Edited version of your written advice

Authorisation Number: 1012877605211

Date of advice: 11 September 2015

Ruling

Subject: GST and partitioning of Land

Question 1

Will the partitioning of the property and the subsequent supply of X lots to Entity A and a single lot to both Entity B and Entity C be taxable supplies pursuant to section 9-5?

Answer

Yes

Question 2

Can you apply the margin scheme to the supplies of the Lots and how is the GST calculated?

Answer

Yes

Relevant facts and circumstances

Entities A, B and C acquired a property on ddmmyyyy as tenants in common. The property is located in an Australian state and included an old house on it. The Property was approximately X sqm in size. Each entity held a percentage interest in the Property.

None of the parties are registered for GST either individually or together. Entity B is Entity C's family trust. Entity A is a unit trust and the units are owned by Entity C, Entity C's brother and an unrelated third party.

The parties acquired the property with the intention of demolishing the house and subdividing the property into X lots. There is neither a written agreement between the parties nor a project agreement. They proposed that the X lots would be divided in the following ways.

1. Entity A would take X lots and build a duplex on each lot with the intention of selling the duplexes and

2. Entity C and B would take the other lot and build a house on the vacant lot and lease/license Entity C to live in that house. Entity C will pay all outgoings on the property including the rates.

As at the date of the ruling the house has been demolished and the subdivision application has been lodged. You expect subdivision approval to be granted imminently. You expect that the construction of a duplex on each of the lots and the construction of the house on the lot held by the partnership will be completed within X months.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Division 75

Reasons for decision

Question 1

Will the partitioning of the property and the subsequent supply of X lots to Entity A and a single lot to both entity B and Entity C be taxable supplies pursuant to section 9-5?

GST is payable on taxable supplies. Section 9-5 provides that an entity makes a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (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.

For the supply of the interests in the sub-divided property to be taxable supplies, all of the requirements in section 9-5 must be satisfied. In your case, any supplies under partitioning will not be GST free or input taxed.

Partitioning

It is common for real property to be held by more than one entity as either joint tenants or tenants in common whether at law or in equity (co-owners). Circumstances may arise between these entities resulting in the termination of the co-ownership by way of the partition of the real property between them. The circumstances in which partitioning occurs between co-owners includes the conclusion of a venture between two or more entities to develop, subdivide and share the products of the subdivision.

The term 'partition' refers to the division of land and the transfer of the subdivided parts between the co-owners.

The Parties propose to subdivide the subject property into X lots, transferring X lots to entity A and one lot to the other co-owners. This transaction is called partitioning by agreement.

The Commissioners view on partitioning is found in the Public ruling 'Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land. (GSTR 2009/2) The term 'partition' is not used or defined in the GST Act. It is defined for the purpose of this Ruling by reference to its ordinary and property law meanings.

Under a partition by agreement, the transfer or conveyance by each co-owner of their respective interest in the land to be taken by the other co-owners in severalty is a supply as defined in subsection 9-10(1).

Paragraph 57 of GSTR 2009/2 goes on to state:

57. It is the Commissioner's view that if land is applied or intended to be applied in an enterprise carried on by a co-owner, a supply of that co-owner's interest in the land under a partition by agreement or court order for co-owners to effect a partition is in connection with the enterprise and is a supply in the course or furtherance of that enterprise.

We must therefore consider whether the partition that will be undertaken is in connection with an enterprise being conducted by the respective parties and who is making the relevant supplies.

Is the partitioning undertaken in connection with an enterprise and who is the supplier in the case of Entity B and C?

The 'you' in section 9-5 is the entity making the supply (that is, 'the supplier'). In this case, Entity A is making a supply under the partitioning arrangement to the two other co-owners, who are making corresponding supplies to entity A.

In certain circumstances where entities work together and receive income it is considered that they are a partnership.

A partnership is defined in section 195-1 of the GST Act with reference to section 995 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 of the ITAA 1997 provides that a partnership means

a) an association of persons (other than a company or a limited partnership) carrying on business as partners or

b) in receipt of ordinary income or statutory income jointly.

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) discusses tax law partnerships. The following paragraphs are relevant:

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

25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income.

26. In our view, the expression 'in receipt of' may be read broadly to include, not only the actual receipt of income, but also all the steps leading to the right or entitlement to that income.

27. The expression 'in receipt of ordinary income...jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach.

We consider that the planned activities of the Entity B and C, in relation to the demolition of the house, subdivision of the property, construction of the house and the subsequent license to Entity C are all steps leading to the receipt of income. The income received by the two entities will be the payment of the rates and outgoings made by Entity C in return for being allowed to reside in the newly constructed house.

Therefore, as Entity B and C are an association of persons who are in receipt of income they will meet the definition of a partnership as defined in section 995 of the ITAA 1997 and described in GSTR 2004/6. We consider that they become a tax law partnership from the time they commenced their activities. In this case, they became a partnership from the time they decided to acquire the house for the purposes set out in the facts. Therefore, it is the Partnership which will be in receipt of the income which is the payment of outgoings by Entity C.

Therefore, the ruling and consequently the 'You' in section 9-5 will relate to:

• the tax law partnership made up of the two co-owners, created when the land was acquired, together the Partnership. and

• the Entity A.

Enterprise

Enterprise is defined in section 9-20 to include an activity done in the form of a business or in the form of an adventure or concern in the nature of trade.

Entity A has acquired the property as a tenant in common and will be a party to the arrangement whereby the house on the property will be demolished, the property partitioned such that it will take X lots. It plans to build a duplex on each lot and then sell the duplexes.

The activities which Entity A is undertaking meet the definition of enterprise.

