Edited version of private advice

Authorisation Number: 1051970410602

Date of advice: 12 April 2022

Ruling

Subject: GST and real property

Questions

1. Did Entity X make a taxable supply of their X% interest in Lot A under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when they acquired Entity Y's X% interest in Lot B on partition?

Answer

No.

2. Will the subsequent sale of Lot B by Entity X be subject to GST?

Answer

No.

This ruling applies for the specified period.

The scheme commences on the specified date.

Relevant facts and circumstances

By contract for the sale and purchase of land Entity X purchased a X% interest in the specified land in Australia (Property). The remaining X% interest was purchased by Entity Y as tenants in common in common in equal shares.

The Property comprises land and an original brick house which was constructed in the last century.

Entity X and Entity Y were not in a general law partnership.

When Entity X purchased the Property as tenants in common in equal shares with Entity Y, their intention was to subdivide the Property to construct two identical dwellings and to take ownership of a dwelling each.

Entity X purchased the property with the express purpose of subdividing the Property into two lots (Lot A and Lot B) and partitioning the land, in the manner set out in a Partition Agreement, following the construction of the dwellings.

Each party was separately invoiced and paid its own costs in respect of the development.

There were no separate financial statements prepared for the project and each party was responsible for its own financial management of the project.

On completion of the construction, the Property was partitioned, with Entity Y taking ownership of Lot A and Entity X taking ownership of Lot B.

Entity X always intended Lot B to be its main residence.

Entity X moved into Lot B and lived there as its main residence.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

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

Reasons for decision

GST is payable on taxable supplies under subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that it makes.

You make a taxable supply if you meet 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 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 in section 195-1 of the GST Act)

All the above requirements must be satisfied for a supply to be a taxable supply.

We need to determine whether there is a supply being made, before determining whether the supply meets the requirements of a taxable supply.

Partitioning

When the Property was partitioned on completion of the construction of the dwelling, Entity Y took ownership of Lot A and Entity X took ownership of Lot B.

The parties gave effect to the partition, by Entity Y transferring its 50% interest in Lot B to Entity X and by Entity X transferring its 50% interest in Lot A to Entity Y.

The term 'supply' is broadly defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. This wide definition of the term includes the transfer or conveyance of an interest in or right over land by a co-owner.

When Entity X purchased the Property as tenants in common in equal shares with Entity Y, their intention was to subdivide the Property to construct two identical dwellings and to take ownership of a dwelling each. Entity X was to use and has used the dwelling at Lot B as its primary place of residence. As such, the purpose of the arrangement for Entity X was private in nature.

The transfer by Entity X of its X% interest in Lot A to Entity Y and its acquisition of the X% interest in Lot B from Entity Y was a private arrangement.

As such, the transfer of Entity X' X% interest in Lot A to Entity Y is not a supply made in the course or furtherance of an enterprise that Entity X carries on. Consequently, the supply of its interest in Lot A is not a taxable supply as it would not satisfy all the requirements of a taxable supply.

Sale of Lot B

The sale would be a taxable supply where all the requirements under section 9-5 of the GST Act are met.

Relevantly, in this case, we need to consider whether the sale is made in the course or furtherance of an enterprise that Entity X carries on.

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity or series of activities done:

•                    in the form of a business

•                    in the form of an adventure or concern in the nature of trade

•                    on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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' (MT 2006/1).

Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 178 of MT 2006/1 lists a number of indicators to be considered when determining whether an activity or series of activities amount to a business.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case.

The sale of the family home, and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade.

On the facts provided, we consider that the sale by Entity X of its main residence identified as Lot B would not be in the course or furtherance of an enterprise that it carries on.

As the sale would not be in the course or furtherance of an enterprise carried on by Entity X, the sale will not meet all of the requirements for a taxable supply under section 9-5 of the GST Act.

Consequently, as the sale will not be a taxable supply, GST will not be payable on the sale of Lot B by Entity X.