Edited version of private advice

Authorisation Number: 1051596137697

Date of advice: 18 October 2019

Ruling

Subject: GST and property development

Question 1

Does ABC Pty Ltd make a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it acquires a 2/3 interest in property situated at a specified location (the Property) and goods and services in relation to construction of the Building on the Property?

Answer

Yes, in part. To the extent the acquisitions are for the following creditable purpose:

·  acquisition of the Property to the extent that the acquisition relates to:

-   making taxable supplies of commercial premises by way of lease

-   making a supply of ABC Pty Ltd's interest in new residential premises

·  acquisition of goods and services in relation to the construction of the commercial premises and residential premises, where those acquisitions are taxable supplies to ABC Pty Ltd and ABC Pty Ltd provides, or is liable to provide, consideration for the goods and services.

However acquisitions not made for a creditable purpose are not creditable acquisitions by ABC Pty Ltd. These acquisitions relate to ABC Pty Ltd's acquisition of both the Property and goods and services in relation to the construction of residential premises for rent as these acquisitions relate to making supplies that are input taxed.

Question 2

Are Individual A & Individual B making a creditable acquisition pursuant to section 11-5 of the GST Act when they acquire a 1/3 interest in the Property and goods and services in relation to construction of Lot 3 of the Property?

Answer

No.

Question 3

Is ABC Pty Ltd making a taxable supply pursuant to section 9-5 of the GST Act when it supplies its 2/3 interest in Lot 3 to Individual A & Individual B?

Answer

Yes.

Question 4

Is ABC Pty Ltd making a creditable acquisition pursuant to section 11-5 of the GST Act when it acquires a 1/3 interest in Lot 1 and Lot 2 from Individual A & Individual B?

Answer

No.

Relevant facts and circumstances

ABC Pty Ltd will register for GST effective from or prior to November 2017.

Individual A & Individual B is registered for GST and carry on an enterprise of leasing commercial property.

On dd/mm/yyyy, ABC Pty Ltd and Individual A & Individual B entered into a contract to purchase property situated at a specified location (the Property) as tenants in common which settled on dd/mm/yyyy (the Contract).

You have provided an extract of the Contract which includes the following information:

vendor XYZ Pty Ltd

...

purchaser ABC Pty Ltd as to a two thirds share and Individual A & Individual B as joint tenants as to the remaining one third share.

...

price $xxx,xxx.xx

...

GST: Taxable supply... yes in full...

margin scheme will be used in making the taxable supply... NO

The Property was purchased as vacant land together with development approval for a three storey building (the Building). Level 1 will be commercial premises and will become Lot 1 after the Property is partitioned (Lot 1). Level 2 will be either two one bedroom apartments or one two bedroom apartment and will become Lot 2 after partition (Lot 2). Level 3 will be a two bedroom residential apartment and will become Lot 3 after partition (Lot 3).

ABC Pty Ltd and Individual A & Individual B funded the acquisition of each of their interests in the Property out of their own separate funds or borrowings.

At the time of acquiring the Property, a Deed of Partition (Deed) was prepared. You have provided a copy of the Deed which includes the following information:

BETWEEN ABC PTY LTD ...('ABC Pty Ltd')

AND INDIVIDUAL A & INDIVIDUAL B ...

...

RECITALS

ABC Pty Ltd and Individual A & Individual B purchased the Property pursuant to Contract for Sale of Land dated dd/mm/yyyy and are registered proprietors of the Property in the Respective Proportions.

ABC Pty Ltd and Individual A & Individual B paid the purchase price, stamp duty and other costs of purchasing the Property in the Respective Proportions.

ABC Pty Ltd and Individual A & Individual B intend to carry out the Development of the Property.

Upon completion of the construction of the Development ABC Pty Ltd and Individual A & Individual B intend to effect a strata subdivision of the Property to create Lot 1, Lot 2 and Lot 3.