The Partnership plans to build a house and license Entity C to live in the property. The construction of the house and the lease or license of the property to Entity C also meets the definition of enterprise pursuant to section 9-20.

Example 4 at paragraphs 66 to 70 of GSTR 2009/2 provides an example of this sort of arrangement.

Example 4 - Supply in the course or furtherance of an enterprise

66. ConstructCo and DevelopCo each carry on a separate enterprise of residential property development. Both are interested in developing the same piece of land. They enter into a joint venture to buy the land together in equal shares and to construct 8 strata titled residential units on the land. ConstructCo and DevelopCo agree to take 4 units each after the development is completed .

67. When the strata plan is registered at the Land Titles Office each of the 8 units is held jointly as tenants in common in equal shares .

68. On completion of the 8 units, under the partition, ConstructCo transfers its interest in units 1 to 4 to DevelopCo. In return DevelopCo transfers its interest in units 5 to 8 to ConstructCo .

69. The joint venture entered into by ConstructCo and DevelopCo is not an entity for GST purposes (that is, it is a non-entity joint venture ).⁴⁵

70. The transfer by ConstructCo of its interest in units 1 to 4 to DevelopCo is connected to the enterprise that ConstructCo carries on as the units were applied in ConstructCo's enterprise of property development. As part of that enterprise, ConstructCo will sell, dispose of or transfer units it has constructed. Similarly, the transfer by DevelopCo of its interest in units 5 to 8 is made in the course or furtherance of the enterprise that DevelopCo carries on .

Consideration

Paragraphs 86 to 98 of GSTR 2009/2 provide the Commissioners view on whether a supply under a partition is made for consideration.

Relevantly paragraphs 86, 97 and 98 states that:

86. The Commissioner considers that, under a partition by agreement or where a court orders the co-owners to effect a partition, each co-owner makes a supply of land for consideration. In the absence of an owelty payment, the consideration received is entirely non-monetary in that each co-owner gives up their interests in parts of the land in return for the same from other co-owners.

97. The value of the consideration is the sum of the GST inclusive market value of all the other co-owners' interests⁶⁰ in the part of the land acquired by a co-owner plus any owelty money received in respect of the partition.

98. The Commissioner considers that the transfer of an interest in a part of the land by a co-owner is 'in connection with', 'in response to' or 'for the inducement' of the supply by each of the other co-owners of their respective interests in a part of the land.

Therefore when each co-owner transfers an interest in a part of the land it is in connection with the supply by the other co-owners of their interests.

The value of consideration for that supply is the sum of the GST inclusive market value of the other co-owners' interests in the part of the land acquired by a co-owner.

GST registration

Section 23-5 requires that an entity that is conducting an enterprise is required to be registered if its turnover meets or exceeds the registration turnover thresholds of $75,000, or $150,000 for non-profit bodies.

Both Entity A and the Partnership are conducting an enterprise as set out above and the relevant threshold is $75,000.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold or

(b) your projected GST turnover is at or above the turnover threshold.

Of relevance at the time of your purchase of the property is your projected GST turnover.

Section 188-20 provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than input taxed supplies.

The value of supplies which were as a result of the partitioning will exceed the GST turnover threshold of $75,000. Therefore, the projected GST turnovers of Entity A and the Partnership each exceed the turnover threshold when they jointly acquired the property.

Therefore at the time you acquired the subject property, you were required to be registered for GST.

In the month of partitioning, the Partnerships projected GST turnover will not exceed the threshold (because the Partnership intends to make input taxed supplies of residential leasing) and it will no longer be required to be registered for GST.

Conclusion

As the requirements of section 9-5 have been met, both Entity A and the Partnership will be making a taxable supply under the partitioning arrangement.

Are the Co- owners entitled to apply the Margin scheme and how is the GST payable calculated?

You have asked whether you can apply the margin scheme to the taxable supplies between the parties and how you calculate the GST payable.

In GSTR 2009/2 the Commissioner takes the view at paragraph 100 that the margin scheme can be applied to a taxable supply of land by a co-owner under a partition by agreement. Therefore, as your respective supplies will be taxable supplies and you acquired the property as an input taxed supply of residential premises, none of the exclusions in section 75-5(3) would apply, you are entitled to apply the margin scheme.

The Commissioner has produced a public ruling called Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000. (GSTR 2006/8) this ruling details how the margin scheme applies to a supply of a freehold interest you acquired on or after 1 July 2000.

Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply.

The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition.

Value of acquisition

Paragraph 52 of GSTR 2006/8 states:

The effect of section 75-15 is that for subdivided land or stratum title units, the consideration for the acquisition is the corresponding proportion of the consideration for the land or premises you acquired.

Therefore, for the purposes of the margin scheme, the consideration for the acquisition of the Property is the corresponding proportion of the purchase price of $X, for the land you acquired.

Value of supply

Paragraph 97 of GSTR 2009/2 states:

97. The value of the consideration is the sum of the GST inclusive market value of all the other co-owners' interests⁶⁰ in the part of the land acquired by a co-owner plus any owelty money received in respect of the partition.

Consequently, the value of the consideration for the supply under the partition, is the sum of the GST inclusive market value of all the other co-owners' interests in the part of the land acquired by a co-owner. For example, the consideration for the supply of Entity A's interest in the Lot received after partition by the Partnership, is the partnerships interest in the Lots received by Entity A post partition.

Conclusion

Both Entity A and the Partnership will be making a taxable supply under the partitioning arrangements and both are entitled to apply the margin scheme.

Where the margin scheme is applied to a supply the acquisition of that supply will not be a creditable acquisition to that party.