Edited version of private advice

Authorisation Number: 1051848707721

Date of advice: 13 July 2021

Ruling

Subject: GST and sale of townhouse units

Question 1

Will the sale of Unit 1 by A Family Trust and B Family Trust be subject to GST?

Answer

No. The sale of Unit 1 will not be subject to GST.

Question 2

Will the sale of Unit 2 by A Family Trust be subject to GST?

Answer

Yes. The sale of Unit 2 will be subject to GST.

Question 3

Will the sale of Unit 3 by B Family Trust be subject to GST?

Answer

No. The sale of Unit 3 will not be subject to GST.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

Relevant facts and circumstances

In 20XX, three parties acquired a residential property located in Australia (the property) as tenants in common, each holding a 1/3 interest.

The parties were:

•                    A Family Trust;

•                    B Family Trust; and

•                    C Family Trust.

The intention of each party was to hold the property for long term and undertake a subdivision of the property into three lots so each party could have an investment property or owner occupied property at completion.

In 20XX, C Family Trust sold its 1/3 share to A Family Trust and B Family Trust resulting to A Family Trust and B Family Trust each owning 50% interest in the property.

In 20XX, a contract to construct 3 townhouse units was entered into with a building company. The construction was completed in mid-20XX.

No GST credits were claimed in relation to the property.

All three units were rented out immediately after construction and continue to be held for rent.

In Month 20XX, the property was strata titled as follows:

•                    Unit 1 to A Family Trust and B Family Trust as tenants in common;

•                    Unit 2 to A Family Trust; and

•                    Unit 3 to B Family Trust.

A Family Trust and B Family Trust are facing cash flow pressures and are considering selling at least one of the units. Extensive damages were caused by tenants in Unit1 and Unit 3. The cost of the repairs will total in excess of $X. Loss of rent income until repairs are completed is $X per week. In addition, a dispute with the insurer regarding claims caused significant cash flow pressure.

As regards Unit1:

•                    It was previously managed by an independent property manager when tenanted.

•                    All the rent payments were received and deposited to a joint account of the co-owners.

•                    All expenses were paid from the joint account of the co-owners.

•                    The co-owners jointly pay all liabilities relating to Unit 1 according to their ownership interest.

•                    It is currently vacant as repairs have just been finished.

A Family Trust is registered for GST in relation to other activities conducted by the trust.

B Family Trust is not registered for GST.

A Family Trust and B Family Trust are not registered together as a partnership.

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

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

Reasons for decisions

1.            GST is payable on a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act) 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 the indirect tax zone; 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.

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

The sale of Unit 1 will be made for consideration. The sale will be connected with Australia as Unit 1 is situated in Australia. The requirements in paragraphs 9-5(a) and 9-5(c) above are satisfied.

What remains to be determined is whether the sale of the property is made in the course or furtherance of an enterprise that A Family Trust and B Family Trust carry on together [paragraph 9-5(b)] and whether A Family Trust and B Family Trust are together required to be registered when they sell Unit 1 [paragraph 9-5(d)].

Paragraph 9-5(b)

While A Family Trust and B Family Trust are not registered as a partnership, we consider that A Family Trust and B Family Trust are in a tax law partnership in respect of Unit 1.

A tax law partnership is an association of persons in receipt of ordinary income or statutory income jointly. A Family Trust and B Family Trust are co-owners of Unit 1 who are in receipt of rental income jointly.

Goods and Services Tax Ruling GSTR 2004/6 explains the GST consequences of the formation of a tax law partnership particularly on whether an enterprise is carried on by the tax law partnership for GST purposes.

Paragraph 60 of GSTR 2004/6 contains our view that a tax law partnership is capable of carrying on an enterprise. The following factors listed in paragraph 62 may point to an enterprise being carried on by a tax law partnership, not by each co-owner:

•                    an oral or written agreement (for example, a syndicate agreement or agreement between family members) determines the mutual rights and obligations of the parties. This agreement may be made before the acquisition of property or it may be made later;

•                    the income producing property is jointly acquired by the co-owners under a single contract

•                    property is held by the co-owners as joint tenants;

•                    the co-owners fund their acquisition of the income producing property out of joint borrowings or funds;•

•                    the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners;

•                    the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise;

•                    income from the income producing property is paid into a joint bank account of the co-owners;

•                    expenses relating to the income producing property are paid from a joint bank account of the co-owners; and

•                    the co-owners jointly pay all liabilities in relation to the income producing property.

A Family Trust and B Family Trust, together with C Family Trust, initially purchased the property under a single contract. The intention was to hold the property for long term and subdivide it so that each co-owner will have an investment property or an owner-occupied property.

A Family Trust and B Family Trust subsequently acquired the interest held by C Family Trust on the property. After subdividing the property, three townhouse units were built which were leased upon completion. A Family Trust and B Family Trust hold interests in Unit 1 as tenants in common.

