Edited version of private advice

Authorisation Number: 1051914541371

Date of advice: 9 November 2021

Ruling

Subject: GST and transfer of real property

Question

Is the Fund liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 when it makes an in-specie distribution of new residential premises to a Fund Member?

Answer

Yes.

Relevant facts and circumstances

The entity is a self-managed superannuation fund (the Fund).

The Fund is registered for the goods and services tax (GST).

More than a decade ago, the Fund purchased a property situated in Australia.

This property was rented out by the Fund for several years.

Subsequently, a subdivision was done, and construction commenced on two new residential buildings.

The Fund sold one of the residential premises as a taxable supply.

The Fund has rented the other residential premises (the property) for less than five years prior to the transfer of the property to the Fund Member.

On the specified date, the Fund made an in-specie distribution of the property in favour of the Fund Member who is a beneficiary of the Fund.

The Fund Member moved in and has lived in the property as the sole and principal residence since then.

The Fund member does not carry on any business or enterprise activities and is not registered or required to be 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 9-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(1)

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

A New Tax System (Goods and Services Tax) Act 1999 Division 72

A New Tax System (Goods and Services Tax) Act 1999 Subsection 72-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 72-5(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 72-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

In this reasoning, unless otherwise stated,

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

where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

reference material(s) referred to are available on the Australian Taxation Office (ATO) websitewww.ato.gov.au

GST is payable on taxable supplies.

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

A taxable supply is defined in section 9-5 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 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.

The term 'supply' is defined in section 9-10 and includes any form of supply whatsoever. Paragraph 9-10(2)(d) further clarifies that a 'supply' includes a grant, assignment or surrender of real property. Therefore, the in-specie distribution of the Property by the Fund to the Fund Member is a supply.

Consideration

'Consideration' is defined in subsection 9-15(1) to include any payment, or any act or forbearance, in connection with, in response to or for the inducement of, a supply of anything.

In the case of a discretionary trust, a beneficiary does not have vested interest in either the income or the assets of the trust. The beneficiary merely has a right to demand that the trustee administers the trust according to the trust deed. As such, when the trustee makes a distribution, the beneficiary has no rights to surrender and gives no consideration. Given that a superannuation fund is considered as a special trust, we consider that these principles can be applied to this case, when the Fund makes an in-specie distribution to the Fund Member who is a beneficiary.

However, although the supply is not being made for consideration, a distribution made by the Fund may still be a taxable supply where Division 72 applies. Special rules contained in Division 72 provide that supplies between associates without consideration are brought within the GST system and may still meet the requirements of a taxable supply.

Subsection 72-5(1) provides that a supply to an associate for no consideration will not stop the supply being a taxable supply if the associate is not registered or required to be registered, or the associate acquires the thing supplied otherwise than solely for a creditable purpose.

The term 'associate' is defined in section 195-1 with reference to section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(3) of the ITAA 1936 provides that an associate of a trustee includes any entity that benefits under the trust (a beneficiary).

In this case, the Fund is making an in-specie distribution to a beneficiary (associate) who is not registered or required to be registered for GST. The beneficiary does not provide any consideration in respect to the transfer of the Property. Therefore, the supply meets the requirements of section 72-5.

Subsection 72-5(2) provides that subsection 72-5(1) will have effect despite paragraph 9-5(a) requiring a taxable supply to be for consideration.

In the course or furtherance of an enterprise that you carry on

The issue of whether the transfer of the Property is made in the course or furtherance of an enterprise that you carry on as required under paragraph 9-5(b) is discussed in Goods and Services Tax Determination GSTD 2009/1 Goods and services tax: is a supply by way of an in-specie distribution of an asset that is applied in an enterprise carried on by a discretionary trust to a beneficiary of the trust made 'in the course or furtherance of the trust's enterprise?

Paragraph 9 of GSTD 2009/1 states:

9. The application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise. The fact that the supply in question was made by way of an in-specie distribution rather than by sale does not alter the analysis. Entities can dispose of assets in a number of ways. The method of itself is not relevant to whether the supply is in the course or furtherance of the enterprise.

In this case the Fund carries on an enterprise of land and property development and has made a supply of the Property constructed in carrying on its enterprise. Therefore, we consider the transfer of the Property to the beneficiary to be done in the course or furtherance of an enterprise that the Fund carries on.

Connected with the indirect tax zone and registration

The Property is connected with the indirect tax zone as it is located in Australia and the Fund is registered for GST as required under paragraphs 9-5(c) and 9-5(d) respectively.

GST-free and Input taxed supplies

On the facts, the transfer of the Property would not be GST-free under Division 38 and would not be input taxed under Division 40.

Consequently, the in-specie distribution of the Property by the Fund to the Fund Member is a supply that fulfils all the requirements of section 9-5 and section 72-5. Therefore, the Fund is making a taxable supply under section 9-5 when it makes an in-specie distribution to the Fund Member.

Conclusion

As the supply/transfer of the Property by the Fund to the Fund Member will be a taxable supply, the Fund will be liable to pay the GST payable on the supply pursuant to section 9-40.

Note that:Subsection 72-10(1) provides that if a supply to your associate without consideration is a taxable supply, its value is the GST exclusive market value of the supply.