ABC Pty Ltd and Individual A & Individual B have agreed to carry out the Development and the partition of the Property in accordance with the provisions of this Deed.

...

'Development' means the development of the Property for shop top housing to include a ground floor shop, two one bedroom apartments or one two bedroom apartment on the first floor and a two bedroom apartment on the second floor generally in accordance with the Notice of Determination and the Plans.

...

'Respective Proportions' means the proportions in which ABC Pty Ltd and Individual A & Individual B own the Property, namely:

ABC Pty Ltd as to a two thirds share;

Individual A & Individual B as joint tenants as to the remaining one third share ...

2. Development

2.1 ABC Pty Ltd and Individual A & Individual B agree that:

...

(f) they will pay the costs of Development and the outgoings of the Property including rates, taxes, insurance premiums, maintenance costs, repair, costs, construction costs and other expenditure in respect to the Property in the Respective Proportions; and

(g) they will be entitled to income (if any) of the Property in the Respective Proportions: and

...

(j) if they proceed with the Development, upon completion of construction of the Development they will make all applications, and do all things and sign all documents necessary to register a plan of strata subdivision of the Property to create Lot 1, Lot 2 and Lot 3; and

...

3. Partition

3.1 ABC Pty Ltd and Individual A & Individual B agree that in consideration of the mutual covenants contained in this Deed the Property is partitioned between them so that upon registration of the plan of strata subdivision of the Property:

(a)  ABC Pty Ltd is to be the sole registered proprietor of Lot 1 and Lot 2 (including in respect to Lot 2 any lots that may comprise Lot 2 if it comprises two one bedroom apartments).

(b)    Individual A & Individual B is to be the sole registered proprietor of Lot 3.

3.2 In order to give effect to the partition referred to in clause 3.1, ABC Pty Ltd and Individual A & Individual B must upon registration of the plan of strata subdivision of the Property sign all documents and do all things necessary to transfer to the other the right title and interest in Lot 1, Lot 2 and Lot 3 so that they become the sole and absolute owner and registered proprietor of the lots as set out in clause 3.1

ABC Pty Ltd will fund construction of Lot 1 and Lot 2 solely. Individual A & Individual B will finance the construction of the Lot 3 solely. Construction timeframe is anticipated to be two years.

ABC Pty Ltd intends to retain and lease Lot 1 and Lot 2 as long term rental.

ABC Pty Ltd will be entitled to 100% of the income generated from leasing Lot 1 and Lot 2.

ABC Pty Ltd has assessed that turnover generated from the leasing of the commercial premises (Lot 1) will be $75,000 or more.

Individual A & Individual B intend to occupy the Lot 3 as their principal place of residence.

Relevant legislative provisions

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

Section 9-5

Paragraph 9-5(b)

Paragraph 9-5(c)

Paragraph 9-5(d)

Section 9-20

Section 11-5

Section 11-15

Section 11-25

Section 11-30

Division 38

Section 40-35

Section 40-75

Subsection 184-1(1)

Section 195-1

Income Tax Assessment Act 1997

Section 995-1

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 ato.gov.au

In this case, the first issue to consider is whether together, the co-owners (ABC Pty Ltd and Individual A & Individual B) are an 'entity' for GST purposes. Subsection 184-1(1) contains the meaning of the term 'entity' as being any of the following:

(a)  an individual

(b)  a body corporate

(c)  a corporation sole

(d)  a body politic

(e)  a partnership

(f)   any other unincorporated association or body of persons

(g)  a trust

(h)  a superannuation fund.

ABC Pty Ltd and Individual A & Individual B have entered into an arrangement to acquire the Property and construct a multi-level building. Individual A & Individual B will construct residential premises for their principal place of residence. ABC Pty Ltd will construct commercial premises and residential premises for leasing. Upon completion of the construction, the Property will be partitioned with each co-owner obtaining a 100% interest in their respective strata titled lots.