Unit 1 was previously managed by an independent property manager when tenanted. All the rent payments were received and deposited to a joint account of A Family Trust and B Family Trust. All expenses were paid from the joint account. A Family Trust and B Family Trust jointly pay all liabilities relating to Unit 1 according to their ownership interest.

Despite A Family Trust and B Family Trust holding interests in Unit 1 as tenants in common, all other information about the activities carried out in relation to Unit 1 point to an enterprise being carried on by the tax law partnership of A Family Trust and B Family Trust. Therefore, the sale of Unit 1 will be made in the course of an enterprise that the tax law partnership carries on.

Paragraph 9-5(b) of the GST Act will be satisfied.

Paragraph 9-5(d)

Section 23-5 of the GST Act provides that an entity is required to be registered if:

(a)          the entity is carrying on an enterprise; and

(b)          the entity's GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for a non-profit body).

As we determined that the tax law partnership is carrying on an enterprise, it must be determined whether its GST turnover meets the registration turnover threshold.

Subsection 188-10(1) of the GST Act states:

You have a GST turnover that meets a particular turnover threshold if:

(a)          your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover the threshold; or

(b)          your projected GST turnover is at or above the turnover threshold.

According to subsections 188-15(1) and 188-20(1) of the GST Act, supplies that are input taxed are not included in calculating current and projected GST turnover. As the supply of residential premises by way of lease is input taxed under section 40-35, the rent payments received by the tax law partnership in respect of Unit 1 are not included in calculating its GST turnover.

Section 188-25 of the GST Act further provides that any supply made, or likely to be made, by way of transfer of ownership of a capital asset is disregarded in working out the projected GST turnover. Generally, a capital asset is an asset held to produce income. Unit 1 is an asset held by the tax law partnership to produce rental income. Therefore, the sale of Unit 1 is disregarded in working out the projected GST turnover of the tax law partnership

Given than the rental income received by the tax law partnership and the proceeds from the sale of Unit 1 are disregarded in calculating its GST turnover, the GST turnover will not meet the registration turnover threshold. Accordingly, the tax law partnership would not be required to register for GST when it sells Unit 1.

Paragraph 9-5(d) of the GST Act will not be satisfied.

As the sale of Unit 1 will not satisfy all the requirements in section 9-5 of the GST Act, the sale will not be a taxable supply and will not be subject to GST.

2.            The sale of Unit 2 will satisfy all the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

a.            the sale will be consideration; and

b.            the sale will be made in the course of the leasing enterprise that A Family Trust carries on; and

c.            the sale will be connected with Australia as Unit 2 is situated in Australia; and

d.            A Family Trust is registered for GST.

Therefore, the sale of Unit 2 will be a taxable supply unless it is GST-free or input taxed.

There is no provision in the GST Act under which the sale of Unit 2 will be GST-free.

Under section 40-65 of the GST Act, the sale of residential premises is input taxed unless the residential premises are commercial residential premises or new residential premises.

Unit 2 is not commercial residential premises which are defined to mean a hotel, motel, inn, hostel and boarding amongst others.

Under subsection 40-75(1) of the GST Act, residential premises are new residential premises if they:

a.            have not been previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

b.            have been created through substantial renovations of a building; or

c.             have been built, or contain a building that has been built, to replace demolished premises.

Under subsection 40-75(2) of the GST Act, residential premises are not new residential premises if they have only been used leased for the period of at least 5 years since:

a.            if not previously been sold as residential premises, the premises first became residential premises; or

b.            if created through substantial renovations, the premises were last substantially renovated; or

c.            if built to replace demolished premises, the premises were last built.

Unit 2 is new residential premises that have only been leased since they were built; however, they have been leased for less than 5 years. Therefore, Unit 2 remains new residential premises and its sale will not be input taxed under section 40-65 of the GST Act.

As the sale of Unit 2 will satisfy all the requirements of section 9-5 and will not be GST-free nor input taxed, the sale will be a taxable supply and will be subject to GST.

3.            The sale of Unit 3 by B Family Trust will satisfy the requirements in paragraphs 9-5(a), 9-5(b), and 9-5(c) of the GST Act as follows:

a.            the sale will be for consideration; and

b.            the sale will be made in the course of the leasing enterprise that Wong carries on; and

c.            the sale will be connected with Australia as Unit 3 is situated in Australia.

B Family Trust is currently not registered for GST; thus, it must be determined whether B Family Trust will be required to register when it sells Unit 3.

Unit 3 is an asset held by B Family Trust to produce rental income; as such, the sale of Unit 3 will be disregarded in working out its projected GST turnover. The rental income received by B Family Trust in respect of Unit 3 is also disregarded in calculating its GST turnover. Therefore, B Family Trust's GST turnover will not meet the registration turnover threshold. B Family Trust will not be required to register when it sells Unit 3. Paragraph 9-5(d) of the GST Act will not be satisfied.

As the sale of Unit 3 will not satisfy all the requirements in section 9-5 of the GST Act, the sale will not be a taxable supply and will not be subject to GST.