Edited version of your written advice

Authorisation Number: 1013035457510

Date of advice: 17 June 2016

Ruling

Subject: GST and court appointed trustees

Question 1

Are you required to be registered for GST in your capacity as court appointed trustees?

Answer

Yes

Question 2

Are you making a taxable supply of the specified property (the Land) in your capacity as court appointed trustees?

Answer

Yes

Question 3

Did you make a creditable acquisition from the owners of the Land when the Land was vested pursuant to the Court order?

Answer

No

Question 4

If you have made a creditable acquisition, what is the amount of the input tax credit (ITC)?

Answer

Not applicable given the answer to the previous question.

Relevant facts and circumstances

In 20xx, a contract was exchanged on a specified property (the Land).

The Land was described as a commercial/retail shop.

The purchasers of the Land were x% (Tenants in Common) A and B (as Joint Tenants) and x% C and D (as Joint Tenants). The purchasers registered as a partnership for GST in July 20yy. The purchasers will be referred to as the Partnership in future references.

The purchase was settled on a specific date in 20yy.

The Land was purchased as a taxable supply, and the Partnership claimed the input tax credits in relation to the acquisition of the Land.

The Partnership acquired the Land for use in carrying on a business of retail trade.

The Partnership's only activity after the acquisition of the Land was that of (further) planning for their business of retail trade.

The Partnership does not carry on any other enterprise.

Following the purchase of the Land the Partnership fell into disagreement about the business (as opposed to the Land itself) before commencing any trade.

The Land has remained vacant since the acquisition in 20yy.

A and B applied to the Relevant Court for the appointment of Trustees over the Land for the purpose of eventual sale.

In 20zz, you were appointed by the Relevant Court of NSW as Trustees for the purpose of selling the Land.

The Court Order provides:

• The Land vested in you, as Trustees to be held by the Trustees upon the statutory trust for sale under Division 6 of Part 4 of the Conveyancing Act 1919 (NSW).

• The Land is to be listed for sale by auction or private treaty at a price agreed in writing by the plaintiffs and defendants, failing any such agreement, the Trustees are to obtain a valuation of the Land and list the Land for sale at a fair market value determined by a registered valuer.

• The Trustees are empowered to retain a real estate agent and solicitors in respect of the sale of the Land.

• Any of the parties to the proceedings are at liberty to purchase the Land at a fair market value as agreed in writing by the plaintiffs and defendants.

• The Trustees shall hold and apply the net proceeds of sale of the Land in the following manner and priority:

(a) auction expenses, agent's commission, and all other expenses of sale;

(b) discharge of existing mortgage;

(c) reasonable legal expenses of the Trustees in respect of the sale;

(d) reasonable fees of the Trustees;

(e) plaintiffs' (A and B) legal costs;

(f) balance to be equally divided between the four parties to the Order.

You are registered for GST.

The Partnership was registered for GST as at the date the Land vested in you.

A and B have made an offer to purchase the land. No contracts have yet been exchanged.

The offer has been "approved" by C and D.

Relevant legislative provisions

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

Section 23-5

Section 23-10

Section 9-5

Section 9-20

Section 11-5

Section 195-1

Subsection 188-10(1)

Section 188-15

Section 188-20

Section 188-25

Paragraph 188-25(a)

Paragraph 188-25(b)

Income Tax Assessment Act 1997

Section 318

Conveyancing Act 1919 (NSW)

Part 4

Division 6

Section 66G

Land Acquisition (Just Terms Compensation) Act 1991 (NSW)

Section 20

Partnership Act 1892 (NSW)

Section 5.

Reasons for decision

Note: In this reasoning, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question 1

Section 23-5 provides that you are required to be registered if:

• you are carrying on an enterprise; and

• your GST turnover meets the registration turnover threshold (currently $75,000 or $150,000 for non-profit bodies).

Carrying on an enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done in the form of a business. The phrase 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise (section 195-1).

The question of whether a party, or parties, appointed pursuant to section 66G of the Conveyancing Act 1919 (NSW) (Conveyancing Act) as trustees for the sale of land, are carrying on an enterprise for GST purposes was considered in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 (Toyama). On this issue, the facts in Toyama are similar to the facts in this case.

In Toyama, White J at [68] noted that the 'enterprise which the trustees carried on was the series of activities required to be undertaken pursuant to their appointment as trustees for sale. The sale of the property, being the very thing they were appointed to do, was in furtherance of that enterprise'.

White J added at [69] that the activity, or series of activities, which the trustees carried on, was done in the form of a business.

