Edited version of your written advice

Authorisation Number: 1051440862250

Date of advice: 16 October 2018

Ruling

Subject: GST – going concern – disposal of co-owners interest in commercial property

Question 1

Did the partnership (Partnership) carry on an enterprise pursuant to section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) at the time that Individual A sold her 50% interest in the Sale Property?

Answer

Yes

Question 2

Was the sale of Individual A’s 50% interest in the Sale Property, a supply by Individual A, in her capacity as partner in a Partnership, in accordance with section 9-10?

Answer

Yes

Question 3

Was the sale of Individual A’s 50% interest in the Sale property, in her capacity as partner in a partnership, a GST-free supply of a going concern under section 38-325?

Answer

Yes

Question 4

Was any part of the sale of Individual A’s 50% interest in the Sale Property, a taxable supply by the Partnership in accordance with section 9-5.

Answer

No

Relevant facts and circumstances

Individual A and Individual B are registered as a partnership (Partnership) for GST purposes from XXYYYY.

Individual B is registered as an individual /sole trader for GST from XXYYYY.

Individual A is not registered for GST in her personal capacity.

Individual A and individual B held the following real properties as co-owners, being as tenants in common, in equal shares:

1. Sale Property; and

2. Property B

The Sale Property and Property B are both commercial properties.

Leasing Enterprise

The Sale Property was acquired by Individual A and Individual B under a single contract.

Property B was acquired by Individual A and Individual B under a single contract.

The purchase of both the Sale Property and Property B was funded by loans jointly held by the Individual A and Individual B.

The Sale Property and Property B were both leased to independent third parties. The leases of the Sale Property and Property B were in the names of Individual A and Individual B.

Individual A and Individual B made all decisions in respect of the Sale Property and Property B jointly, including the appointment of an agent to manage the leasing of the Sale Property and Property B.

The rent derived from the leasing of the Sale Property and Property B was paid into a joint bank account of Individual A and Individual B. The expenses relating to the properties were paid from the joint bank account.

Individual A and Individual B jointly paid all liabilities in relation to the Sale Property and the Property B.

The Partnership charged and remitted GST to the ATO on the leasing of the Sale Property and Property B.

Sale of interest in Sale Property

On XXYYYY, Individual A and Individual B obtained a valuation of the Sale Property.

On XXYYYY, Individual A and Individual B entered into a Contract of Sale under which Individual A would sell her 50% interest in the Sale Property to Individual B.

The sale price for Individual A’s 50% interest in the Sale Property was $X million subject to adjustment for land tax, which is the market value of Individual A’s 50% interest in the Sale Property (in accordance with the XXYYYY valuation).

Under the Contract for Sale, Individual A and Individual B agreed that the sale was GST-free because it was a supply of a going concern under section 38-325.

The sale of Individual A’s 50% interest in the Sale Property settled on the same date as the Contract for Sale was executed, being XXYYYY.

At the time of settlement of the sale of Individual A’s 50% interest in the Sale Property, the whole of the Sale Property was subject to a single lease which commenced on XXYYYY and which does not expire until XXYYYY (or XXYYYY if a 6-year option to renew is exercised). Individual A sold her interest in the Sale Property subject to the existing lease.

The Sale property was not subject to a management agreement.

Cessation of partnership

Following the sale of Individual A’s interest in the Sale Property to Individual B, Individual A and Individual B later sold Property B and ceased to own any property jointly.

You have provided the following documentation in support of your ruling application:

1. Contract for the sale and purchase of land entered into between Individual A and Individual B dated XXYYYY.

2. Lease Agreement entered into between Individual B, Individual A and Entity A dated XXYYYY.

The following information has been extracted from these documents:

Contract for the sale and purchase of land entered into between Individual A and Individual B and dated XXYYYY.

● Vendor Individual A

● Land Folio identifiers …

● Subject to existing tenancies

● Purchaser Individual B

● Price $X

● GST –free because the sale is the supply of a going concern under 38-325

● Clause XX Goods and Services Tax

(a) Sale to be GST free

The Vendor and the Purchaser agree that the sale under this contract is the supply by the Vendor to the Purchaser of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 and the sale is GST free.

(b) …

(c) Vendor to carry on business

The Vendor undertakes to carry on the business the subject of this Contract until completion of this Contract.

…

Lease Agreement entered into between Individual B, Individual A and Entity A dated XXYYYY.

