Edited version of your written advice

Authorisation Number: 1051426020916

Date of advice: 11 September 2018

Ruling

Subject: GST and partitioning

Question 1

Was your supply by partition of the Property a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Were you carrying on a partnership with the other co-owner in relation to the development of the Property?

Answer

No.

Question 3

Are you entitled to input tax credits under section 11-20 of the GST Act in relation to costs incurred for the development of the Property?

Answer

Yes, on your creditable acquisitions to the extent that they relate to the supply of your interest in the Property.

Question 4

Is the time of the capital gains tax event the date the agreement was entered into?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST in relation to your enterprise one. You are registered for GST from DDMMYYYY.

On DDMMYYYY, you and a friend, Owner B jointly purchased the Property for $X as tenants in common with 50% ownership each.

The Property has a residential house on it at the time of purchase and a land area of X square metres.

You and Owner B demolished the existing house on the Property and built a duplex consisting of Address 1 and Address 2.

You always intended to demolish the existing house, build a duplex, of which you would own one duplex.

Your intention was to subdivide the Property immediately after it was purchased so that you and Owner B could each construct a house on each subdivided lot. However this was not possible as you were unable to obtain an individual loan from the bank because you were on a work visa and were a temporary resident at the time.

On DDMMYYYY, you and Owner B entered into a Memorandum of Agreement. You have provided a copy which includes the following information:

…

The parties have entered into this agreement with the express intention to subdivide the land…into two allotments…

The parties will contribute equally to all expenses incurred in subdividing the land and shall upon obtaining the relevant consents, execute the necessary documentation to affect the Land Division, and reciprocal transfers…

On DDMMYYYY, settlement on the purchase of the Property occurred.

On DDMMYYYY the development application was lodged with the council with approved being granted on DDMMYYYY.

On DDMMYYYY the Property was demolished.

On DDMMYYYY construction of the duplex commenced and was completed on DDMMYYYY.

On DDMMYYYY the Property was partitioned to enable individual ownership.

You became an Australian resident for taxation purposes in YYYY.

You became a permanent resident of Australia.

The bank made an error and transferred the full loan to you on DDMMYYYY. The bank fixed this error and subsequently transferred half the loan to Owner B.

You commenced renting out Address 1 from DDMMYYYY.

The original property was never leased. The intention was always to demolish, develop and lease. Each party is leasing their property individually.

You own other residential properties that are leased out. You were renting out a residential property when you purchased the Property however this ceased in DDMMYYYY when the tenant left and an associate moved in. You purchased a further residential property in DDMMYYYY which is being rented out.

You and Owner B do not own any other property together.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 Subsection 184-1

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Questions 1 and 2

In this reasoning, please note:

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

● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make 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 for GST.

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

Entity Structure

The word ‘you’ for the purposes of the GST Act, applies to entities generally. It is the entity that makes a taxable supply.

The meaning of ‘entity’ is considered in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

The meaning of ‘entity’ is defined in subsection 184-1 to mean, amongst others, an individual, a partnership, or any other unincorporated association or body of persons. However, a non-entity joint venture is specifically excluded as an entity.

For taxation purposes a tax law partnership may exist where persons are in receipt of income jointly. For example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. A tax law partnership is an entity in its own right. (Paragraphs 42 and 43 of MT 2006/1)

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a 'non-entity joint venture' to mean an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a) under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties, and

(b) that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

As a non-entity joint venture is not an entity it cannot make taxable supplies. Each participant in the non-entity joint venture is taken to be an entity for GST purposes.

The distinction between a joint venture and a partnership is explained in Goods and Services Tax Ruling GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes?

Paragraph 50 of GSTR 2004/2 explains that the distinction between a partnership and a joint venture was observed in the decision of the Supreme Court of NSW in A.R.M. Constructions Pty Ltd and Others v. Federal Commissioner of Taxation. In that case, Yeldham J stated:

...I am clearly of the opinion that...there was merely a joint venture between the appellants to construct buildings, in contrast to an agreement to make profits for sharing, and it was the intention of the parties at all material times to retain the units and town houses so erected, except to the extent that sales might be necessary to repay moneys borrowed from lending institutions...In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could thereafter go their own respective ways. Their expressed intention so to do was duly manifested in what they thereafter did and achieved, and their agreement constituted in law something in the nature of a joint venture to construct the building, in contrast to an agreement to make profits for sharing, inter se. The only partnership for tax purposes related to such rental income as was received jointly before the date of the deed of partition...

