Edited version of your written advice

Authorisation Number: 1012874751830

Date of advice: 15 September 2015

Ruling

Subject: GST and real property

Question 1

Does the cancellation of the partnership's GST registration upon cessation of the partnership's business on the specified date trigger a supply of the property to X and Y? If so, is GST payable on that supply?

Answer

Yes, the cessation of the partnership's business triggers a dissolution and winding up of the partnership, resulting in a distribution by way of a supply of the property to X and Y. However, as the supply of the property is input taxed, GST is not payable by the partnership on that supply.

Question 2

Will X & Y's involvement in the proposed subdivision and sales of the subdivided lots be regarded as 'carrying on an enterprise' for GST purposes? Consequently, will the sales of the subdivided lots be subject to GST?

Answer

No, their involvement in the proposed subdivision and sales of the subdivided lots will not be regarded as 'carrying on an enterprise' for GST purposes. Consequently, the sales of the subdivided lots will not be in the course or furtherance of an enterprise and will not be subject to GST.

Relevant facts and circumstances

• X and Y were partners in a partnership

• The partnership has carried on a business for many years and was registered for the goods and services tax (GST).

• The partnership ceased business on the specified date.

• The partnership accounts were closed on the specified date and the partnership's GST registration was cancelled effective from that date.

• X and Y acquired a property which consisted of land, a house and various other fixtures.

• At the time of purchase, the property was ideal for joint use as a residence and carrying on the business.

• Since acquisition before 1 July 2000, and for many years, X and Y have used the house as their main residence and the partnership has carried on the business on the property. Large areas of the property were used in the business.

• The property comprising the house, other fixtures and adjacent land is on one title and is owned by X and Y as joint tenants.

• After ceasing their business, X and Y plan to subdivide the property into a number of lots for sale. Real estate agents will be engaged to sell the lots. Apart from the lot which contains the existing house, all new lots will be sold as vacant land. All the vacant land lots have been used in the partnership business.

• At the time of acquisition, X and Y had no intention of subdividing the land.

• X and Y have no previous experience in land developments or subdivision projects.

• X and Y will undertake only the minimum work required to comply with the development application to subdivide the lots. Their involvement during the process will be of a decision making and project management capacity only, with the substantial work being outsourced to professionals in the relevant fields.

• X and Y intend engaging contractors to construct an access road and connect utilities to the front of each block, as required under the development approval.

• The proceeds from the sale of the subdivided lots will be first used to repay the loan taken out by X and Y to fund the development. The balance will be divided between X and Y to be used to fund their retirement.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 138;

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

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Question 1

Detailed reasoning

The partnership has cancelled its GST registration as a result of ceasing its business. At general law, dissolution of a partnership may be brought about in a number of different ways, including by a cessation of its business. Where the partnership no longer carries on a business, it is dissolved and wound up.

The GST law specifically provides that anything done in connection with the termination of an enterprise is treated as done in the course of carrying on that enterprise. The activities, including the final distribution, that are carried out as part of the winding up are in 'carrying on an enterprise'. Therefore, realising business assets as part of winding up a partnership involves the partnership making supplies in the course or furtherance of an enterprise that it carries on. Where not all of the assets of the partnership are required to be sold in order to meet the debts and other liabilities of the partnership, the remaining assets may be distributed to the partners.

In Goods and Services Tax Ruling GSTR 2003/13, the Commissioner considers that where an asset is distributed in specie to a partner, there is a supply made by the partnership in the course or furtherance of the partnership's enterprise.

The Commissioner takes the view that an in specie distribution to the partners as part of the final distribution is made by a partnership for consideration. The consideration for an in specie distribution from a partnership is the proportion of the partner's interest in the partnership.

In this case, as part of the final distribution, the partnership makes an in specie distribution which consists of the property to the partners. The supply of the property is made in the course or furtherance of the partnership's enterprise. The supply is an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and no GST is payable by the partnership on that supply.

Question 2

Will X & Y's involvement in the proposed subdivision and sales of the subdivided lots be regarded as 'carrying on an enterprise' for GST purposes? Consequently, will the sales of the subdivided lots be subject to GST?

Detailed reasoning

Carrying on an enterprise

Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition includes 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.

The definition of 'business' in section 195-1 of the GST Act is the same as that in section 995-1 of the Income Tax Assessment Act 1997. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business.

In order to be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business.

In this case, there is clearly an intention to make a profit. It is likely that the subdivision will be profitable. However, X and Y have held the land for many years. They have not developed land prior to this subdivision. Therefore, based on the facts provided, after weighing all the relevant indicators, we are satisfied that X and Y's activities would not amount to a business of land development.

However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions that do not amount to a business, but which have the characteristics of a business deal.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes.

Paragraph 265 of MT2006/1 details a list of factors that provide assistance in determining whether activities are an adventure or concern in the nature of trade. If several of the factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on.

In this case, X and Y acquired the property with the intention of using it as their residence and to conduct their business. After ceasing their business, X and Y plan to subdivide the land into a number of lots and sell the subdivided lots. The proceeds from the sales of the lots will be used to fund their retirement, after repayment of the loan they have taken out to fund the development.

The activities carried out by X and Y would not go beyond what is required by council's regulations. The fact that X and Y have not been involved in any other land subdivision or property development activities in the past is also a relevant factor.

We acknowledge that the sale of the subdivided lots is more profitable than the sale of the property as one large block. However, this fact alone is not detrimental to the conclusion that the subdivision and sale may not be an adventure or concern in the nature of trade. We refer to paragraph 244 of MT 2006/1 which states:

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.

Having applied all the principles in MT 2006/1 to the present circumstances, we conclude that X and Y's subdivision and development of their land for sale, does not amount to an enterprise for GST purposes. The development of the property and the subsequent sale of the subdivided land as vacant lots are regarded as the mere realisation of a capital asset. X and Y will not be required to be registered for GST. Consequently, the sales of the subdivided lots will not be subject to GST.