Edited version of your written advice

Authorisation Number: 1051181102877

Date of advice: 2 February 2017

Ruling

Subject: Sale of property by joint tenants

Question

Is the sale of the Property a taxable supply under section 9-5 of the GST Act when sold by the joint tenants?

Answer

Yes, the sale of the Property is a taxable supply under section 9-5 of the GST Act when sold by the joint tenants.

Relevant facts and circumstances

X and Y are the joint tenants in an industrially zoned vacant land (the Property). They purchased the Property in 199A and they are not registered for GST in their capacity as joint tenants.

In 199B, X and Y commenced trading activities as partners in a partnership concerned with manufacturing XXX items. They registered their partnership as a general law partnership (the Partnership).

The Partnership has been registered for GST since 1 July 2000.

Also, in 199B the Partnership erected an industrial building on the Property owned by the joint tenants.

In the relevant state, it is not possible to transfer title in the Property, from the joint tenants to the Partnership. Nonetheless, the industrial building was funded as follows:

● A loan from a bank, on which interest as a tax deduction was claimed by the Partnership, and

● The balance by capital contributed to the Partnership by X and Y.

The building first appeared in the Partnership's balance sheet on 30 June 199B.

The Partnership has been carrying on a business of manufacturing XXX items from the Property since 199B.

The Partnership did not lease the Property from, nor did it pay rent to, the joint tenants.

The Partnership wishes to relocate all plant and equipment from the Property at the original location to a new location. The business of manufacturing XXX items will not be sold with the Property but merely transferred to a new location.

Consequently, the joint tenants wish to sell the Property (which now includes the industrial building) with vacant possession. The sale will be by offer and acceptance.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5, 184-5.

Reasons for decision

Summary

The sale of the Property is a taxable supply under section 9-5 of the GST Act when sold by the joint tenants X and Y. This is because X and Y are selling the property in their capacity as partners, on trust for the Partnership. The supply of the property is a supply by the Partnership and meets the conditions in section 9-5 of the GST Act.

Detailed reasoning

In determining whether the sale of the Property constitutes a taxable supply for GST purposes, we must first identify which entity will make that supply by analysing the relationships between the entities involved.

Goods and Services Tax Ruling GSTR 2009/1 Goods and services tax: general law partnerships and the margin scheme (GSTR 2009/1) offers the following relevant guidance -

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

partnership means:

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

(b) a limited partnership.

…

12. The first limb of paragraph (a) of the definition refers to 'an association of persons carrying on business as partners'. This reflects the general law definition of a partnership. The Commissioner refers to this type of partnership as a general law partnership.

13 …

Partnership an entity separate from its partners

14. The GST Act treats a partnership as an entity separate from its partners. A supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner is taken to be made by the partnership, and not by that partner or any other partner of the partnership.

Interest in a general law partnership

15. Upon the formation of a general law partnership, a partner acquires an interest in the partnership. If the partner contributes capital to the partnership, the partner also acquires an interest in the capital of the partnership. An interest in the partnership includes a right to a proportion of the surplus after the realisation of the assets and payment of the debts and other liabilities of the partnership. It also includes a partner's entitlement to a share in the capital of the partnership.

16 …

Partnership property

17. Real property becomes partnership property when the partners make an in kind capital contribution of the property to the partnership, or the real property is acquired by the partners in their capacity as partners in the partnership. An in kind capital contribution of real property by a partner is a supply to the partnership for consideration, being the interest in the capital of the partnership as part of a wider interest in the partnership.

18. A partnership does not have a legal personality separate from its members. This means that a partnership cannot 'hold' the legal interest in real property. The legal interest in real property is normally either held by the partners or held by some of the partners on trust for all the partners.

19. For GST purposes, a transfer of the beneficial (and legal) interest in real property that is partnership property to a partner in its own capacity is taken to be a supply made by the partnership.

Who are the entities involved?

In 199A, X and Y purchased the Property, industrially zoned vacant land, as joint tenants.

In 199B, X and Y commenced trading as partners in a partnership concerned with manufacturing XXX items and they registered their partnership (the Partnership). Consistent with paragraphs 12 and 14 of the GSTR 2009/1, the Partnership is a general law partnership and it is a separate entity from its partners.