Given the above, for the purposes of GST and this ruling, ABC Pty Ltd will be considered a separate entity to Individual A & Individual B.

Question 1

Does ABC Pty Ltd make a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it acquires a 2/3 interest in property situated at a specified location (the Property) and goods and services in relation to construction of the Building on the Property?

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

(a)  you acquire anything solely or partly for a 'creditable purpose'

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

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

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

Section 11-15 provides that you acquire a thing for a 'creditable purpose' to the extent you acquire the thing in carrying on your enterprise. However the acquisition will not be acquired for a creditable purpose to the extent the acquisition relates to making input taxed supplies or is of a private or domestic nature.

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

·  in the form of a business

·  on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

Section 195-1 clarifies that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.

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 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraphs 120 to 137 of MT 2006/1 discuss activities done in the commencement of an enterprise. Paragraphs 122 to 125 state the following:

122. Given this definition, it follows that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

123. In the Commissioner's view the term, 'doing anything in the course of the commencement....of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

124. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated.

125. An enterprise must start somewhere and the first step or steps may be minor. In Ferguson v. Federal Commissioner of Taxation Bowen CJ and Franki J expressed the point in this way:

Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business.

In this case, ABC Pty Ltd has acquired an interest in the Property for the purpose of completing a development (as outlined in the Deed) with the intention of constructing premises (commercial and residential).

We consider that ABC Pty Ltd's acquisition of its interest in the Property, subsequent construction of commercial premises and residential premises, for the purpose of leasing and supply by partition, are activities done in the course of carrying on its enterprise.

Given the facts of this case we consider both the acquisition of its 2/3 interest in the Property and goods and services acquired by ABC Pty Ltd in relation to the construction of commercial premises and residential premises are acquired in carrying on its enterprise.

Section 40-35 provides that a supply of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) by way of lease, hire or licence is input taxed.

ABC Pty Ltd is constructing residential premises (Lot 2) for the purpose of long-term rental. The supply of Lot 2 is neither commercial residential premises nor a supply of accommodation in commercial residential premises. Therefore, ABC Pty Ltd will be making input taxed supplies of residential premises when it rents out Lot 2.

ABC Pty Ltd is constructing commercial premises (Lot 1) for the purpose of long-term rental. Therefore, ABC Pty Ltd will be making taxable supplies of residential premises when it rents out Lot 2.

ABC Pty Ltd will also make a supply of its proportionate interest in new residential premises (Lot 3) to Individual A & Individual B when the Property is partitioned. Therefore, ABC Pty Ltd will make a taxable supply of new residential premises when it supplies its interest in Lot 3.

In this case, ABC Pty Ltd will register for GST effective from a date of November 2017 or earlier. Therefore, we consider paragraph 11-5(d) will be satisfied when it is registered for GST.

In conclusion, ABC Pty Ltd will make the following 'creditable acquisitions' pursuant to section 11-5:

·  acquisition of the Property to the extent that the acquisition relates to:

-  making taxable supplies of commercial premises

-  making a supply of its interest in new residential premises

·  acquisitions of goods and services in relation to the construction of the commercial premises and residential premises where those goods and services are acquired for a creditable purpose, are taxable supplies to ABC Pty Ltd and ABC Pty Ltd provides, or is liable to provide, consideration for the goods and services acquired.

ABC Pty Ltd's acquisition of the Property to the extent that the acquisition relates to making input taxed supplies of residential rent and acquisition of goods and services in relation to the construction of those residential premises are not creditable acquisitions.

Section 11-25 provides that the amount of the input tax credit (ITC) for a creditable acquisition is an amount equal to the GST payable on the supply. However, the amount of the ITC is reduced if the acquisition is only 'partly creditable'. Section 11-30 provides that an acquisition is 'partly creditable' if you make the acquisition only partly for a 'creditable purpose'.

