Edited version of your written advice

Authorisation Number: 1051426985452

Date of advice: 11 September 2018

Ruling

Subject: GST and property development by joint owners

Question 1

Can the partnership join the existing single GST Group?

Answer

No

Question 2

If the partnership is eligible to join the existing single GST group, can membership be back dated to the same date from which the partnership is GST registered?

Answer

As the partnership is ineligible to join the existing single GST group, this question does not arise.

Question 3

Is the transfer of the ownership interests by one of the partners to another partner a GST-free supply under the going concern provisions?

Answer

Yes, the partnership is making a GST-free going concern.

Relevant facts and circumstances

● Entity A is a GST registered company and Entity B is a GST registered trust.

● These two entities are in a GST group consisting of other entities that are companies and trusts.

● Entity A is not a beneficiary of Entity B.

● Entity A and Entity B hold commercial land jointly.

● The commercial property is being developed.

● Entity A and B are considered a general partnership for income tax purposes.

● The partnership is registered for GST.

● The partnership carries on a property development enterprise in relation to the land.

● Entity A intends to sell its interest in the enterprise to Entity B.

● In addition to the interest in the land, Entity A will also transfer to Entity B:

● the freehold property interest;

● the intellectual property, and;

● the relevant contracts to continue with the enterprise of the development;

● the pre-sales contracts;

Where Entity A transfers its interest in the enterprise to Entity B, the contract for the transfer will confirm that:

● the transfer of the land title for the property and all related contracts and intellectual property will be agreed in writing, and outlined in specific clauses of the transfer contract which will stipulate that the sale is a supply of a going concern;

● all items necessary to continue the enterprise are being transferred to the continuing owner.

● the vendors will carry on the enterprise of developing their respective project up to and including the day of transfer; and

● the same identified enterprise of property development would be continued to be conducted by the continuing owner.

● at the time of transfer of each of the projects, both the vendor and the purchaser would be registered for the goods and services tax (GST);

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 48-10

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

A New Tax System (Goods and Services Tax) Regulations 1999 Subdivision 48-A

Reasons for decision

Joining the existing GST group

Under the GST Act, for an entity to join or form a GST group, it must satisfy the membership requirements. These membership requirements of a GST group are outlined in section 48-10 of the GST Act. Under section 48-10 of the GST Act, the types of entity that can form a GST group are a company, partnership, trust or individual. For any of these entities to form a GST group, each member must:

● be registered for GST

● have the same tax period as all the other members of the proposed GST group

● account for GST on the same basis (that is, cash or non-cash) as all the other members of the proposed GST group

● not belong to any other GST group

● have no branches for GST purposes

● satisfy the requirements and regulations that apply to that particular type of entity.

In the current case, the partnership satisfies the entity type test. Therefore, subject to the satisfaction of the last requirement above, based on the facts provided, the partnership needs to satisfy the requirements and regulations that apply to that particular type of entity.

For entities that are partnerships, the relevant membership requirements are set out in Regulation 48-10.02 of the GST Regulations.

Membership requirements for partnerships

Regulation 48-10.02 of the GST Regulations provides that’s:

(1) For subparagraph 48-10 (1)(a)(ii) of the Act, this regulation sets out requirements that must be satisfied for a partnership to be a member of a GST group.

(2) If the GST group includes entities other than partnerships, the partnership must

satisfy the requirements of subregulation (3), (3A), (4) or (5).

(2A) If the GST group consists only of partnerships:

(a) there are no further requirements for one of the partnerships; and

(b) each other partnership must satisfy the requirements of subregulation (5).

(3) The partnership satisfies the requirements of this subregulation if, for at least 1 company that is a member of the GST group:

(a) the partnership has at least a 90% stake in the company (worked out in

accordance with section 190-5 of the Act as if the partnership were a company); or

(b) shares of the company are held in such a way that:

(i) if there is 1 shareholder--the shareholder is a representative of a partner

in the partnership; and

(ii) if there is more than 1 shareholder--at least 2 shareholders are

representatives of different partners in the partnership.

(3A) The partnership satisfies the requirements of this subregulation if each partner in the partnership is:

(a) an individual who is a member of the GST group; or

(b) a family member of such an individual.

(4) The partnership satisfies the requirements of this subregulation if, for at least 1 trust that is a member of the GST group, the beneficiaries include at least 2 representatives of different partners in the partnership.

(5) The partnership (the candidate partnership) satisfies the requirements of this subregulation if:

(a) there is a partnership (the member partnership ) that is a member of the GST group because of:

(i) paragraph (2A)(a) or subregulation (3), (3A) or (4); or

(ii) this subregulation, including the repeated application of this subregulation; and

(b) each partner in the candidate partnership is an individual, a family trust of an individual or a family company of an individual; and

(c) for each partner in the candidate partnership that is an individual, a family trust of an individual or a family company of an individual, one of the following is a partner in the member partnership:

(i) the individual;

(ii) a family trust of the individual;

(iii) a family company of the individual;

(iv) a family member of the individual;

(v) another individual for whom the first individual is a family member;

(vi) a family trust of a family member mentioned in subparagraph (iv) or

the other individual mentioned in subparagraph (v);

(vii) a family company of a family member mentioned in subparagraph (iv)

or the other individual mentioned in subparagraph (v); and

(d) at least 2 of the partners in the candidate partnership comply with paragraph (c) through different partners in the member partnership (whether or not they also comply through the same partner in the member partnership).

