Edited version of private advice

Authorisation Number: 1051696475765

Date of advice: 1 July 2020

Ruling

Subject: The subdivision and disposal of jointly owned property and the subsequent sale of one of the allotments

Question 1

Will the sale of the property constitute a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for GST purposes?

Answer

No

Question 2

Will the proceeds from the sale of the property be subject to the capital gains tax (CGT) provisions in Part 3-1 and Parts 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Can the 50% general discount be applied to the sale of the property?

Answer

No

Question 4

Will transferring your share of a property to a family member under the partioning agreement constitute a taxable supply pursuant to section 9-5 of the GST Act for GST purposes?

Answer

No

Question 5

Will transferring your share of a property to a family member under the partitioning agreement be subject to the capital gains tax (CGT) provisions in Part 3-1 and Parts 3-3 of the ITAA 1997?

Answer

Yes

Question 6

Can you use the 50% general discount for the transfer of the property to a family member?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The co-owners of the property are family members. Neither you or your family members are registered or have been registered for GST.

When you decided to purchase thepropertyafter 20 September1985, the ownership was split one half share in your names as tenants-in-common with your family member who held the remaining half share.

The property has been rented or available for rent continuously since the purchase. You do not carry on any other enterprise.

A decision was made to demolish the house and subdivide the land into two equal allotments, allotment 1 and allotment 2. At the time of the subdivision each allotment was owned as per the original holding of the property, one-half share in your names as tenants-in-common with your family member who held the remaining half share. The new titles to the property were issued.

You entered into a partitioning agreement with your family member whereby you would transfer your one-half interest in allotment 2 to your family member's spouse for no monetary consideration. On account of this transfer your family member would forego any further beneficial or equitable interest in allotment 1 in favour of you. Your one-half share of allotment 2 was transferred to your family member's spouse.

A contract of sale was entered into for the sale of allotment 1 and the sale of the property was settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

Reasons for decision

Summary

GST is not payable on your disposal of your interest in the Property because you are not making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This is because although the disposalof the Property was made for consideration and is connected with Australia and was made in the course or furtherance of your partnership enterprise you are not required to be registered for GST.

A CGT event A1 occurred when you entered into a partitioning agreement with your family member whereby, they would forego any further beneficial or equitable interest in allotment 1 on account of you transferring your one-half interest in allotment 2 to their spouse for no monetary consideration.

A second CGT event A1 occurred when you entered into a contract of sale for allotment 1.

As you purchased the property more than 10 years ago, you have therefore owned a one-half share in both allotments 1 and 2 for more than 12 months and you are entitled to apply the general 50% discount to your capital gain for your one-half share in both allotments.

The remaining one-half share was acquired from your family member (the date of the partitioning agreement) and you disposed of this one-half share when you entered into the contract of sale. As you held this remaining one-half share for less than 12 months you are not entitled to apply the general 50% discount to any capital gain from the disposal of this one-half share.

The disposal of the Property was not a taxable supply

GST is payable on any taxable supply that you make.

The sale of the Property is a taxable supply if the supply satisfies all the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for ^*consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

Consideration is defined in section 9-15 of the GST Act as including:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Pursuant to section 9-20 of the GST Act, an enterprise includes:

'... an activity or series of activities done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property; ...'

Under section 184-1 of the GST Act, for the purposes of GST, an entity includes a partnership.

Goods and Services Tax Ruling GSTR 2004/6 discusses tax law partnerships and co-owners of property.

As per paragraph 25 of this ruling a tax law partnership exists if there is an association of person in receipt of income jointly. As such, as the property was owned by the individuals and they were in receipt of rental income, they were a tax law partnership carrying on an enterprise of leasing.

As per paragraphs 219 and 220 of GSTR 2004/6:

219. An enterprise partnership terminates if the association of persons is no longer in receipt of income jointly. Circumstances that may lead to the termination of a tax law partnership include:

· the sale of an income producing property that is the sole source of income;

· the property or properties are no longer used for an income producing purpose; and

· a change of persons comprising the association of persons in receipt of income jointly. ¹¹⁰

Can a tax law partnership be reconstituted?

220. If one or more of the co-owners of the income producing property dispose of their interest in that property, this constitutes a change in the association of persons. We do not consider that a tax law partnership can be treated as continuing in these circumstances.

