants-in-common. Each owner will be registered on title according to its respective interest in land and that each owner will have several liability and not joint liability.

· although contributing to a mutual fund to pay all liabilities in relation to the income producing property, each co-owner makes the payment in the course of carrying on their own enterprise.

A acquired the interest in the Properties in the course of its broader property development and leasing enterprise and will continue to make payments in the course of carrying on its own enterprise. A also intended to report GST payable and input tax credits claimable in its own business activity statements.

Paragraph 70 of the GSTR 2004/6 provides that neither the existence nor absence of any one of these factors is conclusive one way or another. It is the overall weight of evidence that is important and the individual weighting of each factor depends on the circumstances of the particular case.

Furthermore, paragraph 72 of the GSTR 2004/6 explains that a preponderance of the factors mentioned in paragraph 66 would lead to a conclusion that an enterprise is carried on by each co-owner in their own right in respect of their interest in an income producing property. In these cases, the ATO takes the view that although a tax law partnership may exist, it does not carry on any enterprise in relation to the property.

On the basis of the facts provided, on balance, it is considered that A as a co-owner is carrying on its own enterprise of leasing the assets held in co-ownership and not the tax law partnership.

In this case, it is considered that although a tax law partnership exist, it does not carry on an enterprise of leasing the assets held by the co-owners.

Question 2

Summary

A can report the GST payable and input tax credit claimable in its BAS in relation to the enterprise.

Detailed reasoning

Under section 23-5 of the GST Act, you are required to be registered if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold.

Section 31-5 of the GST Act provides that if you are registered or required to be registered, you must give to the Commissioner a GST return for each tax period.

You confirmed that A is registered for GST and will be carrying on the leasing enterprise of its interest in the Properties in the course of its broader property development and leasing enterprise.

A is carrying on an enterprise of leasing the assets held by the co-owners in its own right. Therefore, A is required to report its supplies and acquisition in relation to the enterprise of leasing assets in its BAS statement for the relevant tax period.

This means A should report GST payable and input tax credits claimable in its BAS for each tax period.