Edited version of your written advice

Authorisation Number: 1012816784546

Ruling

Subject: GST and supply of real property

Question 1

Does goods and services tax (GST) apply to the supply of residential premises from the company to its shareholders?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

• The company is registered for GST.

• The company is formed to carry out a building project (Project) to build a number units, as stated in the Joint Venture Agreement (JV Agreement) between a number of entities (who later became the company shareholders). The key points of the JV Agreement and the Constitution are reproduced as follows:

JOINT VENTURE AGREEMENT

• The Parties wish to form a joint venture to carry out the Project.

• The Parties have incorporated the Company to be the vehicle to carry out the Project.

• The Parties intend to own all of the issued capital of the Company as set out in the Schedule.

COMPANY'S FUND

• Each of the Parties must make the Cash Contribution. These payments will be made in accordance with the direction of the Board.

• In addition to the Contribution to be made by the Parties under this Agreement, the Parties must ensure the Company has sufficient working capital to conduct the Project under each Annual Program either from:

• loans by the Parties to the Company in proportion to the shareholding held by each Shareholder in the Company; or

• borrowings by the Company supported by guarantees from the Parties in proportion to the shareholding held by each Shareholder in the Company.

• The Contribution will be made by the Shareholders as set out in the Schedule. The Contribution will be made by way of a loan to the Company that is unsecured which is to be converted, at the conclusion of the Project, into equity in the Unit that the Shareholder is entitled to in the Project.

TRANSFER OF UNITS

• Each Shareholder must exercise their right to take a transfer of the Unit pursuant to the terms set out in the Constitution.

• All funding requirements of an individual shareholder in order to fund the transfer of the Unit must be arranged by the shareholder in consultation with all of the other shareholders, to enable the transfer of the Unit simultaneously with the transfer of all of the Units in the Project.

• In addition to the forfeiture of the shares in the capital of the company pursuant to the Constitution, each shareholder must pay to the Company the proportion of the debt secured against the Project to their respective shareholding simultaneously with the transfer of their Unit.

• This Agreement will be terminated by mutual agreement of all the Parties; or when the Company is dissolved and the winding-up of its affairs is completed; or in relation to any Party, upon their ceasing to hold any Shares.

DEFINITIONS

Project: means the acquisition, development, construction and disposal of the Real Property described in the Constitution.

Units: means the lot that the Shareholder is entitled to pursuant to the Constitution of the Company.

Cash contribution is the amount referred to in the Schedule is the amount of the cash that each shareholder must pay to the company for its funding.

THE CONSTITUTION

Any invitation to the public to subscribe for, and any offer to the public to accept subscriptions for, any shares in or debentures of the company is prohibited.

Any invitation to the public to deposit money with, and any offer to the public to accept deposits of money with, the company for fixed periods or payable at call whether or not bearing interest, is prohibited

SHARE RIGHTS

• There are a number of classes of shares, the number is corresponding with the number of units to be built in the company.

• All class of share shall entitle the holder similar rights such as:

• the right to occupy, use and enjoy under license for residential purposes that

separate area being proposed Lot X created by a proposed sub-division by

registration of a survey plan, Lot X on SP XXXX ("Lot X") to the exclusion of the Company and any other member of the Company;

(i) upon registration of the sub-division creating Lot X, be entitled in full satisfaction of the holder(s) entitlements to a transfer of the corresponding Lot X in exchange for the surrender of the "specific" Class Ordinary Shares and subject to the holder(s) assuming liability for liabilities duly incurred by the Company in respect of Lot X.

• A Clause of the Constitution provides that:

THE PROJECT

• The company was formed specifically and only to purchase the property located at XX Street and to build a number of units for the shareholders who owned shares in the company.

• The intention was to finish this building project and each individual shareholder takes over the title when the residential premises are completed and then terminate the company.

• The company acquired the land and held the title of the land in the company's name.