Paragraph 51 of GSTR 2004/2 provides a table summarising the common features of a partnership and joint venture.

A key characteristic of a joint venture for GST purposes is that each participant receives an agreed share of the product or output rather than a share of jointly earned profit. (Paragraph 31 of GSTR 2004/2)

The Memorandum of Agreement between you and Owner B states, in part:

The parties have entered into this agreement with the express intention to subdivide the land …into two allotments…

The parties will contribute equally to all expenses incurred… execute the necessary documentation to affect the Land Division, and reciprocal transfers…

Another characteristic is that a joint venture is for a specified project, has a finite life and when the project is completed the joint venture ends. (Paragraph 40 of the GSTR 2004/2)

In this case upon partition, you will supply Owner B your interest in Address 2 and Owner B will supply you their interest in Address 1 so that you will have sole ownership of a single property being Address 1 and Owner B will have sole ownership of a single property being Address 2. At this point the project is completed and you and Owner B have proceeded on your own respective ways. You have utilised Address 1 in your residential leasing enterprise.

On balance it is concluded that you are a non-entity joint venture. As such you will be a separate individual entity and will individually account for the GST on any taxable supplies that you make.

Supply by Partitioning of New Residential Premises

Goods and Services Tax Ruling GSTR 2009/2 Goods and Services tax: partitioning of land considers the GST consequences of partitioning property among joint tenants and tenants in common.

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 is in connection with the enterprise and is a supply in the course or furtherance of that enterprise. (Paragraph 57 of GSTR 2009/2)

Further, where the partition of that land results in the termination of the enterprise which was carried on, the supply of the interest in the land by the co-owners would still be in connection with the enterprise carried on by the co-owner and is a supply in the course or furtherance of the enterprise. (Paragraph 58 of GSTR 2009/2)

Section 40-65 provides that sales of residential premises are input taxed (ie there is no requirement to pay GST or entitlement to claim GST credits) to the extent the property is residential premises to be used predominantly for residential accommodation. However, the supply is not input taxed to the extent that the residential premises are ‘new residential premises’.

Section 40-75 provides the meaning of ‘new residential premises’ which include those premises that

● have not previously been sold as residential premises, or

● have been built, or contain a building that has been built, to replace demolished premises on the same land.

For newly constructed residential premises, the supply under a partition between co-owners, or participants in a joint venture, of their interest in the land, constitutes the first sale of new residential premises but only to the extent of the interest supplied by one co-owner or participant to the other. (Paragraph 172 of GSTR 2009/2)

Enterprise that you carry on

You are conducting two enterprises, being your enterprise one and your property development / leasing enterprise. You and the other party have come together with the intention of building two houses. You have demolished the original dwelling on the land. You have entered into the Memorandum of Agreement which outlines that there will be reciprocal transfers such that each party has an allotment each.

To complete the development as per the agreement, the Property was partitioned such that you each took one duplex.

Paragraph 78 of GSTR 2009/2 discusses instances where jointly owned land is applied in an enterprise of one or more co-owners. This is illustrated in the following example.

Example 6 - Supply in the course or furtherance of an enterprise carried on by one co-owner and not the other co-owner

79. Two friends, Caroline and Shaun, purchase a block of land as tenants in common in equal shares with the intention to subdivide the land, to construct two houses and to take a house each.

80. Caroline's intention in entering into the arrangement is to use the house she acquired as her primary residence. Caroline is not carrying on an enterprise in these circumstances. In Caroline's case, the purpose of the arrangement is private and domestic in nature.

81. Shaun's intention in entering into the arrangement is to sell the house he acquires for a profit. Shaun is carrying on an enterprise in these circumstances because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.^…

82. Shaun and Caroline agree that Shaun will take Lot 1 which includes House 1 and Caroline will take Lot 2 which includes House 2.

