Edited version of private advice

Authorisation Number: 1051596619483

Date of advice: 11 December 2019

Ruling

Subject: GST and sale of real property

Question

Is the trustee for the bankrupt estate of Mr A (the Trustee) required to be registered for GST?

Answer

No.

Relevant facts

The partnership of Mr A and Mr B (the Partnership) bought the Property a number of years ago, for the purpose of commencing their own farming business.

At the time of the acquisition, a farming business had been carried on for over 5 years preceding the sale and because they intended to continue to operate the farming business, the sale of the Land to the Partnership was a GST-free supply of farm land.

The Partnership immediately began carrying on its farming business on the Land.

The Partnership applied for an ABN and registered for GST from the time of acquisition of the Property.

After a number of years, the partners separated and both vacated from the Property in anticipation of selling it.

Prior to vacating the Property, Mr A had spoken to a number of real estate agents seeking their proposals to sell the Property, and earlier in the year they were able to agree to exclusively appoint a real estate agent to sell the Property.

Since the partners vacated the Property, it has not been used except by the real estate agent to photograph it, and take buyers through for inspections.

While the Property was not used directly for farming for a short period (between the partners vacating the Property until it was placed on the market), there was no change in purpose for which the land was held, because the purpose was carrying on the farm business, in this instance, with a purpose of terminating the farming business.

The Partnership's GST registration was cancelled recently.

Shortly after, Mr A became a bankrupt and the trustee was appointed bankruptcy trustee (the Trustee). Under section 58 of the Bankruptcy Act 1966, Mr A's joint ownership interest on the land vested in the Trustee.

The Trustee has continued to wind down the farming enterprise by continuing the farm sale process and recently appointed a selling agent to sell the property via public auction. The Property did not sell at auction and it continues to be on the market for sale.

The vendors named in the contract of sale are Mr B and the Trustee.

Mr B and the Trustee are not carrying on an enterprise jointly.

Mr A was not carrying on any enterprise on their own, and was not registered for GST.

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 9-20.

A New Tax System (Goods and Services Tax) Act 1999 section 23-5.

A New Tax System (Goods and Services Tax) Act 1999 subsection 58-5(1).

A New Tax System (Goods and Services Tax) Act 1999 subsection 58-5(2).

A New Tax System (Goods and Services Tax) Act 1999 section 58-20.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

The Trustee is not required to be registered for GST.

Detailed reasoning

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out who is required to be registered and it states:

You are required to be registered under this Act if:

(a)   you are *carrying on an *enterprise; and

(b)   your *GST turnover meets the *registration turnover threshold.

(* denotes a term defined in section 195-1 of the GST Act.)

The term 'you' in the GST Act applies to entities generally.

The meaning of entity as defined in section 184-1 of the GST Act includes an individual and a partnership.

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.

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.

The second limb of paragraph (a) of the definition refers to an association of persons that is not in business, but that is nevertheless in receipt of ordinary income or statutory income jointly. The Commissioner refers to this type of partnership as a tax law partnership.

There was a general law partnership of Mr A and Mr B (the Partnership) carrying on the farming business. When they decided to vacate the property and place the property on the market, the Partnership was winding down its operations.

Goods and Services Tax Ruling GSTR 2003/13 Goods and Services Tax: general law partnerships (GSTR 2003/13) contains the ATO view regarding the treatment of general law partnerships for GST purposes.

Paragraph 128 of GSTR 2003/13 provides that a general dissolution of a partnership may be brought about, among other ways, by the bankruptcy of a partner.

When Mr A was declared bankrupt, there was a general dissolution of the Partnership. The general dissolution of the Partnership required them to cancel their GST registration.

You advised that the contract of sale lists the vendors as Mr B and the Trustee.

A tax law partnership exists between the new co-owners as there is an association of persons in receipt of ordinary income or statutory income jointly, when the Property is sold.

Goods and Services Tax Ruling GSTR 2004/6 Goods and Services Tax: tax law partnerships and co-owners of property (GSTR 2004/6) explains how the GST Act applies to transactions involving tax law partnerships.

Paragraphs 60 to 98 of GSTR 2004/6 explain when a tax law partnership is carrying on an enterprise as opposed to an enterprise being carried on by the co-owners in their own right.

In some cases, an evaluation of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership.

In this case, the Trustee was appointed to deal with the administration of the bankrupt's estate. Under section 58 of the Bankruptcy Act 1966, Mr A's joint ownership interest on the land vested in the Trustee. When the bankrupt's interest in the property vested in the Trustee, the joint tenancy between the Mr A and Mr B was severed and the Trustee and Mr B became tenants in common.

The new co-owners are not carrying on an enterprise in relation to the Property and are merely selling the Property as part of the Trustee's administration of the bankrupt's estate.

We consider that each new co-owner is dealing with their interest in the Property in their own right. We take the view that, although a tax law partnership may exist, it does not carry on any enterprise in relation to the Property.

Hence, each of the new co-owners needs to consider whether they are required to be registered for GST.

In this case, we need to consider if the Trustee is required to be registered for GST.

Division 58 of the GST Act sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes.

A 'representative' is defined in section 195-1 of the GST Act to include a trustee in bankruptcy and it further defines an 'incapacitated entity' to include an individual who is a bankrupt.

Subsection 58-5(1) of the GST Act provides that a supply, acquisition or importation by a representative, in its capacity as representative, is taken to be a supply, acquisition or importation by the incapacitated entity.

Under subsection 58-5(2) of the GST Act, any act or omission of a representative is taken, for GST purposes, to be an act or omission of the incapacitated entity but only for the purposes of determining for GST purposes the matters detailed in paragraphs (a) to (c) of that subsection.

The intention of subsections 58-5(1) and (2) of the GST Act is to ensure that the GST consequences that arise for the representative are the same as the consequences that would have arisen if they were supplies, acquisitions or importation or related acts or omissions of the incapacitated entity.

Section 58-20 of the GST Act provides that a representative of an incapacitated entity is required to be registered for GST in that capacity if the incapacitated entity is registered or required to be registered. Note that this section has effect despite what is said in section 23-5 about who is required to be registered.

In this case, the bankrupt Mr A, as an individual, was not registered for GST prior to bankruptcy. In order to determine whether the Trustee is required to be registered for GST in that capacity, it is necessary to determine whether Mr A was required to be registered for GST.

An entity is required to be registered for GST if it carries on an enterprise.

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

·        in the form of a business, or

·        in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the term 'enterprise' for the purposes of entitlement to an Australian business number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Mr A was a partner of the partnership and it was the partnership that was carrying on the enterprise. Mr A would have been selling his interest in the Property that is a capital asset. Hence, Mr A was not carrying on an enterprise on his own and was not required to be registered for GST.

As Mr A was neither registered nor required to be registered, the Trustee is not required to register for the GST in the capacity as trustee for the bankrupt estate of Mr A.