Edited version of your written advice

Authorisation Number: 1012865434720

Date of advice: 27 August 2015

Ruling

Subject: GST - company distributing new residential premises to shareholders via redeemable shares

Questions

1. Is the Company's transferring five (X) residential strata units to the shareholders through redemption of redeemable shares made in the course or furtherance of an enterprise that the Company carries on?

2. Are the redemption of redeemable shares from the respective shareholders, and the corresponding transfer of legal titles of the X completed strata units to the shareholders, taxable supplies from the Company to its shareholders?

Answers

1. Yes, the Company's transferring X residential strata units to the shareholders is made in the course or furtherance of an enterprise that the Company carries on.

2. These are two separate supplies:

• The transfer of legal titles of the X completed strata units from the Company to the shareholders is a taxable supply of new residential premises from the Company to its shareholders.

• The Company's redemption of redeemable shares from the respective shareholders: The Company's acquisition of an interest in the redeemable preference shares (an acquisition-supply) is a financial supply and therefore an input-taxed supply.

Relevant facts and circumstances

The Company has an ABN but is not registered for GST. The company acquired a residential property (the property) by a contract for sale dated XXX. The company provided a copy of the building contract dated YYY (building contract), where the Company entered into the building contract for the demolition of the existing house on the property and the construction of strata units on the property.

The scope of the development project (Development) and the Company's arrangements with its shareholders are detailed in the Constitution of the Company (Constitution). The Development has been structured so that only one legal entity, the Company, acquires title to the property and will incur all of the development expenses.

The shareholders in the company own redeemable shares (Special Shares). Special Shares is defined in the Definition clause of the Constitution to mean A, B, C D and E class shares. The Special Shares are fully paid. The Special Shares entitle each shareholder to an Allocated Unit which is set out in the Constitution.

The Company does not intend to sell any of the Allocated Units for a profit. After the titles of the units are transferred to the shareholders, the Company will be wound up. Each shareholder intends to hold the completed unit as a long-term rental investment. The shareholders will be exempted from stamp duty when the transfer of legal titles takes place.

The acquisition costs of the property were funded by a bank loan for the purchase price and for the costs that will be incurred under the building contract. In relation to the remainder of the costs, these will be met by the shareholders in proportion to their respective shareholdings.

The Directors of the Company may issue Ordinary Shares or Special Shares. The Constitution states that the subscription price for each Special Share will be that proportion of the Project Costs that the Directors determine is attributable to that share's Allocated Unit. Project Costs is defined in the Constitution as "all costs incurred in acquiring the site for the Development and completing the Development as determined by the Directors".

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 subsection 9-5(a)

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(d)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 195-1(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 195-1(b)

A New Tax System (Goods and Services Tax) Act 1999 subsection 195-1(c)

A New Tax System (Goods and Services Tax) Act 1999 section 40-5(2)

A New Tax System (Australian Business Number) Act 1999 section 41

A New Tax System (Goods and Services Tax) Regulations 1999, regulations 40-5.02, 40-5.06, 40-5.09(1) and 40-5.09(3)

Reasons for decision

Summary

1. The Company has been established for the purpose of carrying on property development activities for the benefits of the shareholders. Apart from the stamp duty exemption on the transfer of legal titles from the Company to the shareholders, the gain received by the shareholders is also the reduced costs of acquisitions of the new strata units. The gains represent the profits made by the Company and distributed back to the shareholders in the form of reduced price compared with the market value. We consider that the Company's enterprise of property development would constitute an adventure or concern in the nature of trade.

Hence the Company transferring legal titles of the strata units to its shareholders is made in the course of carrying on an enterprise for GST purposes.

2. The redemption of redeemable shares from the respective shareholders, and the corresponding transfer of legal titles of the completed strata units to the shareholders are two separate supplies with equal non-monetary consideration (similar to barter transactions).

The transfer of legal titles of the completed strata units from the Company to the shareholders: is a taxable supply of new residential premises from the Company to its shareholders. The consideration for the company's supply of the new residential premises to the shareholders is non-monetary in the form of redeemable shares. Hence the consideration is the market value of the redeemable shares.

Where a particular unit is strata-titled and allocated to a shareholder, the Company makes a supply of new residential premises according to paragraph 47 of Goods and Services Tax Ruling (GSTR) 2003/3 in return for the redeemable shares. We consider that the strata units are the Company's revenue assets and the consideration will be included in the Company's projected GST turnover.

