Edited version of your written advice

Authorisation Number: 1012690877175

Ruling

Subject: GST and property

Question 1

Is the partnership entitled to use the GST margin scheme for the sale of the residential units?

Answer

Yes, the partnership is entitled to use the GST margin scheme for the sale of the residential units.

Question 2

If the margin scheme is available, what is the total cost base to be used in calculating the margin on the sales?

Answer

According to subsection 75-11(7) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), as the acquisition was made after 1 July 2000, it will be the GST inclusive market value of the real property at the time of its acquisition.

Question 3

If the margin scheme is available does section 75-22 of the GST Act apply?

Answer

No

Relevant facts and circumstances

Entities A and B are partners in a property development venture and carry on an enterprise of property development.

The development comprises mixed commercial and residential premises and the residential component is due for completion soon.

Entities A and B are registered for goods and services tax (GST) as partnership (you).

Entity A is not registered for GST.

Entity B is not registered for GST.

Entities A and B are not related parties.

The site is a consolidation of several titles acquired by Entity A over several years. It is a combination of commercial and residential properties:

Entity A undertook various activities on the site including demolition of the old residential premises and the consolidation of the titles.

Entity A entered into a commercial lease of the consolidated property as a holding yard/site storage. The lease was not renewed after the initial terms as initial construction works commenced after the end of the lease.

Before the expiry date of the lease, Entity A sold 50% of the land subject to the lease to Entity B. As Entity A is not registered for GST, the sale by Entity A to Entity B was therefore not subject to GST.

The intention was for joint development of the land by Entities A and B to construct mixed-use premises comprising both residential units for sale and commercial units for sale/lease.

For the purposes of the joint development, Entities A and B registered their tax law partnership for GST purposes.

The partnership has been claiming input tax credit for the project development costs and returning GST on the rental income associated with the lease of the completed commercial units.

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 subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(2)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-11(7)

A New Tax System (Goods and Services Tax) Act 1999 section 75-22

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1 Is the partnership entitled to use the GST margin scheme for the sale of the residential units?

Enterprise

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

In this case, Entity A bought several properties over several years and undertook various activities on the site including the demolition of the old residential premises and the consolidation of the titles.

Entity A then entered into a commercial lease of the consolidated property as a holding yard/site storage but the lease was not renewed after the initial terms as initial construction works commenced after the end of the lease.

As such, we are of the view that Entity A carries on a leasing enterprise.

Subsequently, Entity A sold 50% of the land subject to the lease to Entity B.

Taxable supply

To be a taxable supply the supply must meet the conditions under section 9-5 of the GST Act. This section 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.

The asterisk denotes a defined term in the GST Act.

In your case, the sale of 50% of the land subject to the lease to Entity B will be for consideration, is made in the course of your enterprise and the supply is connected with Australia.

We then need to consider whether Entity A is required to be registered for GST.

Goods and Services Tax Ruling GSTR 2001/7 provides guidance on the meaning of GST Turnover, including the effect of section 188-25 on projected GST turnover.

Supplies to be disregarded under section 188-25

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53.)

Meaning of 'transfer of ownership'

37. The GST Act does not define the concept, 'transfer of ownership'. The words retain their ordinary meaning in context, and mean a transfer of the whole of your beneficial interest in the asset with or without legal title. A transfer of an interest in property that is less than your full interest will not be captured by these words. For example, if you merely grant a lease or licence over an asset that you own, the supply of that lease or licence will not be a 'transfer of ownership'. However, if you assign your full interest in that lease or licence it will be a 'transfer of ownership'.

Meaning of 'solely as a consequence'

41. For the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise (see example 1), or the substantial and permanent reduction in size or scale of an enterprise (see example 2).

The meaning of 'substantially and permanently'

43. In the context of section 188-25, we consider that the term 'substantially' refers to a reduction in size which is greater than merely nominal and does not necessarily require a reduction which is proportionately large. We will accept that, in the context of section 188-25, a 10% reduction in the size or scale is substantial in the case of most enterprises. Size or scale in this context means something measurable in terms other than turnover, for example, number of divisions within a company or number of stores operated (see example 2). In some enterprises a reduction of less than 10% may be substantial. This will depend on the facts and circumstances of each enterprise.

44. The concept of 'permanently' requires that the reduction in size and scale of an enterprise is enduring or is reasonably expected to be enduring. A reduction resulting from circumstances that have a foreseeable end is not permanent, for example a change that foreseeably affects only one or two years. Provided the basis of the expectation of endurance is reasonable it is not relevant that the expectation is proved inaccurate by subsequent events.

45. The substantial and permanent reduction applies to each enterprise operated by the entity, rather than the entity which may be required to be registered for GST.

In this case, Entity A is transferring 50% of the land to Entity B and the whole of its beneficial interest in that portion of the land to Entity B according to paragraph 188-25(a) of the GST Act, it ceases 50% of the leasing enterprise according to subparagraph 188-25(b)(i) of the GST Act or it substantially and permanently reduce the size or scale of the leasing enterprise according to subparagraph 188-25(b)(ii) of the GST Act.

As such the supply by Entity A to Entity B will be excluded when working out its projected GST turnover under section 188-25 of the GST Act.

As such Entity A is not required to be registered for GST when it supplies 50% of the land to Entity B.

Partnership

According to Goods and Services Tax Ruling GSTR 2003/13: general law partnerships (GSTR 2003/13) below:

Acquisitions by a partnership upon formation

65. Upon formation, a general law partnership, as an entity for GST purposes, acquires capital from the partners. This may be either in money or in kind, or the promise to provide labour, skills or services in the conduct of the partnership's business.