White J found at [72] that 'When the enterprise carried on by the trustees is regarded as a whole, it can be seen that it involves a series of acts done by the trustees. These included the engaging of consultants, the marketing of the property, the obtaining of judicial advice and the sale of the property'.

In this case, you were appointed by the Court to list the Land for sale by auction or private treaty, obtain a fair market valuation if required, retain real estate agents and solicitors in respect of the sale of the Land and distribute proceeds in accordance to priority stated under the Court order.

We consider you are carrying on an enterprise for GST purposes in conducting your duties and obligations as trustees appointed by the Court for the sale of the Land.

GST turnover

Subsection 188-10(1) provides that you have a GST turnover that 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 less than $75,000; or

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

'Current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

'Projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Section 188-25 provides that when calculating your projected GST turnover the following supplies are disregarded:

• transfers of ownership of a capital asset; or

• supplies solely as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover GSTR 2001/7) discusses the above turnover issues.

The ATO view of the meaning of 'capital assets' is discussed in paragraphs 31 to 36 of GSTR 2001/7. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise and are often referred to as 'structural assets'. Paragraph 33 of GSTR 2001/7 states that an asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). Paragraph 35 continues stating that if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction.

You were appointed pursuant to Division 6 of Part 4 of the Conveyancing Act 1919 (NSW) (Conveyancing Act). Section 66G of the Conveyancing Act provides that on application of one or more co-owners of property, the Court may appoint trustees of the property to be held on the statutory trust for sale. The property is vested in the trustees.

In Toyama, White J established at [66] that the supply of the property, having been vested in the trustees pursuant to the Conveyancing Act, was made by the trustees. The trustees enter into the contract for the sale of the property and conveyed the title to it.

In this case, the sole purpose for holding the Land is for sale as prescribed for under section 66G of the Conveyancing Act. As such, we do not consider your supply of the Land to be the transfer of ownership of a capital asset and as such not excluded from calculations of your projected GST turnover by virtue of paragraph 188-25(a).

Paragraphs 38 to 41 of GSTR 2001/7 discusses the meaning of the term 'solely as a consequence'. Paragraph 41 of GSTR 2001/7 states that for the purposes of section 188-25 a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise or the substantial and permanent reduction in size or scale of an enterprise.

In this case, your supply of the Land is not a result or consequence of you ceasing (or substantially and permanently reducing the size) of your enterprise. In this case the ceasing of your enterprise will be a consequence of your sale of the Land (and fulfilling your other obligations as Trustees). As such, your supply of the Land will not be excluded from calculations of your projected GST turnover by virtue of paragraph 188-25(b).

The sale of the Land does not fall within the exclusions provided for in section 188-25 and will be included in the calculation of your projected GST turnover. Therefore, you will be required to register for GST at a time when your current GST or projected GST turnover is $75,000 or more.

Section 23-10 provides that you may register for GST at any time you carry on an enterprise, regardless of your GST turnover.

Question 2

As discussed above, you will be making a supply when you supply the Land. Section 9-5 provides that your supply will be a taxable supply if:

• you make the supply for consideration;

• the supply is made in the course or furtherance of an enterprise that you carry on;

• the supply is connected with the indirect tax zone (Australia); and

• you are registered or required to be registered for GST.

The supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

Also as discussed above, your supply of the Land will be in the course or furtherance of an enterprise you carry on. Furthermore the supply will be for consideration, is connected/located in Australia and you are registered for GST.

Also given the facts of this case, the supply of the Land will be neither GST- free nor input taxed.

Your supply of the Land will be a taxable supply.

Question 3

Section 11-5 states that you make a creditable acquisition if:

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

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

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

• you are registered or required to be registered for GST.

The main factor to be considered on this issue is whether the supply of the Land to you (when vested) was a taxable supply by the Partnership to you.

The meaning of the word 'supply' is contained in subsections 9-10(1) and (2) with a further examination of the term in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9).

GSTR 2006/9 makes reference to a number of propositions to assist in analysing a transaction (in this case, the vesting in the Land to you) to identify the supply, the subject of the transaction. One of the propositions is that to 'make a supply' an entity must do something (Proposition 5).

Paragraphs 81-82 of GSTR 2006/9 provide an example of a compulsory acquisition of land where the relevant land is vested in the authority of the state acquiring the land via section 20 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW). In that case the required acquisition notices are gazetted and the effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished.