83. Caroline and Shaun give effect to the partition, after the completion of construction, by Shaun transferring his interest in Lot 2 to Caroline and by Caroline transferring her interest in Lot 1 to Shaun.

84. The transfer by Caroline of her interest in Lot 1 to Shaun is not in the course or furtherance of an enterprise she carries on. Caroline's transfer of her interest in Lot 1 to Shaun does not have any connection with an enterprise that she carries on.^…

85. In contrast, the transfer by Shaun of his interest in Lot 2 to Caroline is in the course of furtherance of an enterprise he carries on.^… Shaun's transfer of his interest in Lot 2 to Caroline is connected with his enterprise of selling new residential premises^… for profit.^…

On partition, you transferred your interest in Address 2 to Owner B and Owner B transferred their interest in Address 1 to you.

Similar to Shaun in example 6 above, your transfer of your interest in Address 2 was an activity undertaken in the course of carrying on your enterprise (in your case, the property development / leasing enterprise). Therefore, the requirement that the supply is made in the course or furtherance of an enterprise that you carry on under subsection 9-5(b) was satisfied.

Supply for Consideration

The Commissioner considers that, under a partition by agreement 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. (Paragraph 86 of GSTR 2009/2)

The value of the consideration 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 plus any owelty money received in respect of the partition. (Paragraph 97 of GSTR 2009/2)

An owelty payment is any sum of money paid by one co-owner to another co-owner to take account of any differences in the value of the portions of the land they receive.

Therefore, the requirement that the supply is made for consideration under paragraph 9-5(a) is satisfied on partition.

Conclusion

In addition to satisfying paragraphs 9-5(a) and (b) as discussed above you also satisfied paragraphs 9-5(c) and (d) as the property was located in Australia and you were registered for GST. Further, there are no provisions under the GST Act whereby the supply by partition of your interest in Address 2 will be input taxed or GST-free.

As the supply by partition of your interest in Address 2 satisfies all the requirements of a taxable supply under section 9-5 you are liable for GST on the sale of the property.

Question 3

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 provides:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a * creditable purpose; and

(b) the supply of the thing to you is a * taxable supply; and

(c) you provide, or are liable to provide, * consideration for the supply; and

(d) you are * registered, or * required to be registered.

Subsection 11-15(2)(b) provides that you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Some of the costs you incurred for the development of the Property were incurred in the course of carrying on your property development / leasing enterprise and relate to the taxable supply by partition of new residential premises, being the supply of your interest in Address 2 to Owner B.

Therefore, you are entitled to input tax credits on your creditable acquisitions to the extent that they relate to the supply of your interest in Address 2 to Owner B.

Question 4

Capital gains tax (CGT) event A1

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) applies when there is a disposal of a CGT asset (CGT event A1).

Subsection 104-10(3) of the ITAA 1997 provides that CGT event A1 happens when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.

The time when a contract is entered into is the time when it comes into existence for general law purposes.

If a contract is subject to a condition, an issue arises whether the condition is a condition precedent to its formation or whether it is a condition precedent to performance of the contract. In the first case, the contract does not come into existence until the condition is met. In the second case, the condition does not prevent the creation of the contract - non-fulfilment of the condition merely entitles a party to terminate the contract

In this case, you and Owner B entered into the agreement in which you both agreed that it was your intention to subdivide the Property, with both of you contributing to all expenses incurred in relation to the subdivision. Upon the receipt of the relevant consents, the title of the subdivided lots would be transferred with you and Owner B each owning 100% of one of the two subdivided lots.

Two transactions have occurred in your situation, being the joint purchase of the Property from an unrelated party and the reorganisation of the ownership interests in the property.

Based on the information provided it is viewed that the agreement is a contract and the conditions contained in the agreement indicated the obligations both you and Owner B were required to perform as part of the agreement. There was a mutual intention by both you and Owner B to create a legal relationship and for it to have legal effect. All of the actions following the date the agreement was entered into were in relation to you and Owner B obtaining the sole ownership in the subdivided lot you each ended up with.

Therefore, it is viewed that CGT event A1 occurred when you and Owner B entered into the agreement on DDMMYYYY and not when the titles in the subdivided were transferred.