Please note that when the shareholders provide non-monetary consideration of redeemable shares for the Company's supply of legal titles to the units, the shareholders are in turn making a supply of redeemable shares to the Company.

The Company's redemption of redeemable shares from the respective shareholders: The Company's acquisition of an interest in the redeemable preference shares (an acquisition-supply) is a financial supply and therefore an input-taxed supply. The consideration given by the Company to the shareholders is non-monetary in the form of the Company's transfer of legal titles of the strata units which are associated with the shares. Hence the value of the consideration is the market value of the strata units.

Paragraphs 22 to 26 of Goods and Services Tax Ruling (GSTR) 2001/6 provide that the consideration for the above two supplies would have the same value. Therefore, the market value of the redeemable shares is equal to the market value of the strata units. Hence the Company is required to remit 1/11^th of the market value of the strata units to the Australian Taxation Office (ATO) when it transfers the legal titles of the strata units to the shareholders, as it makes taxable supplies of X new residential strata units to the company's shareholders.

Detailed reasoning

Please note that your question 1 is a requirement under paragraph 9-5 (b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Hence we will discuss supply and taxable supply before answering your question 1.

Under subsection 7-1(1) and section 9-40 of the GST Act, an entity is liable for GST on the taxable supply it makes.

Characterisation of the supplies

Paragraph 9-10(2)(d) of the GST Act provides a supply includes a grant, assignment or surrender of real property.

Real property is defined in section 195-1 of the GST Act as including:

a) any interest in or right over property; or

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

c) a licence to occupy property or any contractual right exercisable over or in relation to property.

We consider that when the Company transfers the legal titles of the residential premises to the company's shareholders, the Company makes a supply of real property to the relevant shareholders under paragraph 9-10(2)(d) of the GST Act.

Goods and Services Tax Ruling (GSTR) 2003/3: "when is a sale of real property a sale of new residential premises?" discusses company title arrangements when residential premises are supplied.

Paragraphs 44 to 47 and 49 of GSTR 2003/3 state:

Company title converted to strata title

44. Company title means:

A type of title for multi-occupancy buildings (usually home units), common before the introduction of strata title. Under company title, a company owns the building, and the company's shares are divided into a number of blocks or classes, each block or class entitling the owner of the shares to exclusive occupation of a particular part of the building. This right of exclusive occupation is not a proprietary interest in the freehold, but is rather a contractual right against the company or sometimes a right to be granted a lease.

45. Under company title, the company holds the title to the building. The company may be the first owner having built the building (that is, it has never been sold) or it may have purchased the building (in which case it has previously been sold).

46. The company issues shares that contain certain rights. The rights attached to the shares include an entitlement to occupy a unit in the building owned by the company. Following conversion of the title, in some cases, the newly created strata titled units will be transferred to the existing shareholders for nominal consideration or in exchange for shares in the company.

47. Where the company is the first owner of the building, the supply of the residential units by the company to the individual shareholders is a supply of new residential premises under paragraph 40-75(1)(a) as they have not previously been sold. It is only shares in the company that have previously been sold. The supply of the units may be a taxable supply by the company.

49. Where the shareholder returns the shares to the company in exchange for the unit, the supply of the shares is a financial supply and may be an input taxed supply under Subdivision 40-A. Any subsequent sale of a unit by the new owner will not be a sale of new residential premises under paragraph 40-75(1)(a).

We consider that the Company and the shareholders have exchanged various rights and obligations to the transactions and there are three supplies as follows:

a) The supply from the Company of redeemable shares to the shareholders with monetary consideration of the subscription price.

b) The transfer of legal title of the strata unit from the Company to the shareholders with non-monetary consideration of the redeemable shares.

c) The Company's redemption of redeemable shares from the respective shareholders with non-monetary consideration of the transfer of legal titles.

Your two questions relate to the second and third supplies.

Goods and Services Tax Ruling (GSTR) 2001/6 "non-monetary consideration", paragraph 16 states:

16. By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

We will proceed to examine whether the two supplies are taxable supplies or not.

Taxable supply

Section 9-5 of the GST Act provides that 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 for GST, 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 term 'you' applies to 'entities' generally.

'Company" is defined in section 41 (Dictionary) of the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to include the meaning of a body corporate. An entity is defined in section 184-1(b) of the GST Act to include a body corporate.

Hence the company is an entity for GST purposes under paragraph 184-1(b) of the GST Act.