• The building project was also financed the shareholders' contributions and by a bank loan.

• Each shareholder picked the residential premises they wanted out of the plan (indicated by a specific class of share) and then paid an agreed amount which was set by the company.

• At completion, the residential remises were transferred to each shareholder holding relevant class of share in the company.

• The company provided that the initial marketing to the shareholders was all aiming at the shareholders taking ownership at completion and keeping a completed property that they can rent out to tenants and have it at what was referred to as wholesale instead of buying an investment property from a real estate agent.

• None of the premises are being lived in by the owners.

• Most of the residential premises distributed have been sold.

Relevant legislative provisions

Subsection 7-1(1)

Section 9-5

Section 9-10

Section 9-15

Section 9-20

Section 9-40

Section 11-5

Paragraph 11-15(2)(a)

Section 40-65

Subsection 40-75(1)

Section 72-70

Paragraph 184-1(b)

Section 195-1

Income Tax (Assessment) Act 1936

Section 318

Reasons for decision

Summary

The company is the entity who owned the residential premises in question. The company made supplies of real property when the company supplied (transferred) each of the residential premises to the company's shareholders in the course of carrying on an enterprise for GST purposes.

The company will therefore be liable for GST under the GST Act as it made taxable supplies of those premises to the company's shareholders.

Detailed reasoning

Under sections 7-1(1) and 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is liable for GST on the taxable supply it makes.

Supply

The term 'supply' is statutory term defined in section 9-10 of the GST Act to mean:

(1) A supply is any form of supply whatsoever

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c)  a provision of advice or information;

(d)  a grant, assignment or surrender of *real property;

(e)  a creation, grant, transfer, assignment or surrender of any right;

(f)  a *financial supply;

(g)  an entry into, or release from, an obligation:

(i)  to do anything; or

(ii)  to refrain from an act; or

(iii)  to tolerate an act or situation;

(h)  any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

*an asterisk denotes a defined term in the GST Act

Under section 195-1 of the GST Act - Definitions 'real property' means:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any contractual right exercisable over or in relation to land

It is considered that by transfer the title of the residential premises to the company shareholders, a supply is made by under paragraph 9-10(2)(d) of the GST Act.

Entity

'Entity' is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to have the meaning given by section 184-1 of the GST Act

All Corporations Act companies are entitled to an ABN. The term 'Corporations Act Company' is defined to mean 'a body registered as a company under the Corporations Act 2001'. Under paragraph 184-1(b) of the GST Act, the company is an entity for GST purposes.

The company is the entity who owns the residential premises. The company made the supply of real property when the company made a supply (transferred) of the residential premises to the company's shareholders.

The company will be liable for GST if the supply the company made (as discussed above) is a taxable supply for GST purposes.

It is noted that the shareholders did not make any supply in returning the relevant class of share to the company. The interest in the share is not supplied to the company. Legal ownership of the share does not transfer to the company as the result of the distribution of the residential premises to the shareholders. The entitlement of the distribution arises when the share was acquired, not when the shares is returned to the company. The shareholders made no supply to the company.

Is the supply under the JV Agreement taxable supply?

Under section 9-5 of the GST a supply becomes taxable when all of the requirements in the section are met. This section states:

9-5 Taxable supplies

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 supply is not GST-free under any provision of the GST Act or other Acts. The supply of new residential premises is not input taxed under subsection 40-40(2)(b) of the GST Act or any other Acts. The supply of the completed residential premises in the company's circumstances is considered the supply of new residential premises in accordance with paragraph 40-75(1)(a) of the GST Act where it provides that residential premises are new if they have not been sold as residential premises. The company's supply is the first supply of those residential premises after completion.

We need to consider whether any of the requirements under section 9-5 of the GST Act above is not met.

The company has provided that the residential premises are in Australia and the company is registered for GST. We need to consider whether the transfer is made in the course or furtherance of an enterprise and whether the transfer is made for consideration.

