Edited version of your written advice

Authorisation Number: 1013010521542

Date of advice: 16 May 2016

Ruling

Subject: GST and sale of land

Question

Was the sale of property A located in Australia by the Trustee for an Estate (Estate) and XYZ a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

The sale of property A was made by the Estate and XYZ in their own right.

When the Estate sold its share of property A, the sale was a taxable supply under section 9-5 of the GST Act.

When XYZ sold its share of property A, the sale was not a taxable supply under section 9-5 of the GST Act. GST is not applicable to the supply.

Relevant fact

XYZ carries on a farming business and the annual turnover of this business is less than $75,000. XYZ also receives royalty payments for another Australian property (Property A) and the annual turnover for the royalty payments is less than $75,000.

XYZ is not registered for the goods and services tax (GST).

Property A

Property A was purchased some years ago under joint names by the parent of XYZ, XYZ and another sibling in the family. The parent funded the purchase of the property and each owned 25% of the property. The owners entered into an agreement with an Australian entity where they would receive royalty under a license made to the Australian entity.

When the parent of XYS died, the Estate owned 75% of Property A and XYZ owned 25% of property A. The Estate is registered for GST.

The co-owners continued to receive the royalty payment which was paid in their own individual bank account. They never held a joint account. There was no written agreement between the co-owners except that the co-owners have a specific right in the land title. Since the land is family owned, there was no formal agreement on mutual rights and obligations.

XYZ and the Estate recently sold property A.

For the payment of expenses related to property A, there was an ad hoc arrangement between the executors and all the beneficiaries. XYZ paid some of the expenses for some time and ceased making them. The Estate then started paying those expenses. XYZ has not been reimbursed for those payments. The Estate has asked XYZ to pay for some of the expenses that are associated with selling property A.

The only business activities of the co-owners was the licensing business for property A. The co-owners never had an ABN together at any time. The co-owners have had only a mutual interest of securing a better return on their investment. At the time of the sale of property A, they did not have any other interest in the property other than their desire to sell the property and get a better return on their investment.

Relevant legislative provisions

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

Question 1

Summary

The sale of property A was made by the Estate and XYZ in their own right.

When the Estate sold its share of property A, the sale was a taxable supply under section 9-5 of the GST Act.

When XYZ sold its share of property A, the sale was not a taxable supply under section 9-5 of the GST Act. GST is not applicable to the supply.

Detailed reasoning

Before we determine the GST status of the sale of property A we need to identify whether the owners were carrying on an enterprise as a tax law partnership or the enterprise was carried on by each co-owner in their own right for the receipt of the royalties and sale of the property.

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

Partnership means:

a) An association of person (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income jointly; or

b) A limited partnership.

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'.

This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. We refer to this type of partnership as a general law partnership.

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.

Persons, who are in receipt of income jointly, are therefore an association of person and a tax law partnership for GST purposes.

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

From the facts given, the Estate and XYZ had a joint right of entitlement to receive the royalties when supplying the licence. In this instance a tax law partnership exists for GST purposes.

However, the fact that a tax law partnership exists does not necessary mean that in every case it is the partnership that carries on an enterprise. Accordingly, the next step is to determine whether the tax law partnership is carrying on an enterprise or is an enterprise being carried on by each co-owner, in their own right.

Goods and Services Tax Ruling GSTR 2004/6 explains the circumstances in which a tax law partnership carries on an enterprise and the circumstances in which the co-owners of an income producing property, rather than a tax law partnership, each carry on an enterprise.

The question of whether a tax law partnership carries on an enterprise requires an objective evaluation of all the facts and circumstances of a case, including the conduct of the co-owners of the income producing property.

Paragraph 62 in GSTR 2004/6 provides factors that may point to an enterprise being carried on by a tax law partnership and not by each co-owner in their own right.

Paragraph 66 in GSTR 200/6 provides the factors that may point to an enterprise being carried on by each co-owner in their own right and not by a tax law partnership

From the facts given, the Estate and XYZ became co-owners of property A when the parent of XYZ died. The supply of the licence was made under a single agreement and no other agreement was entered when the Estate and XYZ became co-owners of property A. The Estate and XYZ continued to receive the royalty payments which were paid in accordance to the share of ownership of the property and paid into separate bank accounts of the Estate and XYZ. The co-owners did not have a joint account and the expenses related to property A were not paid from a joint account. The Estate and XYZ contributed to the expenses related to property A while carrying on their own enterprise.

Taking in consideration the factors in paragraphs 62 and 66 in GSTR 2004/6 and the information received, it is considered that the tax law partnership was not carrying an enterprise. The enterprise was carried on by each co-owner in their own right and therefore the sale of property A was made by each co-owner in their own right.

GST status of sale of property A

GST is payable on a taxable supply. A supply is 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 the indirect tax zone; and

d) you are registered or required to be registered for GST.

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

As discussed above, the sale of property A was made by each co-owner in their own right. We will now determine the GST status of the sale of property A made by each co-owner.

Supply made by the Estate

From the information received, the supply made by the Estate satisfied all the requirements in section 9-5 of the GST Act as:

a) the Estate made the supply of its share of property A for consideration;

b) A licensing enterprise was carried on when the supply of the licence was made. The supply was therefore made in the course of the licensing enterprise carried on by the Estate;

c) the supply of property A was connected with the indirect tax zone as the property is located in the indirect tax zone;

d) the Estate is registered for GST.

There is no provision under the GST Act that makes the supply of property A GST-free or input taxed.

When the Estate sold its share of property A, the sale was a taxable supply under section 9-5 of the GST Act.

Supply made by XYZ

When XYZ sold its share of property A, paragraphs 9-5(a) to 9-5(c) of the GST Act were satisfied as:

• it supplied its share of property A for consideration;

• A licensing enterprise was carried on when the supply of the licence was made. The supply was therefore made in the course of the licensing enterprise carried on by XYZ;

• the supply of property A was connected with the indirect tax zone as the property is located in the indirect tax zone.

There is no provision under the GST Act that makes the supply of property A GST-free or input taxed.

What remains to consider is paragraph 9-5(d) of the GST Act.

Paragraph 9-5 (d) of the GST Act

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

a) you are carrying on an enterprise; and

b) your GST turnover meets the registration turnover threshold (currently $75,000 and $150,000 for non-profit organisation).

Section 188-25 of the GST Act provides that in working out your projected GST turnover, the following is disregarded:

a) any supply made, or likely to be made by you by way of transfer of ownership of a capital asset of yours; and

b) any supply made, or likely to be made, by you solely as a consequence of:

i. ceasing to carry on an enterprise; or

ii. substantially and permanently reducing the size or scale of an enterprise.

The co-owners held property A as an asset when they carried on the licensing business. Accordingly, when property A was sold, XYZ would not include the turnover of its share of property A when calculating its projected annual turnover.

XYZ was not registered for GST at the time of sale because its turnover was below the GST threshold. In this instance, XYZ was not required to be registered for GST at the time property A was sold.

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

Summary

XYZ did not make a taxable supply when it sold its share of property A as all the requirements in section 9-5 of the GST Act were not met. The sale of its share of property A would not be subject to GST.