A. The transfer of legal title of the strata unit from the Company to the shareholders with non-monetary consideration of the redeemable shares:

Based on the facts provided, the Company satisfies the requirements under paragraph 9-5(c) of the GST Act as the supply that the Company makes is connected with Australia since the strata units are located in Australia.

Therefore, we need to consider:

• whether the supply of the strata units from the Company to the shareholders is made for consideration (paragraph 9-5(a) of the GST Act);

• whether the Company's supply of the strata units is in the course or furtherance of an enterprise that the Company carries on (paragraph 9-5(b) of the GST Act); and

• whether the Company is required to be registered for GST (paragraph 9-5(d) of the GST Act).

Consideration (paragraph 9-5(a) of the GST Act)

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.

We consider that the consideration for the transfer of legal titles is non-monetary in the form of redeemable shares.

GSTR 2001/6, paragraphs 12, 42, 68 and 71 state:

12. A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as:

•   providing goods;

•   granting a right or performing a service (an act); and

•   entering into an obligation, for example to refrain from selling a particular product

(a forbearance)….

Example 6 - consideration not 'expressed as an amount of money'

42. Angus agrees to make a supply to Barry. The consideration to be provided by Barry is a particular goods. The agreement between the parties states that the goods are worth $100. For the purposes of subsection 9-75(1), the price for the supply by Angus is the GST inclusive market value of the specified goods.

68. In determining whether a payment is consideration under subsection 9-15(1), the test is whether there is a sufficient nexus between the supply and the payment made.

71. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

In addition, paragraph 67 in GSTR 2001/6 provides that the nature of the nexus required between supply and consideration is as follows: a payment will be consideration for the supply if the payment is 'in connection with", in response to", or 'for the inducement of the supply".

We consider that there is a nexus between the transfer of legal titles of the strata units from the Company to the shareholders and the shareholders' agreement to allow the Company to buy back the redeemable shares. This contractual link is stated in the Constitution. Hence the Company will receive non-monetary consideration of redeemable shares from the shareholders for the Company's supply of the strata units (transfer of legal titles) to the shareholders.

Thus paragraph 9-5(a) of the GST Act is satisfied. We will now examine paragraph 9-5(b) of the GST Act, which is also the reply to your Question 1.

Question 1: Is the Company's supply of the strata units in the course or furtherance of an enterprise that the Company carries on (paragraph 9-5(b) of the GST Act)?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or …

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 Barnstow [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].

21. The word "enterprise" is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerproperty, was considered by the High Court in Thiel v Federal Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344:

"... an activity, as well as a framework within which such activities are engaged in, may constitute an 'enterprise' for the purposes of the agreement."

22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade:
Edwards v Bairstow (1956) AC 1;

Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135; Thiel at 352 per Dawson J; at 360 per McHugh J

The meaning of enterprise is considered in Miscellaneous Taxation Ruling (MT) 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

The principles outlined in the ruling and the determination have been applied in the Company's circumstances

Paragraph 10 of Goods and Services Tax Determination (GSTD) 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the acquiring the property, demolish a house, subdivision, building and supply of strata units.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

In the absence of other facts, we consider that the Company's activities are not carried out in the form of a business if these current activities are part of a one off transaction on the property and not the beginning of an ongoing property development business.

As the company's activities of development and supply of the strata units is an isolated transaction, it is necessary to determine whether the development and supply of the X strata units will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

In the form of an adventure or concern in the nature of trade

Paragraph 13 of GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

• there is a change of purpose for which the property is held,

• additional land is acquired to be added to the original parcel of land,

• the parcel of land is brought into account as a business asset,

• there is a coherent plan for the subdivision of the land,

• there is a business organisation (for example, a manager, office and letterhead),

• borrowed funds financed the acquisition or subdivision,

• interest on money borrowed to defray subdivisional costs was claimed as a business expense,

• there is a level of development of the land beyond that necessary for council approval for the subdivision, and

• buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

We consider that the Company's development and disposal of the strata units to the shareholders is in the course of an enterprise and more than the mere realisation of a capital asset because:

• The company has a coherent plan for subdivision and development of the property and later the sale of the strata units to the shareholders. The company has plans to subdivide and construct the strata units, seek approval from council for the subdivision and obtain finance for the Development. All planning and construction and finishing work will be completed by professionals and trade contractors via the building contract. The strata units are new and unoccupied. The company will transfer the title of the strata units to the relevant shareholders who paid about $ZZZ for the shares associated with each of the strata units.

