Edited version of private advice

Authorisation Number: 1051853589746

Date of advice: 24 June 2021

Ruling

Subject: Disposal of property - GST and CGT

Issue 1 - Capital Gains Tax

Question 1

Will the disposal of Person A's share of Property B to Person B be subject to capital gains tax (CGT)?

Answer 1

Yes

Question 2

Will there be any CGT exemptions or rollovers available on the disposal of Person A's share of Property B to Person B?

Answer 2

No

Question 3

Is there a discount available on the CGT incurred in relation to the disposal of Person A's share of Property B to Person B?

Answer 3

Yes

Question 4

Will the disposal of Person B's share of Property A to Person A be subject to capital gains tax?

Answer 4

Yes

Question 5

Will there be any CGT exemptions or rollovers available on the disposal of Person B's share of Property A to Person A?

Answer 5

No

Question 6

Is there a discount available on the CGT incurred in relation to the disposal of Person B's share of Property A to Person A?

Answer 6

Yes

Issue 2 - Goods and Services Tax

Question 1

Will the supply of Property A be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No

Question 2

Will the supply of Person A's X% interest in Property B to Person B be a taxable supply under section 9-5 of the GST Act?

Answer 2

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

Person B and Person A (collectively, You) are parent and adult child.

Person B and Person A are not registered for GST individually or jointly.

On XX XXXX 20XX you purchased the Property as tenants in common.

The Property was Person B's residence.

In 20XX you demolished the Property and built two townhouses which were completed in XXXX 20XX.

Your intention was to continue to have a residence for Person B and a townhouse for rental. Once the townhouses were built Person B moved into one townhouse and the other has been rented out.

On XX XXXX 20XX the Property was subdivided into:

•         Property A, your rental property.

•         Property B, Person B's residence.

Person B and Person A each have a 50% ownership in Property A and Property B.

Person B and Person A each receive 50% of the income from Property A.

Person B wishes to transfer 50% ownership in Property A to Person A, so that Person A has 100% ownership of Property A.

Person A wishes to transfer 50% ownership in Property B to Person B, so that Person has 100% ownership of Property B.

Person B will continue to live in Property B. Person A will continue to rent out Property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-75

Income Tax Assessment Act 1997 section 118-85

Income Tax Assessment Act 1997 Subdivision 124-B

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

A New Tax System (Goods and Services Tax Act) 1999 section 9-40

Reasons for decision

Issue 1 - Capital Gains Tax

Capital gains tax (CGT) is imposed on capital gains made from a relevant CGT event. Land and buildings are classified as capital assets[1], and as the Property was co-owned each share is treated as a separate CGT asset. When a CGT asset changes ownership, this is a disposal and therefore a CGT event, in this case a CGT A1 event[2].

With CGT there are certain times a capital gains event is exempt from CGT. In relation to land and property this happens if the property is your main residence[3], in relation to a marriage or relationship breakdown[4], or in relation to a special disability trust[5].

You can rollover your capital gain in certain circumstances, in relation to property this would be if your property was lost, destroyed or compulsorily acquired[6].

If you meet certain requirements[7] you can have your capital gain discounted, for individuals who are not foreign residents this is 50%[8]. An individual[9] who owns a CGT asset for more than 12 months[10] and the cost base of the asset has not been indexed[11], is eligible to the discount.

Question 1

Person A is going to transfer her ownership in Property B to Person B. This results in a CGT A1 event occurring; therefore, this transfer is subject to CGT.

Question 2

Person A has never lived in Property B; therefore, the main residence CGT exemption cannot apply to this transfer. There are no other CGT exemptions available in this scenario, and as this property was not lost, destroyed or compulsorily acquired, there are no rollovers available to this transfer.

Question 3

As Person A has had an ownership percentage in Property B for over 12 months, they will be entitled to a 50% discount on their capital gain.

Question 4

Person B is going to transfer her ownership in Property A to Person A. This results in a CGT A1 event occurring; therefore, this transfer is subject to CGT.

Question 5

Person B has never lived in Property A; therefore, the main residence CGT exemption cannot apply to this transfer. There are no other CGT exemptions available in this scenario, and as this property was not lost, destroyed or compulsorily acquired, there are no rollovers available to this transfer.

Question 6

As Person B has had an ownership percentage in Property A for over 12 months, they will be entitled to a 50% discount on their capital gain.

Issue 2 - Goods and Services Tax

In this reasoning, please note:

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Question 1

An entity is liable for GST on any taxable supplies that it makes.[12]

Person B and Person A receive income from renting out Property A (the rental property). Person B wishes to transfer 50% ownership in Property A to Person A, so that Person A has 100% ownership of Property A.