…

C. Lessor Individual B and Individual A

D …

E Lessee …

F …

G 1. Term X years

2. Commencing Date XXYYYY

3. Terminating Date XXYYYY

4. With an OPTION TO RENEW for a period of X years

...

Relevant legislative provision

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

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

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

Did the partnership of Individual A and Individual B (Partnership) carry on an enterprise pursuant to section 9-20 at the time that Individual A sold her 50% interest in the Sale Property?

Section 184-1(1) defines “entity” to include a partnership.

A partnership is defined in section 195-1 by reference to the definition of ‘partnership’ in subsection 995-1(1) of the 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.

Paragraph 10 of Goods and Services Tax Ruling GSTR 2004/6 Goods and Services tax: tax law partnership and co-owners of property states:

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or limited partnership) ‘in receipt of ordinary income or statutory income jointly’. We refer to this type of partnership as a tax law partnership.

Paragraph 24 of GSTR 2004/6 goes on to say that ‘Persons who are in receipt of income jointly are an association of persons and a tax law partnership for GST purposes‘.

Enterprise

Enterprise is defined in Section 9-20(1) and includes an activity or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Based on the information outlined above, we consider that the Partnership was conducting a leasing enterprise at the time the Vendor disposed of her 50% interest in the Sale Property.

Question 2

Was the sale of Individual A’s 50% interest in the Sale Property, a supply by Individual A, in her capacity as partner in a Partnership, in accordance with section 9-10?

Entities (including individuals), that are in a tax law partnership are partners and are capable of acting in their capacity as partners. If a tax law partnership carries on an enterprise, supplies or acquisitions made by, or on behalf of, partners in a tax law partnership in their capacities as partners are taken, under subsection 184-5(1), to be supplies or acquisitions made by the partnership. Subsection 184-5(1) provides that:

For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner:

(a) is taken to be a supply, acquisition or importation made by the partnership; and

(b) is not taken to be a supply, acquisition or importation made by that partner or other partner of the partnership.

Paragraph 63 of GSTR 2004/6 provides further that in all cases in which a tax law partnership carries on a leasing enterprise, the enterprise involves the interests of all the co-owners of the income producing property.

Paragraphs 183 to 184 of GSTR 2004/6 discusses the supply of an interest in an income producing property:

Supply of an interest in the income producing property

183. For GST purposes, a sale of a co-owner's interest in property may be a supply by either an enterprise partnership or by a co-owner that carries on a leasing enterprise in its own right. [85] For the supply of an interest in leased property to be capable of being the supply of a going concern, an enterprise must be carried on in relation to that interest.

184. We accept that a leasing enterprise can be carried on, and that an enterprise partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests.

Paragraph 234 of GSTR 2004/6 provides that any sale of a property or interest in property which is used in carrying on an enterprise by a partnership is a supply by the partnership and not by the co-owners.

As Individual A and Individual B are an enterprise partnership conducting a property leasing enterprise, the sale by Individual A of her 50% interest in the Sale Property, will be a supply by Individual A in her capacity as partner of the partnership, that is, it is a supply by the Partnership.

Question 3

Was the sale of Individual A’s 50% interest in the Sale property, in her capacity as partner in a partnership, a GST-free supply of a going concern under section 38-325?

The term ‘supply of a going concern’ is a statutory term which is defined for the purposes of Subdivision 38-J in subsection 38-325(2):

(2) 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 part of a larger enterprise carried on by the supplier),

Subsection 38-325(1) provides:

(1) The *supply of a going concern is GST –Free if:

(a) The supply is for *consideration; and

(b) The *recipient is *registered or *required to be registered; and

(c) The supplier and the recipient have agreed in writing that the supply is not a going concern.

In this case, the Partnership is supplying Individual A’s 50% interest in a fully leased Property to Individual B.

Paragraphs 183 to 184 of GSTR 2004/6 states:

183. For GST purposes, a sale of a co-owner's interest in property may be a supply by either an enterprise partnership or by a co-owner that carries on a leasing enterprise in its own right. [85] For the supply of an interest in leased property to be capable of being the supply of a going concern, an enterprise must be carried on in relation to that interest.

184. We accept that a leasing enterprise can be carried on, and that an enterprise partnership can carry on that enterprise, in relation to each co-owner's interest in the leased property, as part of a larger enterprise involving all the interests.

Paragraphs 187 to 190 state further:

187. We consider that the supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease. If the leased property is subject to a management agreement and the supply of rights under such an agreement is necessary for the continued operation of the enterprise, the partnership will have supplied all the things necessary for the continued operation of a leasing enterprise if there is a supply of that interest and the rights under the management agreement by assignment or novation.