Therefore, there are three distinct entities, namely, (i) the Partnership, (ii) the partners whose actions bind the Partnership, and (iii) the joint tenants (individually or collectively) whose actions do not bind the Partnership.

Interests in the Partnership

Upon formation of the Partnership, each partner obtained an interest in the Partnership in exchange for a capital contribution.

In addition to capital contributions, we are of the view that each partner's interest in the Property was contributed in kind to the Partnership on or after the formation of the partnership. We say this because -

● X and Y control the Property (consisting of the land and industrial building) which they allow to be used by the Partnership;

● X and Y are each entitled to the share of profits of the Partnership and derive profits as partners;

● the industrial building would be a fixture to the land having regard to the extent and purpose for which it was fixed and thus it became part of the land upon its construction (that is, it became part of the Property);

● the Partnership had treated the industrial building as its own asset for tax and accounting purposes having regard to its balance sheet and its claiming as a tax deduction of interest expenditure incurred on the loan for construction of the industrial building; and

● the Partnership benefits from the Property without a formal grant of occupancy rights, for example, through a leasing arrangement. The Partnership does not pay rent to the joint tenants.

The factors above together with the fact that profit is only possible due to the right to access which the Partnership has to the Property , supports the view that the interest in the Property passed from the joint tenants to the Partnership.

Although the legal title to the Property could not pass from the joint tenants to the Partnership under the relevant state law, it is held by individual partners on trust for the Partnership, consistent with paragraph 18 of the GSTR 2009/1. That is, the interest in the Property passed from X and Y in their capacity as the joint tenants to X and Y in their capacity as partners, on trust for the Partnership. The Partnership enjoys the interest in the Property despite its legal title resting with the partners. Accordingly, the Property is partnership property; an asset of the Partnership.

Therefore, any supply of the Property is a supply by X and Y in their capacity as partners of the Partnership and thus would be a supply by the Partnership by virtue of subsection 184-5(1).

Is the sale of the Property a taxable supply?

Taxable supply is defined in section 9-5 of the GST Act as follows:

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 the indirect tax zone; 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.

[An asterisk (*) denotes that the terms are defined in section 195-1]

All elements of section 9-5 must be satisfied for a supply to be a taxable supply.

The sale of the Property will be by offer and acceptance. The Partnership will accept the offer if the price is right and, accordingly, paragraph (a) in section 9-5 of the GST Act is satisfied.

The supply of the Property by the Partnership will be in furtherance of an enterprise it carries on. Goods and Services Tax Ruling GSTR 2009/2, Goods and services tax: partitioning of land (GSTR 2009/2) provides the following relevant guidance:

64. The application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise. Given the broad meaning of 'in the course or furtherance', the supply of an interest in land under a partition is capable of being made in the course or furtherance of an enterprise where the relevant interest in the land has been applied in an enterprise carried on by the co-owner.

65. The GST Act does not require that an asset must be applied primarily or principally in carrying on the enterprise for the supply of an asset to be in the course or furtherance of an enterprise. Accordingly, a connection between the supply of the interest in land under a partition and the enterprise carried on by the co-owners exists even if, at the time of the supply, the land is applied in carrying on the enterprise to a minor or secondary extent.

Accordingly, because the Property was applied in carrying on the Partnership's business of manufacturing XXX items the Property has the necessary connection with that enterprise. When the Partnership disposes of the Property, it is doing so in furtherance of its enterprise and paragraph (b) in section 9-5 of the GST Act is satisfied.

The Property is real property located in Australia and, therefore, connected with the 'indirect tax zone'. Accordingly, paragraph (c) in section 9-5 of the GST Act is satisfied.

The Partnership is registered for GST and, therefore, paragraph (d) in section 9-5 of the GST Act is satisfied.

Based on information supplied to the Commissioner, there is no reason for the supply of the Property to be GST-free or input taxed. Accordingly, the supply of the Property by way of offer and acceptance meets all elements of section 9-5 of the GST Act, and the supply is a taxable supply.