(6) For this regulation:

(a) a family trust of an individual is a trust that distributes income or capital of the trust only to the individual or family members of the individual (whether or not other distributions could lawfully be made); and

(b) a family company of an individual is a company each shareholder of which is either the individual or a family member of the individual.

Based on the facts provided, the existing GST group consists of companies and trusts. As such, as based on subregulation 48-10.02(2), if the GST group includes entities other than partnership, the partnership must satisfy the requirements of subregulation (3), (3A), (4) or (5).

In respect of the requirements set out in subregulation (3), (3A), (4) or (5), based on the ownership test, subregulations (3), (3A), and (5) are clearly not satisfied.

Based on the facts of the current case, we consider subregulation (4) is the provision that needs close examination in determining the eligibility of joining the existing GST group for the two GP partnerships.

Subregulation (4) provides that ‘The partnership satisfies the requirements of this subregulation if, for at least 1 trust that is a member of the GST group, the beneficiaries include at least 2 representatives of different partners in the partnership’.

For the partnership, the trust that is a member of the GST Group is Entity B. As such, to satisfy the requirements in subregulation (4), the beneficiaries of Entity B need to include at least 2 representatives of different partners in the partnership.

The two partners in the partnership are not individuals. Under Regulation 48-10.01, a ‘representative’ in relation to a partner in a partnership that is not an individual is the partner itself. As the representatives of the two partners in the partnership are the two partners, they both need to be beneficiaries of the trust, which cannot be the case based on the facts.

On this basis, we consider that the partnership is not eligible to join the existing GST group.

Transfer of ownership interest in the partnership

In a scenario where Entity A makes a supply of an interest in the enterprise to the co-owner, including the supply all of the rights and assets necessary for the continued operation of the enterprise, the recipient will acquire a beneficial interest in the property, which would include:

● the freehold property interest;

● the intellectual property, and;

● the relevant contracts to continue with the enterprise of the development;

● the pre-sales contracts;

The supply made by Entity A will be a GST-free supply going concern if all requirements set out in subsection 38-325(1) and subsection 38-325(2) of section 38-325 of the GST Act are met.

Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

a) the supply is for consideration

b) the recipient is registered or required to be registered for GST, and

c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

Based on the facts, the requirements of subsection 38-325(1) are met.

Subsection 38-325(2) provides that a supply of a going concern is a supply under an arrangement under which:

a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and

b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of the larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) explains at paragraph 19 that the term supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided the things supplied relate to the ‘identified enterprise’.

At the present case, the partnership carries on an enterprise in relation to the property development. This is consistent with the decision that the partnership is a general partnership.

The land and commercial property development becomes an asset of the partnership when the partnership is formed and the asset commences to be used for the purposes of the enterprise of the partnership. Any subsequent supply of the property or an interest in the property is a supply by the partnership (see paragraph 108 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6)). A supply made by a partner a partner of a partnership in their capacity as a partner is taken to be a supply made by the partnership (subsection 184-5(1) GST Act).

Therefore it is the partnership that makes the supply.

Identified enterprise

GSTR 2002/5 provides guidance on the requirements to be met for a supply to be a GST-free supply of a going concern. Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).

In the current case, both Entity A and Entity B are involved in the acquisition, development, and sale of developed commercial and residential property (the identified enterprise) jointly and the requirements under paragraphs 38-325(2)(a) and 38-325(2)(b) are satisfied in relation to this enterprise for there to be a sale of a going concern.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 80 of GSTR 2002/5 states:

The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

● the assets necessary for the continued operation of the enterprise

● the operating structure and process of the enterprise.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.

In this circumstance, the parties would be transferring their entire interest in either the GP1 project or the GP2 project to their co-owner.

In acquiring an interest in the property as a supply from the partnership, the purchaser is acquiring more than a specified percentage of rights in the titles. The purchaser will be acquiring both an interest in the assets and the existing operating structure of the venture comprising the relevant contracts including the operating agreement.

In the present case, as provided in the facts, the partnership will supply to the partner all of the rights and assets necessary for the continued operation of the property development enterprise, as the acquiring partner will acquire a beneficial interest in all of the partnership property, which includes:

● the land title

● the intellectual property (eg relevant licences, approvals, permits)

● the material contracts,

● the pre-sales contracts.

Based on the information provided, the partnership will supply to the purchaser the two elements essential for the continued operation of the identified enterprise being an interest in the assets and operating structure. In acquiring the remaining interest in each title the purchaser is in a position to carry on an enterprise.

Paragraph 141 of GSTR 2002/5 advises that all of the activities of the enterprise must be active and operating on the day of the supply and the activities must be capable of continuing after the transfer to new ownership.

Paragraph 161 of GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier.

Entity A and Entity B would continue to carry on the property development operation until the day of supply.

As all the requirements for section 38-325 will be satisfied, the supply of the Interest would be a GST-free supply of a going concern by the partnership.