For taxation purposes a tax law partnership may exist where persons are in receipt of income jointly. For example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. A tax law partnership is an entity in its own right.[13]

The moment a tax law partnership exists, it is an entity for GST purposes and the GST Act treats the tax law partnership as an entity separate from its partners.[14]

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

Relevantly, Paragraph 108 of GSTR 2004/6 outlines that if a co-owned property is converted from a non-income producing use to an income producing use, a tax law partnership is formed when the co-owners enter into the agreement to convert the property. The property becomes an asset of the partnership when the partnership is formed, and the asset commences to be used for the purposes of the enterprise of the partnership. Any subsequent supply of the property or an interest in the property, is a supply by the partnership.

When Person B and Person A decided to demolish the house used as Person B's residence (non-income producing use) and built a townhouse for rental (income producing use) a tax law partnership was formed. Further, once Property A was rented out it became an asset of the Partnership.

Therefore, Person B and Person A are a tax law partnership (the Partnership) and Property A is an asset of the Partnership, which is carrying on a leasing enterprise, and making residential rental supplies.

The sale of a property which is used in carrying on an enterprise by a partnership is a supply by the partnership and not by the co-owners.[15] This means, for the Partnership to facilitate Person A having 100% ownership of Property A, the Partnership will supply 100% of Property A (the Partnership asset) to Person A.

If the Partnership proceeds with its intention to transfer Property A it will make a supply of 'new residential premises', defined in section 40-75 to include premises that have not previously been sold as residential premises. A sale of new residential premises will be taxable where all the requirements of section 9-5 are satisfied.

Section 9-5 provides that 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.

Whilst the Partnership may supply Property A without consideration, a special rule under section 72-5 ensures that a supply to an associate (a partnership and its partners are associates) does not stop that supply being a taxable supply if the associate is not registered or required to be registered for GST, despite paragraph 9-5(a). Therefore, if the supply is a taxable supply, paragraph 9-5(a) will be satisfied. If the supply is a taxable supply, its value is the GST exclusive market value of the supply[16].

The Partnership will also satisfy paragraphs 9-5(b) and 9-5(c) as it will be selling Property A located in Australia in the course or furtherance of its leasing enterprise. Further, the supply of Property A will neither be GST-free or input taxed in this circumstance.

Therefore, if the Partnership is required to be registered for GST, the Partnership will make a taxable supply when it transfers Property A to Person A.

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

•         it is carrying on an enterprise, and

•         its GST turnover meets the registration turnover threshold (currently $75,000).

We have already established the Partnership is carrying on a leasing enterprise.

Of relevance is the Partnerships projected GST turnover. Under section 188-20 an entities 'projected GST turnover' at a time during a particular month is the sum of the values of all the supplies it's made, or is likely to make, during that month and the next 11 months, subject to the exclusion of certain types of supplies, including supplies that are input taxed. Relevantly, section 188-25 disregards the transfer of ownership of capital assets.

The Partnership's supplies of residential rental are input taxed and therefore excluded from its projected GST turnover calculation. We also consider that Property A is a capital asset[17] and as such its transfer is disregarded when calculating the Partnerships projected GST turnover.

The Partnership is not required to be registered for GST.

Therefore, as all the requirements of section 9-5 are not satisfied the supply of Property A will not be a taxable supply and GST will not be payable on the transfer.

Question 2

You are liable for GST on any taxable supplies that you make.[18]

The requirements of a taxable supply under section 9-5, set out in full above, include that the supply is made in the course or furtherance of an enterprise that you carry on.

Subsection 9-20(1) defines enterprise in part as:

An enterprise is 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, licence or other grant of an interest in property; or

...

Person A wishes to transfer 50% ownership in Property B to Person B, so that Person B has 100% ownership of Property B, Person B's main residence.

We consider that Property B is a private asset[19] and do not consider that the supply of Person A's 50% interest in Property B to Person B is made in the course or furtherance of any enterprise that you carry on.

Therefore, you are not making a taxable supply will not be liable for GST on the transfer.

[1] Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)

[2] Section 104-10 of the ITAA 1997

[3] Subdivision 118-B of the ITAA 1997

[4] Section 118-75 of the ITAA 1997

[5] Section 118-85 of the ITAA 1997

[6] Subdivision 124-B of the ITAA 1997

[7] Section 115-5 of the ITAA 1997

[8] Section 115-100 of the ITAA 1997

[9] Section 115-10 of the ITAA 1997

[10] Section 115-25 of the ITAA 1997

[11] Section 115-20 of the ITAA 1997

[12] Section 9-40

[13] Paragraphs 41 to 43 of 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

[14] Paragraph 52 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property

[15] Paragraph 234 of GSTR 2004/6

[16] Section 72-10

[17] Paragraphs 31 to 36 of 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

[18] Section 9-40

[19] Paragraph 244 of 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