Goods and Services Tax Ruling 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose discusses the explains the Commissioner's view on the meaning of 'creditable purpose' and 'extent of creditable purpose'. GSTR 2006/4 also contains guidance on how to determine the extent of your creditable purpose in making acquisitions and importations to enable you to claim the correct amount of input tax credits by providing examples of apportionment methods (both direct and indirect methods that you may use). Paragraph 32 of GSTR 2006/4 states that you may choose your own apportionment method, but the method you choose needs to be fair and reasonable in the circumstances of your enterprise. It needs to appropriately reflect the intended or actual use of your acquisitions or importations.

Question 2

Are Individual A & Individual B making a creditable acquisition pursuant to section 11-5 of the GST Act when they acquire a 1/3 interest in the Property and goods and services in relation to construction of Lot 3 of the Property?

As discussed above, one of the requirements of making a 'creditable acquisition' is that you acquire a thing for a 'creditable purpose'. Also as discussed above, an acquisition will be made for a 'creditable purpose' to the extent you acquire the thing in carrying on your enterprise however the acquisition will not be made for a creditable purpose to the extent the acquisition is of a private or domestic nature.

In this case, Individual A & Individual B acquired their 1/3 interest in the Property with the intention of constructing new residential premises for use as their principal place of residence. Following the construction of the Property, the Property is to be subdivided creating three separate lots with a transfer of interests between ABC Pty Ltd and Individual A & Individual B resulting in Individual A & Individual B holding a 100% interest in Lot 3.

The process of the division of property and the transfer of interests in the property between co-owners is referred to as 'partitioning'.

Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land discusses the partitioning of real property among co-owners.

Paragraph 78 of GSTR 2009/2 states:

78. There may be instances where jointly owned land is applied in an enterprise of one or more co-owners but not applied in an enterprise of other co-owners. In these circumstances, a partition of the jointly owned land will result in some co-owners making a supply that is in the course or furtherance of an enterprise and other co-owners making a supply that is not in the course or furtherance of an enterprise.

Whilst Individual A & Individual B is registered for GST and carries on an enterprise of leasing commercial premises, we do not consider the acquisition of their 1/3 interest in the Property to be in the course of carrying on of their leasing enterprise. Furthermore, we consider the acquisition of their 1/3 interest in the Property to be private and domestic in nature given their intention to use the Property as their principal place of residence.

Therefore we consider that the acquisition of a 1/3 interest in the Property by Individual A & Individual B has not been made for a 'creditable purpose.

For similar reasons, we do not consider acquisitions of goods and services in relation to the construction of Level 3 of the Property have been made for a 'creditable purpose'.

Therefore, Individual A & Individual B have not made a 'creditable acquisition' when they acquired a 1/3 interest in the Property or when they acquired goods and services in relation to construction of Level 3 of the Property.

Question 3

Is ABC Pty Ltd making a taxable supply pursuant to section 9-5 of the GST Act when it supplies its 2/3 interest in Lot 3 to Individual A & Individual B?

Section 9-5 provides 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.

The issue of whether a supply of an interest in property by way of partition is also discussed in GSTR 2009/2.

Consideration (paragraph 9-5(a))

Paragraphs 86 to 89 of GSTR 2009/2 state:

86. The Commissioner considers that, under a partition by agreement or where a court orders the co-owners to effect a partition, 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.

...

88. Subsection 9-15(1) provides that a payment, or any act or forbearance is consideration for a supply if it is 'in connection with', 'in response to or for the inducement of' a supply. Further, a payment, act or forbearance may be consideration for a supply even though it is not made voluntarily, and regardless of whether it is made by the recipient of the supply.

89. A payment, act or forbearance is consideration for a supply where there is a sufficient nexus between the payment, act or forbearance and the supply. The test as to whether there is a sufficient nexus is an objective test.

Paragraphs 92 - 93 and 97 - 98 continue stating:

92. Although a partition ordinarily does not involve a monetary payment, consideration is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form.[58] This includes acts, forbearances, and goods or property.

