Edited version of your written advice

Authorisation Number: 1012788454064

Ruling

Subject: GST and sale of property

Question 1

What was the nature of the relationship among the owners A, B and C, when they acquired and sold the property located in Australia?

Answer

Based on the information received, the owners A, B and C in a general partnership carried on a business when acquiring the property. After the partnership ceased the business, the nature of the partnership's business changed to leasing when the partnership allowed Mr and Mrs A to use the property to carry on their business for non-monetary consideration and at the time the property was sold.

Question 2

Did the owners A, B and C make a taxable supply of land under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when they sold the property?

Answer

No, the owners A, B and C did not make a taxable supply of land under section 9-5 of the GST Act when they sold the property because all the requirements in section 9-5 of the GST Act were not satisfied.

Relevant fact

• The property located in Australia was held as tenants in common by the owners A, B and C. The property is held on one title and was acquired under a single purchase contract.

• The owners, in a partnership, carried on a business on the property under the partnership's ABN and the partnership was registered for GST during that period. The GST registration for the partnership was cancelled when the partnership ceased the business.

• Mr and Mrs A carried on a business on the property under their ABN and resided on residential premises located on the property after the partnership ceased their business.

• There was no lease agreement in place between Mr and Mrs A and the partnership when Mr and Mrs A used the property for their business activity. Instead Mr and Mrs A paid all the outgoings related to the land including loan and interest repayments.

• Partners B and C did not derive any income from the business carried on by Mr and Mrs A. Partners B and C carried on their own business on another property which they have bought when the partnership ceased the business.

• The owners sold the property to a purchaser recently.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

Reasons for decisions

Question 1

Goods and Services Tax Ruling GSTR 2003/13 provides guidance on general law partnership and Goods and Services Tax Ruling GSTR 2004/6 provides guidance on tax law partnership.

Paragraphs 9 to 14 in GSTR 2003/13 state:

9. A partnership is defined in section 195-1 of the GST Act by reference to the definition of a partnership in section 995-1 of Income Tax Assessment Act 1997 (ITAA 1997). That definition states:

Partnership means:

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.

10. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or limited partnership), carrying on business as partners'. This reflects the general law of partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit. We refer to this type of partnership as a general law partnership.

11. The second limb of paragraph (a) of the definition of partnership includes as a partnership an association of persons (other than a company or limited partnership) 'in receipt of ordinary income or statutory income jointly'. This type of partnership is referred to as a tax law partnership.

12. A general partnership is formed when persons commenced carrying on business with a view of profit under an agreement, either written or oral. The 'relation' or the 'association' is one that arises under an agreement.

13. Under general law, a partnership is not an entity. The general law regards the business as being carried on by the persons that are in partnership. The term 'partnership' is merely descriptive of the relation between persons carrying on business with a view of profit.

14. The position under the GST Act is different. The definition of an entity includes a partnership. A consequence of this is that the GST Act applies to partnership transactions, in particular dealings between partners and the partnership, in a manner that does not reflect the general law treatment of those transactions. Against this background, we have applied the GST law to general law partnerships in a way that best promotes the purpose or object of the GST Act and produces a sensible result.

Paragraph 19 of GSTR 2004/6 states:

19. If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership.

From the information received, the owners have jointly acquired the property, carried on a business on the property and derived income from the business. In this instance the owners in a general partnership have carried on the business.

After the partnership ceased the business, one the partners, Mr A and their spouse used the property in order to carry on their own business. In return for using the property Mr and Mrs A paid for the outgoings related to the land including bank loan and interest.

The supply of the use of the property to Mr and Mrs A is an enterprise as defined in section 9-20 of the GST Act and in accordance to Miscellaneous Taxation Ruling MT 2006/1. The next step is to determine whether the enterprise made a supply in return for 'consideration'.

'Consideration' is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply'.

The meaning given to consideration in sections 9-15 and 9-17 extends beyond payments to include such things as acts and forbearances. It may include payments made voluntarily, and payments made by persons other than the recipient of a supply.

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary form. For more information on non-monetary consideration refer to Goods and Services Tax Ruling GSTR 2001/6.

Section 9-15 of the GST Act further provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Thus there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

In this instance we consider that the payments made by Mr and Mrs A were non-monetary consideration for the supply of the use of the property by the partnership since, there was a direct link between the supply of the use of the property to Mr and Mrs A and the payment of the outgoings related to the property including bank loan and interest.

Accordingly, the partnership was still carrying on a business at the time they sold the property despite the fact that the nature of the business carried out by the partnership had changed from farming to leasing.

Question 2

GST is payable on a taxable supply. Under section 9-5 of the GST Act 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 for GST.

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

We will now apply the facts to section 9-5 of the GST Act.

Paragraph 9-5(a) of the GST Act

This paragraph is satisfied as the owners sold the property for consideration.

Paragraph 9-5(b) of the GST Act

As discussed in question 1, the owners in a general partnership were carrying on a leasing enterprise at the time they sold the property.

Paragraph 9-5(b) is satisfied since the partnership made the supply of the property in the course of the leasing enterprise that they carried on.

Paragraph 9-5 (c) of the GST Act

This paragraph is satisfied as the property is located in Australia and therefore the supply is connected with Australia.

Paragraph 9-5(d) of the GST Act

The partnership was previously registered for GST when they were carrying on the business. They have cancelled their GST registration when the business ceased.

We will now consider whether the partnership was required to be registered for GST when they sold the property to the purchaser.

Under section 23-5 of the GST Act you are required to be registered for GST if:

a) you are carrying on an enterprise; and

b) Your GST turnover meets the registration turnover threshold of $75,000 ($150,000 if you are non-profit organisation).

Your GST turnover is your gross business income excluding GST for either the 12 months leading to the current month (current GST turnover) or the 12 months starting with the current month (projected GST turnover).

Further, when calculating your projected GST turnover, section 188-25 of the GST Act requires you to disregard the following:

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.

'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixates and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your good will.

For more information on 'GST turnover' please refer to Goods and Services Tax Ruling GSTR 2001/7.

When the partnership sold the property, they sold a capital asset as the property was used to derive non-monetary consideration when leasing it to Mr and Mrs A. Accordingly, the sale of the property is not included when the projected annual turnover of the business is calculated. In this instance the partnership was not required to be registered for GST.

Paragraph 9-5(d) of the GST Act is therefore not satisfied.

Summary

The sale of the property by the owners is not a taxable supply since all the requirements in section 9-5 of the GST Act are not satisfied.