In the course or furtherance of an enterprise

Paragraph 3.10 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 provides:

'In the course or furtherance' is not defined, but is broad enough to cover any supplies made in connection with r enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goal, is furtherance on an enterprise although it may not always in the course of that enterprise.'

Therefore, we need to consider whether the company was carrying on an enterprise of land development (subdivision, building residential premises). Where it is considered that the company was, the transfer is considered to be within the course or furtherance of that enterprise.

The Enterprise

The Project is a one-off activity that the company carries on. The activity is not considered to be done in a form of business as it is not repetitive. However, under paragraph 9-20(1)(b) of the GST Act, which defines the meaning of the term 'enterprise', the activities under the Project can be considered as done:

An enterprise is an activity, or series of activities done:

(b) in the form of an adventure or concern in the nature of trade.

Paragraph 9-20(1)(b) was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

…But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making: Edwards (Inspector of Taxes) v Bairstow [1956] Ac 14; Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199; Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344-345 per Mason CJ, Brennan and Gaudron JJ; at 351-351 per Dawson J; and at 360 per McHugh J.

In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

The Commissioner has expressed his views on the meaning of paragraph 9-20(1)(b) at paragraphs 233 to 261 of Miscellaneous Tax Ruling MT 2006/1. The Ruling states:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

238. A similar view was expressed by Foster J in AB v. FC of T 97 ATC 4945 at 4961; 37 ATR 225 at 242 where he said:

See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal' (McClelland v. FCT (1970) 120 CLR 487 at 495; 2 ATR 21 at 26; 70 ATC 4115 at 4120).

….

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

MT 2006/1 identifies the following six badges or identifying features of trade at paragraphs 247 to 257:

• the subject matter of realisation:

- if the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

• the length of period of ownership:

- a trading asset is generally dealt with or traded within a short time after acquisition.

• the frequency or number of similar transactions:

- the greater the frequency or similar transactions the greater the likelihood of trade.

• supplementary work on or in connection with the property realised:

- improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggest an element of trade.

• motive:

- if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

- Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides the following relevant views:

47. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (see Whitfords Beach at 150 CLR 379; 82 ATC 4044; 12 ATR 707). Whether a particular transaction has a business or commercial character depends very much on the circumstances of the case.

48. In Myer, the High Court did not set out guidelines as to what constitutes a business operation or commercial transaction. However, it did regard the following instances as being such operations or transactions:

(i) A syndicate purchased a mining property for the purpose of resale at a profit, rather than deriving income from mining operations on the property, and later sold the property at a profit (Californian Copper Syndicate v. Harris).

(ii) A company engaged in exploiting a particular invention by granting licences under patents acquired additional patents in relation to the invention and, as always contemplated, sold those patents at a profit (Ducker v. Rees Roturbo Development Syndicate Ltd [1928] AC 132).

(iii) A partnership purchases a complete spinning plant with a view to resale at a profit, having no intention of using the plant to derive income from spinning, and later sold the plant at a profit (Edwards v. Bairstow [1956] AC 14).

(iv) A company which owned beachfront land suffered a change in ownership and then procured changes of zoning, developed the land as a residential subdivision and sold the vacant subdivided lots for a profit of several million dollars (Whitfords Beach).

49. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a) the nature of the entity undertaking the operation or transaction (Ruhamah Property Co. Ltd v. FC of T (1928) 41 CLR 148 at 154; Hobart Bridge Co. Ltd v. FC of T (1951) 82 CLR 372 at 383; FC of T v. Radnor Pty Ltd 91 ATC 4689; 22 ATR 344). For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature. However, if the taxpayer acts in the capacity of trustee of a family trust, the inference that the transaction was commercial or business in nature may not be drawn so readily;

(b) the nature and scale of other activities undertaken by the taxpayer (Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 CLR 729 at 740);

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out. This factor would include whether professional agents and advisers were used and whether the operation or transaction took place in a public market.