The partnership ceased when they ceased receiving income.

232. If an interest in the property is sold, a new enterprise partnership involving the remaining co-owners and any new co-owner may be formed. In this case, the interests of the remaining partners in the income producing property become assets of a new partnership.

In this case there is no new partnership and so the sale by you is simply a sale of your interest.

Based on the information that you have provided, your disposal of your interest was for non-monetary consideration, (the supply of your interest in allotment 2 to the other family member), was connected with Australia as the property is located in Australia, and supplied in the course of termination of your partnership enterprise. The supply satisfies paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act and is neither GST-free or input taxed.

It remains to be determined whether you are required to be registered for GST pursuant to section 23-5 of the GST act.

As the partnership was carrying on an enterprise of leasing, we need to consider whether the sale proceeds are to be included in the calculation of your turnover. You have advised that your only other turnover for GST purposes was the rental income. There was no other turnover for GST purposes.

Section 23-5 of the GST Act states that you are required to be registered for GST if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed above, your activities of renting the property constitutes an enterprise thus satisfying paragraph 23-5(a) of the GST Act.

The next issue to consider is whether your GST turnover is $75,000 or more.

Subsection 188-10(1) of the GST Act provides that you have a GST turnover that meets the registration turnover threshold if:

(a)  your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)  your projected GST turnover is at or above $75,000.

'Current GST turnover' is defined in section 188-15 of the GST Act as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

'Projected GST turnover' is defined in section 188-20 of the GST Act as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Your only other income for current GST turnover purposes is the rental of the property and that is input taxed and excluded by 188-15 of the GST Act.

Section 188-25 of the GST Act provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Taking into account your intention at the time of acquiring the Property (rental of residential premises) and subsequent lease of the Property we consider that the Property would be correctly classified as a 'capital asset'. Any proceeds from the sale of the Property would be disregarded for the purpose of calculating your projected GST turnover.

Given the above, your GST turnover does not meet the registration turnover threshold of $75,000 and as your projected turnover will reduce, you are not required to be registered for GST.

As you do not satisfy all of the requirements of section 9-5 of the GST Act, the transfer of your beneficial or equitable interest is not a taxable supply. GST is not payable by you on the disposal of allotment 1 and the disposal of your interest in allotment 2.

Capital Gains Tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base.

As outlined in section 112-25 of the ITAA 1997, the subdivision of land itself does not constitute a CGT event as there is no change of ownership. It is at the time of the disposal that any capital gain or capital loss may arise. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets. The subdivided blocks will retain the acquisition date of the original property (Taxation Determination TD 2000/10).

The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks.

Although the subdivision of your land was not a CGT event, it meant that you then had more than one CGT asset.

The most important element in the application of the CGT provisions when dealing with the disposal of a CGT asset is determining who the owner of the CGT asset was for CGT purposes at the time of disposal. Under section 104-10(1) of the ITAA 1997 a CGT event A1 happens if you dispose of a CGT asset. Under section 104-10(2) 'you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law'.

The CGT provisions will apply to you when you entered into the partitioning agreement (allotment 2) and any capital gain made on the disposal of your interest at this time is included in your assessable income.

It will also apply when you entered into the contract of sale to sell the CGT asset (allotment 1) to an unrelated third party. Any capital gain made on the disposal of allotment 1 should be included in your assessable income for that year.

CGT discount

A general 50% discount can be applied to a capital gain if certain conditions are met under Division 115 of the ITAA 1997. The main condition is that the CGT asset was acquired by you at least 12 months before the CGT event (section 115-25 of the ITAA 1997).

The first CGT event A1 occurred when you disposed of your interest in allotment 2. As you acquired your share in allotment 2 more than 12 months before the CGT event, you are entitled to a 50% discount on the capital gain from the original half share.

The second CGT event A1 occurred when you entered into a contract of sale to sell allotment 1 to the unrelated third party. As you acquired one-half share of allotment 1 more than 12 months before the CGT event, you are entitled to a 50% discount on the capital gain from the original one-half share. As you acquired the remaining one-half share in allotment 1 during the 12 months prior to the CGT event you are not entitled to apply the 50% discount to any capital gain you make on that share.