Paragraphs 82 - 82A of GSTR 2006/9 further state:

In cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

However, in other cases the owner may do something or undertake some action such that it does make a supply of the land that vests in the authority. For example, see the decision in Re Hornsby Shire Council v. Commissioner of Taxation in which the Administrative Appeals Tribunal found that, in the circumstances the owner, CSR Limited, made a supply of its land by way of entry into an obligation and the surrender of its land when it issued a notice, pursuant to statute, compelling the Hornsby Shire Council to acquire its land.

This discussion in GSTR 2006/9 in relation to compulsory acquisitions states that it is necessary to examine the relevant facts and circumstances to determine whether or not the owner makes a supply of the land to the authority.

Similarly, to determine whether or not the Partnership makes a supply when the Land is vested in you (as statutory trustee), it is necessary to consider whether the actions of an individual partner or partners that applied to the court for the court to appoint trustees of the Land (in accordance with section 66G of the Conveyancing Act) undertook some action to cause the Land to vest in the statutory trustees (noting the other two partners didn't take any action).

Under partnership law each partner has a beneficial interest in each and every partnership asset and the action of one partner on behalf of the partnership results in a supply made by the partnership.

In NSW, section 5 of the Partnership Act 1892 (NSW) provides the power of partners to bind a firm (i.e. which actions are considered the actions of the firm). This provision states that every partner is an agent of the firm for the purpose of the business of the partnership, and acts done by the partner for carrying on a business of the kind being carried on in its usual way bind the firm, unless the partner has no authority to do so, of which the person with whom the partner is dealing is aware.

However, it is arguable in this case that the action of applying to the court by two of the partners was not on behalf of the Partnership. It is arguable that the partners that applied to the court for the court to appoint a statutory trustee to sell the Land did not act in the capacity as a partner for the purposes of the Partnership. The nature of the act (i.e. making an application to the court to sell the Land intended to be used for retail purposes is not carrying on a business of retail in the usual way) was not an act of a kind that would typically have been carried on by the Partnership and was not made with the consent of all the partners.

ATO Interpretive Decision ATOID 2009/129 discusses the capital gains tax (CGT) consequences of property vesting in a statutory trustee and states that on the making of the court order the whole of the co-owners' interest in the property vested in the trustees and the co-owners' interests were converted into personalty (that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests). In these circumstances it is considered that the making of the court order effects a disposal of property from the co-owners to the trustees for sale by operation of law.

However, a wide meaning of disposal for the purposes of taxing capital gains does not necessarily mean that there will be a supply for GST purposes. As indicated above, it is arguable in this case that the Partnership did not take any action to cause the Land to vest in the statutory trustee. In addition, case law authorities provide some guidance in relation to which entity makes the act in relation to the vesting under section 66G of the Conveyancing Act.

For example, Permanent Trustee Co. Ltd. v. Commissioner of Stamp Duties (NSW) 86 ATC 4345 (Permanent Trustee) considered whether a vesting order made under section 66G of the Conveyancing Act is a conveyance within the meaning of the relevant Stamp Duties Act. In this regard, Lusher J stated at 4347:

'the vesting order is not the act of either of the co-owners, although the procedure for obtaining it is initiated by them, but is the act of the Court itself.'

'The land shall not vest until the appropriate entries are made in accordance with the provisions of that Act [the Real Property Act 1900]...'.

In CSR Ltd v Hornsby Shire Council [2004] NSWSC 946 (CSR), CSR's land was acquired by the Council by compulsory acquisition under the relevant land Act, as opposed to property vesting in accordance with the Conveyancing Act, however, the judgment provides some useful discussion (at [24]) in relation to a similar scenario in which property vests in a Trustee in Bankruptcy:

24. A not dissimilar view had been adopted with respect to instruments of transfer for stamp duty purposes. Thus in Dixon v Chief Commissioner of Stamp Duties (1985) 3 NSWLR 347 it was held that an application by a trustee in bankruptcy pursuant to the Real Property Act 1900, s 90 for registration as the proprietor of land, the legal estate in which had vested in him by virtue of the Bankruptcy Act 1966 (Cth), s 58, was not chargeable to duty as a conveyance because it was the Statute that vested the property in the trustee.

Given the above, it is our view that whilst there may be a disposal of the Land for CGT purposes, there is no supply (and consequently no taxable supply) by the Partnership for GST purposes when the Land vests in you as the statutory trustee.

The vesting of property in a statutory trustee is similar to that of a compulsory acquisition (albeit without any compensation paid for the extinguishment of the co-owners' interests).

Consequently, you have not made a creditable acquisition in regard to the transaction of the Land vesting in you as a consequence of the court order.

Question 4

As previously discussed, you have not made a creditable acquisition when the Land vests in you. As such it is not necessary to address the amount of consideration (input tax credit).