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. For example, the relationship between the parties may suggest that the operation or transaction was essentially a family dealing and not business or commercial in nature;

(g) if the transaction involves the acquisition and disposal of property, the nature of that property (Edwards v. Bairstow; Hobart Bridge 82 CLR at 383). For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn; and

(h) the timing of the transaction or the various steps in the transaction (Ruhamah Property 41 CLR at 154). For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature.

Application of the factors:

(i) The subject matter of realisation / the acquisition and disposal of property

The case law that considers an 'adventure or concern in the nature of trade' typically consider the scenario where an entity has acquired some form of property which is subsequently disposed. As observed in paragraph 49(b) of TR 92/3 above, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn

The company has provided that it acquired the property for the purposes of building a number of residential premises to distribute them to the company's shareholders. The property the company acquired was transformed into a number of residential premises for the purposes of supplying to the company's shareholders. The property the company acquired did not return any income nor was it being used in any income producing activities. Instead it was developed into a number of residential premises for distribution.

In this sense, this factor points towards characterising the transactions in the nature of trade.

(ii) The nature of the entity undertaking the operation or transaction

In this particular case, there is an identified group of persons who have formed a company for the common purpose of building residential premises for supply. The activities that the company has conducted are similar to activities performed by many ordinary land owners who engaged a builder to build residential premises for supply.

It is apparent that this incorporated association of persons has been established for the purposes of carrying on land development activities for the benefits of shareholders. This is similar to other businesses carrying activity to benefits their shareholders/owners in different forms. In this context, we consider that the nature of the entity undertaking the transaction points towards the characterising the transactions in the nature of trade.

(iii) The length of period of ownership

The company acquired the property located at X Street and transformed the property into a number of residential premises without a reasonable holding period. The purpose that the company acquired the land is to develop, to transforming the property into a number of residential premises after a short period of ownership for the benefits of the company's shareholders. We consider that this factor also points towards characterising the transactions in the nature of trade.

(iv) Frequency of transactions

The Project is a one off activity. The frequency of the transactions is a factor that points away characterising the transactions in the nature of trade.

(v) Supplementary work on or in connection with the property realised:

The company took actions to improve property beyond preparing an original asset for sale, to bring it into a number of finished residential premises and achieve the outcome that is better than the market value of those residential premises so that the company can supply them to the shareholders at a gain to them. The outcome of a better price suggests an element of trade.

(vi) Amount of money involved/complexity of the arrangements/manner in which the operation was carried out

The amounts of the payments to be received by the company are not insignificant. The JV Agreement the company has entered into with the company's shareholders to set up the Project and to establish a company is a complex agreement. These factors do suggest a commercial intention undertaken by the incorporated association of persons.

(vii) Motive

Having considered the relevant case law, the motive or intention of the taxpayer to make a profit at the time of acquiring property appears to be one of the strongest indicators that an entity is undertaking an adventure or concern in the nature of trade. This is often in the context of whether a disposal of an asset is a mere realisation of an asset or whether the disposal was of a commercial nature. In this context:

• The company acquired the property for the purposes of benefiting the company's shareholders. The transform of the property into a number of residential premises is not a mere realisation of an asset. It went far beyond that where the property was transformed into a number of residential premises. This can be characterised as having a commercial flavour. We consider that this factor also points towards characterising the transactions in the nature of trade.

• Although the company has not made the supply of the residential premises to external parties, it is not disputed that the purposes of the Project was to reduce the acquisition costs of the residential premises. The company has provided that:

'As stated previously the shareholder initial investment was made to keep a completed property as cheaper value that buying direct from real estate agents to build equity in the property. The liquidation of the project manager and builder added increased costs which they need to recover and had no other option.'