• The company borrowed funds to finance the purchase, subdivision, construction and/or other costs.

• The development of the property for the strata units is beyond that necessary for council approval of the property, and the development cost of the strata units is substantial.

• The company entered into the Constitution with the company's shareholders to set up the Development Project and to establish a company, which is a complex agreement of a business organisation.

• The Company takes actions to improve the property beyond preparing an original asset for sale, to build strata units on the property, and achieve the outcome that is better than the market value of the property so that the Company can supply the strata units to the shareholders at a better price to the shareholders than if the shareholders try to obtain a new strata unit on the market. The outcome of a better price suggests an element of trade.

• The Company erects new residential strata units on the property.

The above factors suggest a commercial intention undertaken by the Company. The activities that the Company has conducted are similar to activities performed by many ordinary property owners who engage a builder to build residential premises for the property owners' benefit (whether to sell or to keep for rental purposes).

Although the Company does not intend to make the supply of the strata units to external parties, we consider that the purpose of the Development is to gain the stamp duty exemption and to reduce the acquisition costs of the strata units. Hence the ultimate purpose (motive) of the Development is to make gains for the company's shareholders. Apart from the stamp duty exemption, 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. For completeness, please note 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 such as the Company are not caught by this provision.

The Company's activities (acquisition and development of the property, construction and disposal of the strata units) would constitute an adventure or concern in the nature of trade in accordance with paragraph 9-20(1)(b)of the GST Act. Hence the Company is carrying on an enterprise of property development and the requirement of paragraph 9-5(b) of the GST Act is satisfied

Answer to your question 1:

The transfer of legal titles of the strata units from the Company to the shareholders is in the course or furtherance of an enterprise that the Company carries on.

Question 2: Is the redemption of redeemable shares from the respective shareholders, and the corresponding transfer of legal titles of the completed strata units to the shareholders, taxable supplies from the Company to its shareholders?

As mentioned under characterisation of the supplies, the Company's redemption of redeemable shares from the respective shareholders, and the corresponding transfer of legal titles from the Company to the shareholders are two separate supplies as follows:

A. The transfer of legal title of the strata units from the Company to the shareholders with non-monetary consideration of the redeemable shares;

B. The Company's redemption of redeemable shares from the respective shareholders with non-monetary consideration of the transfer of legal titles.

A. The transfer of legal titles of the strata units:

As discussed above, we consider that when the Company transfers the legal titles of the completed strata units to the shareholders, the Company's supply satisfies paragraphs (a), (b) and (c) of section 9-5 of the GST Act. We will now discuss the requirement of paragraph 9-5(d) of the GST Act.

Whether the Company is required to be registered for GST - paragraph 9-5(d) of the GST Act.

As the Company is not registered for GST, it needs to be established whether or not the Company is required to be registered for GST in relation to the disposal of the strata units that the Company constructs.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b) supplies that are not for consideration.

c) supplies that are not made in connection with an enterprise that you carry on.

d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, the Company's activities of developing and disposing the strata units to the shareholders constitute the carrying on of an enterprise. At the time of the intended sale, the nature of the asset is a revenue (trading) asset. The purpose that the company acquired the property is to transform the property into strata units and to transfer the legal titles to the shareholders after a short period of ownership. We consider that the transfers of legal titles of the strata units from the Company to the shareholders do not constitute the transfer of capital assets and paragraph 188-25(a) of the GST Act does not apply.

Therefore, the disposal of the X strata units is not excluded from the calculation of the Company's projected GST turnover. The value of the consideration for the transfer of legal titles of the X strata units must be included in the calculation of the Company's current and projected GST turnovers.

Ceasing or reducing the size or scale of an enterprise

Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

Paragraphs 46 and 47 of GSTR 2001/7 discuss isolated transactions. GSTR 2001/7 states at paragraphs 46 and 47:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

The Company intends to wind up after transferring the legal titles of the strata units. The enterprise ceases as a consequence of the disposal of the assets. Therefore, the Company' s transfer of legal titles of the strata units to the shareholders will not satisfy paragraph 188-25(b) of the GST Act, and the consideration received from the sale of the X strata units is included in the calculation of the Company's projected GST turnover.

Accordingly, prior to the transfer of legal titles of the strata units, the Company should be registered for GST because their projected GST turnover would be above the GST registration turnover threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, it is not taxable if it is GST-free or input-taxed.