188. Paragraph 38-325(2)(b) requires that the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier). We consider that if property is used in a leasing enterprise at the time of the supply, the enterprise partnership, as the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply.

189. The supply by an enterprise partnership of an interest in an income producing property is GST-free as the supply of a going concern if it meets the requirements of subsection 38-325(1).

190. An enterprise partnership may make the supply of a going concern to another partnership comprising some of the same partners as the partnership making the supply. [91]

Example 18 in paragraphs 196 to 201 of GSTR 2004/6 most closely aligns with your situation and states:

Example 18: supply that is a GST-free supply of a going concern - supply by an enterprise partnership of a co-owner's interest in a leased commercial property

196. Hot Summer Properties Ltd (Hot Summer) has a 20% interest in a leased commercial property that it owns with a number of other co-owners. The co-owners operate as a syndicate and have a syndicate agreement. Under the syndicate agreement, any purchaser of an interest in the property is bound by the terms and conditions of the agreement. A tax law partnership, comprising all the syndicate members, is registered for GST as it carries on the leasing enterprise.

197. Hot Summer agrees to sell its 20% interest in the property, with all leases in place, to Tall Sky Builders Ltd (Tall Sky). As the leasing enterprise is carried on by the partnership, the supply of Hot Summer's 20% interest in the property is by Hot Summer in its capacity as partner of the partnership, that is, it is a supply by the partnership.

198. Tall Sky is bound by the syndicate agreement. When Tall Sky purchases Hot Summer's interest, a new enterprise partnership, which is required to be registered is formed. The purchase by Tall Sky is taken to be by Tall Sky as partner of the new partnership.

199. The enterprise is carried on by the old partnership until the day of supply. Hot Summer, as a partner in the old partnership, and Tall Sky, as a partner in the new partnership, agree in writing that the supply is of a going concern.

200. The requirements of subsection 38-325(1) are satisfied as the supply is for consideration, the new partnership is required to be registered for GST, and there is an agreement between the supplier and the recipient in writing that the supply is of a going concern.

201. The supply of Hot Summer's interest in the property by the partnership is a GST-free supply of a going concern under section 38-325

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? discusses leasing enterprises at paragraph 107A. This paragraph states:

Management and services contracts relating to the lease of a property

107A. An identified enterprise may consist solely of the leasing of a property to a tenant or tenants. Such an activity is an enterprise under paragraph 9-20(1)(c).13A This is the case even though the leasing of the property may be carried on as part of the supplier's broader enterprise.13B Where the identified enterprise consists solely of leasing a property, management and services contracts related to the lease are not things necessary for the continued operation of that enterprise. That is, where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a).

Application to your circumstances

The Contract of Sale between Individual A (in her capacity as partner in the Partnership) and Savvas was entered into on XXYYYY. Pursuant to the Contract for Sale, the 50% interest in the leased Property is sold subject to existing tenancies. Clause XX of the Contract for Sale further confirms that Individual A (in her capacity as partner in a Partnership) undertakes to carry on the business the subject of the Contract for Sale (that is the leasing enterprise) until completion of the Contract for Sale. In this regard, we note that the Lease between Individual A, Individual B and Entity A is for a period of X years commencing XXYYYY and ceasing on XXYYYY and that 100% of the Property (being Certificate of Title Folio Identifiers XX, XX and XX) has been leased to the Lessee.

The supply by the Partnership of the 50% interest in the leasing enterprise to Individual B will be for consideration of $X.

Individual B was registered for GST from XXYYYY and the contract indicates that the parties have agreed that the supply of the interest in the property is a supply of a going concern.

The requirements of subsection 38-325(1) are satisfied as the supply of the 50% interest in the Property is for consideration, the recipient purchaser is registered for GST and there is an agreement between the supplier and the recipient in writing that the supply is of a going concern.

Consequently, the supply of Individual A’s 50% interest in the Property, in her capacity as partner in a Partnership, is a GST-free supply of a going concern.

Question 4

Was any part of the sale of Individual A’s 50% interest in the Sale Property, a taxable supply by the Partnership in accordance with section 9-5.

Section 9-5 provides that you make 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.

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

We have already established in Question 3 that the supply of the 50% interest in the Property by the Partnership to the purchaser is a GST-free supply. In the event that the requirements of 38-325 are not met, the supply of the interest in the Property will be a taxable supply as the requirements of section 9-5 are met