The fact that the residential premises are supplied to shareholders only does not change the outcome that the ultimate purpose (motive) of the Project is to benefit shareholders i.e. to make gains for the company's shareholders. The gain received by the shareholders is the reduced costs of acquisition of the residential premises. The gains represent the profits made by the company on the Project and distributed back to the shareholders in the form of reduced price compared with the market value.

The company has provided that it was not making profit for the company itself. Regardless of the reasoning above, it is noted that that it is only individuals and partnerships of individuals that are excluded from being an enterprise if there is no expectation of making a profit, per para 9-20(2)(c) of the GST Act . Incorporated entities are not caught by this provision.

Conclusion

On balance, and considering all relevant factors, we consider that factors that suggest the company's supplies of residential premises to the company's shareholders are of a commercial nature prevail. The company's activities are not dissimilar to activities of other builders who are carrying on an enterprise of land development.

It is considered that the company was carrying on land development (acquisition, development, construction and disposal of the real property) in accordance with paragraph 9-20(2)(b) of the GST Act.

The supply is made for consideration

The term 'consideration' for GST purposes is defined in section 9-*15 of the GST Act as follows:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

…

(2B) For the avoidance of doubt, the fact that the supplier is an entity of which the *recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration.

The company did not collect any amount payable for the residential premises at the time of the supply (transfer of title).

As discussed above, the supply of the company to the shareholders is not made in response to any supply from the shareholders. The shareholders have certain rights to claim their entitlement from the shares. The distribution of the premises satisfied the rights of the shareholders but is not made in return for those shares.

In accordance with the JV Agreement and clauses of the Constitution:

• the holder(s) of each class of shares, other than the X class, is entitled to receive the interest of the relevant residential premises specified by the Lot number associated with that class of share.

• The cash contribution and any other payments required under the JV Agreement and the Constitution are the payment for the supply of the relevant share which entitled the ownership of the associated residential premises.

It is considered that the payments the shareholders made to the company under those clauses mentioned above are consideration for the supply of the residential premises in question.

As all of the requirements under section 9-5 of the GST Act are met, the company made a taxable supply when the company transferred the titles of the 7 residential premises the company owned to the shareholders.

What is the GST payable on the supply?

The company has provided that the payments that the shareholders made in return of the shares (that is made in return for the interest in the Lot associated with the share) is lower that the market value. The supply for an inadequate consideration is not relevant unless the supplier and the recipient of a supply are associates. If it is the case, Division 72 of the GST applies.

Section 72-70 of the GST Act provides that:

72-70 The value of taxable supplies for inadequate consideration

(1) If a supply tosr *associate for *consideration that is less than the *GST inclusive market

value its value is the *GST-exclusive value of the supply.

(2) Subsection (1) does not: apply if

(a) your associate is *registered or *required to be registered; and

(b) your associate acquires the thing supplied solely for a *creditable purpose.

(3) This section has effect despite section 9-75 (which is about the value of taxable supplies).

The term 'associate' has the meaning given by section 318 of the Income Tax Act 1936. The company and its 7 shareholders are associates under subsection 318 of the Income Tax.

The GST amount will be calculated on the market value of the residential premises unless the recipients are registered and they acquired the residential premises for a creditable purpose.

Although most the recipients are registered for GST, all of the recipients did not acquire the residential premises solely for a creditable purposes (for use as rental property) and therefore failed the test under paragraph 11-15(2)(a) of the GST Act.

It follows that:

• section 72-70 of the GST applies so that the value of the supply is the GST-exclusive market value of the residential premises in question.

• the recipient is not entitled to any input tax credit because their acquisition is not a creditable acquisition as required under section 11-5 of the GST Act (the purpose is rental property). However, the subsequent supply of the residential premises by the shareholders is also not a taxable supply because the underlying supply is not new residential premises, section 40-65 of the GST Act applies to make the subsequent supply input taxed. When an entity makes an input taxed supply, the entity is not liable to pay GST on the supply and also not entitled to any input tax credit for things acquired to make the supply.