93. The consideration for a co-owner transferring their interest in land to the other co-owners is the transfer or conveyance made by the other co-owners of their respective interests in another part of the land to the first co-owner. The transfer or conveyance by the other co-owners together with any owelty money paid or payable is consideration received by the first co-owner for the supply of their interest to the others.

...

97. 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.

98. The Commissioner considers that the transfer of an interest in a part of the land by a co-owner is 'in connection with', 'in response to' or 'for the inducement' of the supply by each of the other co-owners of their respective interests in a part of the land.

Given the above, we consider ABC Pty Ltd's supply of its 2/3 interest in new residential premises (Lot 3) is a supply for consideration satisfying paragraph 9-5(a).

In the course or furtherance of an enterprise that you carry on (paragraph 9-5(b))

Paragraph 57 of GSTR 2009/2 states:

57. 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 or court order for co-owners to effect a partition is in connection with the enterprise and is a supply in the course or furtherance of that enterprise.

As discussed above with reference to paragraph 78 of GSTR 2009/2, there may be situations where jointly owned land is applied in an enterprise of one co-owner but not applied in an enterprise of the other co-owner. In these circumstances, a partition of the jointly owned land will result in some co-owners making a supply that is in the course or furtherance of an enterprise.

In this case we consider ABC Pty Ltd is making a supply of its 2/3 interest in new residential premises (Lot 3) in order to obtain a 100% interest in Lot 1 and Lot 2 for the purpose of carrying on its leasing enterprise. ABC Pty Ltd's supply will satisfy paragraph 9-5(b) and be a supply in the course or furtherance of an enterprise that ABC Pty Ltd carry on.

The Property is located in Australia and as discussed above, ABC Pty Ltd's will be registered for GST thus satisfying paragraphs 9-5(c) and 9-5(d) respectively.

Paragraph 171 of GSTR 2009/2 states:

171. A sale of land comprised of residential premises may be input taxed under section 40-65 to the extent the residential premises are to be used predominantly for residential accommodation. However, under paragraph 40-65(2)(b), the sale is not input taxed if the premises are new residential premises as defined in section 40-75.

Section 40-75 provides that 'new residential premises' include premises that have not previously been sold as residential premises. In this case the newly constructed premises comprising Lot 3 has not previously been sold as residential premises. As such, ABC Pty Ltd's supply will constitute a supply of its interest in 'new residential premises. Therefore, ABC Pty Ltd's supply of its interest in Lot 3 will not be input taxed. Furthermore, ABC Pty Ltd's supply does not fall within the scope of Division 38 and will not be a GST-free supply.

In summary, ABC Pty Ltd's supply will satisfy the positive limbs of section 9-5 and is neither GST-free nor input taxed. Therefore, ABC Pty Ltd's supply will constitute a taxable supply as defined in section 9-5.

Question 4

Is ABC Pty Ltd making a creditable acquisition pursuant to section 11-5 of the GST Act when it acquires a 1/3 interest in Lot 1 and Lot 2 from Individual A & Individual B?

Following on from the discussion above in Question 2 where the acquisition by Individual A & Individual B was considered not to be in the course or furtherance of an enterprise Individual A & Individual B carries on, the supply by Individual A & Individual B to ABC Pty Ltd of their 1/3 interest in Lot 1 and Lot 2 would also be considered not to be done in the course or furtherance of an enterprise.

Also as discussed above, one of the requirements of a taxable supply is that the supply is made in the course or furtherance of an enterprise that the supplier carries on.

Consequently, the supply by Individual A & Individual B to ABC Pty Ltd will not satisfy the definition of a 'taxable supply'.

As a result, ABC Pty Ltd will not make a 'creditable acquisition' in relation to its acquisition of a 1/3 interest in Lot 1 and Lot 2 from Individual A & Individual B as paragraph 11-5(b) will not be satisfied.