Edited version of private advice

Authorisation Number: 1051960635844

Date of advice: 17 March 2022

Ruling

Subject: GST and sale of a tax law partnership's property

Question

Will the Taxpayers be required to be registered for GST at settlement under the Contract of Sale?

Answer

No.

This ruling applies for the following period:

The scheme commences on:

24 January 20XX

Relevant facts and circumstances

An entity (a tax law partnership) conducted an enterprise in relation to a property.

The entity is selling the property used in the carrying on of its enterprise.

At the time of sale the entity will not be registered or required to be registered for GST.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-1

A New Tax System (Goods and Services Tax) Act 1999 sections 188-5, 188-10, 188-15, 188-20 & 188-25

Reasons for decision

Hereon any reference to the partnership is a reference to the Taxpayers and vice versa.

According to the information provided the Taxpayers are in a tax law partnership, are not, and have never been, registered for GST.

Subsection 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that for GST purposes entities include a partnership.

The term partnership is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to include 'an association of persons carrying on business as partners.'

This aspect of the definition imports the common law meaning of partnership, being the relationship, which exists between persons carrying on business in common with a view to profit.

Goods and Services Tax Ruling GSTR 2004/6 explains how the GST Act applies to transactions involving tax law partnerships.

Paragraph 52 of GSTR 2004/6 provides that the definition of 'entity' includes a partnership. The moment a tax law partnership exists it is an entity for GST purposes. The GST Act treats the partnership as an entity separate from its partners.

Paragraph 8 of GSTR 2004/6 provides that a partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the 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 following paragraphs have been reproduced from GSTR 2004/6:

9. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. We refer to this type of partnership as a general law partnership.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

18. A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership)... in receipt of ordinary income or statutory income jointly'.

Receipt of income

25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income.

Therefore, according to the information provided the Taxpayers can be considered to have formed a tax law partnership.

Should the partnership be registered for the GST?

Under subsection 23-5 of the GST Act you are required to be registered if you are carrying on an enterprise, and your GST turnover meets the registration turnover threshold.

We have been informed of the following:

•         the homestead (and surrounding land has been used in connection with and for the better enjoyment of the homestead) has been occupied by the Taxpayers as their main residence at all times since it was constructed (with some Airbnb letting on weekends),

•         the only enterprise of the Taxpayers is the leasing of the Property's paddocks to the Trust for the last xx years,

•         the Taxpayers are selling the Property with vacant possession,

•         the Taxpayers are not registered for GST, and

•         the Taxpayers are not intending to carry on another enterprise in the 12 months following settlement under the Contract of Sale.

According to the lease agreement the partnership has been conducting an enterprise in relation to the leasing of part of the Property to the Trust for the last xx years, being the part used for farming and the production of beef and lamb comprising approximately of xx hectares (paddocks) Therefore, the partnership has been conducting an enterprise in relation to the property and satisfies the first requirement for registration. To satisfy the second requirements, the partnership's GST turnover must meet the registration turnover threshold.

Subsection 188-10 (1) of the GST Act provides that an entity has a GST turnover that meets a particular turnover threshold if:

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

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

Regulation 23-15.01 of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) states the registration turnover threshold for non-profit bodies is $75,000.

Section 188-15 of the GST Act defines 'current GST turnover'. The 'current GST turnover' at any time during a particular month is the sum of the values of all the supplies that an entity makes, or are likely to make, during the current month and the preceding 11 months.

Section 188-20 of the GST Act defines 'projected GST turnover'. The 'projected GST turnover' at a time during a particular month is the sum of the values of all the supplies that an entity makes, or are likely to make, during that month and the next 11 months.

Section 188-25 of the GST Act provides for the exclusion of certain supplies made when working out an entity's projected GST turnover. Section 188-25 requires the entity to disregard the following when calculating its projected GST turnover:

(a)  any supply made, or likely to be made, by the entity by way of transfer of ownership of their capital assets; and

(b)  any supply made, or likely to be made, by the entity solely as a consequence of:

                                      I.        ceasing to carry on an enterprise; or

                                    II.        substantially and permanently reducing the size or scale of an enterprise

An entity's projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. An entity's supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b).

As provided by section 188-25 of the GST Act in working out its projected GST turnover an entity can disregards any supply made, or likely to be made, by it by way of transfer of ownership of a capital asset of theirs. In addition, this section states to disregard any supply made, or likely to be made, by an entity solely as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

The partnership has carried on an enterprise of leasing on the land. As such, the sale of the property by the partnership will be in the course or furtherance of its enterprise.

The relevant issue for consideration is whether the sale of the property is the transfer of ownership of a capital asset of the partnership, such that it can be excluded from the calculation of its projected GST turnover.

Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) refers to the meaning of GST turnover. Paragraphs 31-32 of GSTR 2001/7 state:

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.

The partnership carried on an enterprise of leasing on the land. As such, the property was a capital asset that made up 'the profit yielding subject' of its leasing enterprise.

Over the period that an asset is held by an entity, its character may change from capital to revenue or vice versa. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply. When the partnership sells the property, that property will be a capital asset at the time of the sale as it has previously been used as the 'profit yielding subject' of an enterprise.

Paragraph 108 of GSTR 2004/6 explains 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. In these cases, 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.

We consider that the sale of the Property by the partnership to the purchaser will constitute the supply of a "capital asset". The Property was not acquired for the primary purpose of resale. Further, the homestead (and surrounding land used in connection with and for the better enjoyment of the homestead) has been occupied by the partners as their main residence at all times since it was constructed (with some Airbnb letting on weekends), and the paddocks have been leased to the Trust for the last xx years.

Accordingly, the sale of the partnership's property will be disregarded when calculating its projected GST turnover. Consequently, the partnership is not required to register for GST when it sells the property.

Division 72 of the GST Act will not apply in this case as the Trust as an associate is registered for the GST and acquires the thing supplied for a creditable purpose.