GST-free and input taxed supply

The transfer of legal titles of the X strata units is not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

'New residential premises' is defined in subsection 40-75(1) of the GST Act to mean premises that:

a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

b) have been created through substantial renovation of a building, or

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

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the new strata units are residential premises to be used predominantly for residential accommodation. The X strata units will be transferred to the shareholders upon completion and would be new and unoccupied when transferred. The strata units are neither used before 2 December 1998, nor rented for five years.

We consider that the supply of the strata units by the Company to the individual shareholders is a supply of new residential premises under paragraph 40-75(1)(a) as the X strata units have not previously been sold. That is, it is only shares in the Company that have previously been sold to the shareholders. Hence, the strata units are new residential premises as defined under subsection 40-75(1) of the GST Act, and the disposal of the strata units from the Company to the shareholders will not satisfy the requirements to be an input taxed supply of residential premises under section 40-65 of the GST Act.

Note: any subsequent sale by the shareholder will not be sale of new residential premises under paragraph 40-75(1)(a) of the GST Act.

Conclusion on whether the supply of the strata units by the Company to the individual shareholders is a taxable supply:

In summary, the supply of the strata units by the Company to the individual shareholders satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. The company is required to remit 1/11^th of the GST-inclusive market value of the non-monetary consideration to the Australian Taxation Office (ATO).

B. The Company's redemption of redeemable shares from the respective shareholders with non-monetary consideration of the transfer of legal titles

When the Company redeems the shares from the shareholders, the consideration given by the Company to the shareholders is the legal titles to the strata units which are associated with the shares.

Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the GST Regulations.

Regulation 40-5.02 of the GST Regulations gives the meaning of 'interest' as anything that is recognised at law or in equity as property in any form. The GST Regulations relevantly provides that the provision, acquisition or disposal of an interest listed in the table in subregulation 40-5.09(3) of the GST Regulations is a financial supply if the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied.

Regulation 40-5.09 of the GST Regulations states:

What supplies are financial supplies

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

                    (a)  the provision, acquisition or disposal is:

                              (i)  for consideration; and

                             (ii)  in the course or furtherance of an enterprise; and

                            (iii)  connected with the indirect tax zone; and

                    (b)  the supplier is:

                              (i)  registered or required to be registered; and

                             (ii)  a financial supply provider in relation to supply of the interest

Securities are listed at item 10 in the table in sub regulation 40-5.09(3) of the GST Regulations. Redeemable preference shares are securities for the purposes of the GST Regulations.

It follows that the Company's acquisition of an interest in redeemable preference shares (an acquisition-supply) is a financial supply if the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied in relation to the acquisition.

'Acquisition', in relation to the provision and disposal of an interest, includes acceptance and receipt of the interest.

Through the redemption process, the shareholders deliver their share certificates, thereby disposing of their interests in the redeemable preference shares. By taking delivery of the share certificates, the Company accepts and receives the interests. Accordingly, the Company acquires an interest in (makes an acquisition-supply of) the redeemable preference shares.

The GST Regulations do not require that, following acquisition, the interest must be enduring. It is not relevant that the entity cancels the shares after it acquires them.

For the acquisition-supply to be a financial supply, subregulation 40-5.09(1) of the GST Regulations requires that the acquisition must be for consideration, in the course or furtherance of an enterprise, and connected with Australia; and that the supplier is registered or required to be registered for GST, and is a financial supply provider in relation to the supply of the interest.

A consideration for the supply of an interest acquired may also be treated for GST purposes as consideration for the acquisition-supply of that interest (Authority for this view is found in AXA Asia Pacific Holdings Limited v. Commissioner of Taxation [2008] FCA 1834). Thus, the non-monetary consideration made to each shareholder for redemption of the redeemable preference shares is consideration for the Company's acquisition-supply of that interest.

The Company acquires the interest in the course or furtherance of its enterprise of property development and the acquisition is in connection with Australia because the shares belong to an Australian company. The company is required to be registered for GST as mentioned above.

Subregulation 40-5.06 of the GST Regulations provides that, in relation to the supply of an interest, the entity that acquires the interest (the Company) is also the financial supply provider of the interest. Accordingly, the Company is also a financial supply provider in relation to supply of the interest.

Conclusion on whether the supply of the redeemable shares by the shareholders to the Company is an input-taxed supply

It follows that the Company entity meets the requirements of subregulation 40-5.09(1) of the GST Regulations in relation to the acquisition of the interest in redeemable preference shares and therefore makes a financial supply of the interest when it redeems the shares from its shareholders. Hence the Company's redemption of redeemable shares is an input-taxed supply under subsection 40-5(1) of the GST Act.