67. We consider that the in kind contribution is consideration for the supply of the partnership interest. However, the acquisition relates to the actual operation of the partnership and, therefore, relates to the making of supplies by a partnership in the course of the partnership's ordinary or general business. Any claim, therefore, for input tax credits is determined by reference to the use of the in kind capital contribution in the partnership's business activities and will be a creditable acquisition if the requirements of section 11-5 are met.

Example 1: In kind capital acquisition relates to taxable supply by partnership

68. George and Claudia form a partnership to run a coffee shop. George is registered for GST in respect of a wholesale restaurant supplies business he conducts. He has an espresso coffee machine which he contributes as an in kind capital contribution. The market value of the coffee machine is $5,500.

69. The consideration provided by the partnership for the coffee machine is the interest in the partnership. The supply of the espresso coffee machine is a taxable supply by George.

70. Although the coffee machine is consideration for the supply of the partnership interest, the acquisition relates to the taxable supplies of coffee in the coffee shop. The partnership is able to claim an input tax credit of $500.

In this case, a partnership is formed when Entity A sold 50% of the land subject to leasing to Entity B.

The partnership was registered for GST subsequently.

Entity A has 50% of the land which it contributes as an in kind capital contribution. The consideration provided by the partnership for the 50% land is the interest in the partnership.

The supply of 50% of land will be taxable supply by Entity A if all the requirements under section 9-5 of the GST Act are met. However, we are of the opinion that Entity A is not required to be registered for GST for the same reasoning as above.

Entity B has 50% of the land which it contributes as an in kind contribution. The consideration provided by the partnership for the 50% land is the interest in the partnership.

The supply of 50% of land will be taxable supply by Entity B if all the requirements under section 9-5 of the GST Act are met. However, we are of the opinion that Entity B is not required to be registered for GST for the same reasoning as above.

Margin scheme

Under subsection 75-10(2) of the GST Act the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or lease.

Subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if the entire freehold interest, stratum or long term lease is acquired through a supply that was ineligible for the margin scheme.

Among other things a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

In your case, the acquisition of the land by the partnership are not taxable supplies, accordingly, you are entitled to use the margin scheme for the sale of residential units.

Question 2 If the margin scheme is available, what is the total cost base to be used in calculating the margin on the sales?

According to Goods and Services Tax Ruling GSTR 2009/1: general law partnerships and the margin scheme (GSTR 2009/1) below:

(c) How is the margin calculated if a general law partnership supplies on or after 17 March 2005 real property that was acquired from its partners by way of capital contribution?

68. If, on or after 17 March 2005, the partnership supplies real property under the margin scheme that was acquired from a partner or its partners by way of capital contribution, the margin for the supply is calculated under subsection 75-11(7), unless the other provisions in section 75-11 apply. Subsection 75-11(7) applies because a partnership and its partners are associates.³⁵

69. As section 75-11 takes precedence, subsections 75-10(2) and 75-10(3) do not apply.

70. Under subsection 75-11(7) the margin for the supply is the amount by which the consideration for the supply exceeds:

• an approved valuation of the real property as at 1 July 2000 - if the acquisition was made before 1 July 2000; or

• the GST inclusive market value of the real property at the time of its acquisition - if the acquisition was made on or after 1 July 2000.

Example 6: partnership supplies on or after 17 March 2005 real property that was acquired from a partner as a capital contribution

71. On 1 December 2002, Graham and Lynette, who were not carrying on an enterprise, purchased a block of land as tenants in common for $400,000, with each having a 50% interest in the property. On 1 August 2004, they formed a general law partnership and contributed the land to the partnership for the purpose of carrying on a business of land development. The contribution of the land to the partnership was not a taxable supply. The partnership was registered for GST. When the land was contributed to the partnership, its GST inclusive market value was $600,000.

72. On 1 May 2005, the partnership sold the land to Murray for $710,000 and used the margin scheme to calculate the GST payable.

73. When the partnership acquired the land, the partnership and its partners were associates of each other. As the partnership acquired the land from associates and then supplied it on or after 17 March 2005, the margin for the supply is calculated under subsection 75-11(7).

74. The margin for the supply is $110,000 being the difference between the consideration for the supply and the GST inclusive market value of the land at the time of acquisition (that is, $710,000 less $600,000).

75. The GST payable by the partnership on this supply is $10,000, being 1/11th of the margin of $110,000.

In your case, when the partnership acquired the land, the partnership and its partners were associates of each other. As the partnership acquired the land from associates, and then supplied it on or after 17 March 2005, the margin for the supply is calculated under subsection 75-11(7).

According to paragraph 70 of GSTR 2009/1, as the acquisition was made after 1 July 2000, it will be the GST inclusive market value of the real property at the time of its acquisition.

Question 3 If the margin scheme is available does section 75-22 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply?

Subsection 75-22(1) of the GST Act provides that you have an increasing adjustment if:

• you make a taxable supply of real property under the margin scheme; and

• an acquisition that you made of part of the interest, unit or lease in question was made through a supply that was ineligible for the margin scheme; and

• you were, or are, entitled to an input tax credit for the acquisition.

The amount of the increasing adjustment is an amount equal to the previously attributed input tax credit amount for the acquisition.

In your case, subsection 75-22(1) of the GST Act does not apply to the partnership as the acquisition of the property will not be eligible for the purpose of applying the margin scheme under subsection 75-5(2) of the GST Act and the partnership is not entitled to an input tax credit for the acquisition.