Additional Information - working out the value of non-monetary consideration

As discussed above, the consideration for the transfer of legal titles of the strata units is the redeemable shares (non-monetary consideration). Under section 9-75(1) of the GST Act, the price for the Company's supply of the legal titles of the units to the shareholders is the GST inclusive market value of the redeemable shares.

Correspondingly, when the Company redeems the shares from the shareholders, the non-monetary consideration given by the Company to the shareholders is the transfer of the legal titles to the strata units. The price for the Company's acquisition of the shares from the shareholders is the GST inclusive market value of the strata units.

We refer you to paragraphs 13 and 19 of GSTR 2001/6 as follows:

13. The amount of GST on a taxable supply is 10% of the value of the taxable supply. Under subsection 9-75(1), the value of a taxable supply is the price x 10/11, where the price is the sum of:

(a)   so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and

(b)   so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

19. We consider that, in most circumstances, when the parties to a transaction are acting at arm's length, the goods, services or other things being exchanged are of equal market value. This value can be determined by using a reasonable valuation method that is agreed to by you and the other party. However, this method must produce a reasonable GST inclusive market value of the things exchanged.

Hence the 2 supplies being exchanged for each other will have equal market values. The value of the redeemable shares is the market value of the strata units. The two relevant supplies are similar to Example 1 in paragraph 22 of GSTR 2001/6. Paragraphs 21 to 26 of GSTR 2001/6 state:

Value of a taxable supply

21. The amount of GST on a taxable supply is 10% of its value which is 10/11ths of the price of the taxable supply. Subsection 9-75(1) provides that the price is the sum of the monetary consideration and the non-monetary consideration. This is set out in the following table:

Example 1 - wholly non-monetary consideration

22. Jasper sells a computer to Kasper in return for 10 office chairs. The GST inclusive market value of the computer and the chairs is the same for each, being $5,500.

23. Jasper supplies the computer for consideration (that is, for the chairs) and, as the supply is not otherwise GST-free or input taxed, he makes a taxable supply. As the consideration is non-monetary, under subsection 9-75(1), the price for the supply of the computer is the GST inclusive market value of the chairs, that is, $5,500. Using the table at paragraph 21, the GST payable by Jasper :

=   10% x value

=   10% x 10/11 x price

=   10% x 10/11 x [amount of monetary consideration + GST inclusive market value of the chairs]

=   10% x 10/11 x [$0 + $5,500]

=   10% x 10/11 x $5,500

=   $ 500 .

24. As the acquisition Kasper makes is a creditable acquisition, he is entitled to claim an input tax credit of $500, provided he has a relevant tax invoice when he submits his GST return .

25. Kasper makes a taxable supply of the chairs to Jasper who provides the computer as consideration. The GST payable by Kasper:

=   10% x value

=   10% x 10/11 x price

=   10% x 10/11 x [amount of monetary consideration + GST inclusive market value of the computer]

=   10% x 10/11 x [$0 + $5,500]

=   10% x 10/11 x $5,500

=   $500 .

26. As the acquisition Jasper makes is a creditable acquisition, he is entitled to claim an input tax credit of $500, provided he has a relevant tax invoice when he submits his GST return .

The market value of the strata units can be determined by using a reasonable valuation method that is agreed to by the Company and the shareholders. However, this method must produce a reasonable GST inclusive market value of the things exchange. GSTR 2001/6 provides reasonable methods for determining the GST-inclusive market value of non-monetary consideration.

Hence, the Company is required to remit 1/11^th of the GST-inclusive market value of the strata units to the Australian Taxation Office (ATO).

Additional Information - Margin scheme

Where you make a taxable supply of real property by selling a freehold interest in property, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which are available on our website at www.ato.gov.au

Additional Information - Claiming input tax credits

Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-20 of the GST Act provides that you make a creditable acquisition if:

• you acquire anything solely or partly for a creditable purpose; and

• the supply of the thing to you is a taxable supply; and

• you provide, or are liable to provide, consideration for the supply; and

• you are registered, or required to be registered.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

• the acquisition relates to making supplies that would be input taxed; or

• the acquisition is of a private or domestic nature.

Therefore, you are entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the new property where your GST registration is backdated to a date before you made the creditable acquisitions.

All public rulings and publications are available on the ATO website at www.ato.gov.au