Edited version of private advice

Authorisation Number: 1052253571741

Date of advice: 29 May 2024

Ruling

Subject: GST - supply of a partnership asset

Question

Is XXXX (the Partnership) liable to pay GST on the full market value of the commercial property located in Australia (the Property) if it sells it to its partner for 50% of its market value?

Answer

No. The Partnership is liable to pay GST equal to 1/11 of the consideration paid by its partner.

This ruling applies for the following period:

ddmmyyyy to ddmmyyyy

Relevant facts and circumstances

The Partnership is registered for GST.

A bought the Property with B as tenants in common on a specified date. A purchased his 50% interest in the Property for a specified amount.

B sold their 50% interest in the Property to C on a specified date for a specified amount.

There is no written partnership agreement between A and C.

A and C are not related entities and deal with each other at arm's length.

The Partnership has been leasing the Property to C for its full market value.

The Partnership has been issuing tax invoices to C for lease of the Property and paying GST on the lease income.

The Partnership has been claiming input tax credits on expenses relating to the Property.

A and C hold a joint account into which income from the Property is paid and expenses relating to the property are paid from.

The market value of the Property is currently around a specified amount (GST exclusive). The Partnership intends to sell the Property to C for 50% of its full market value.

The Property is the only asset of the Partnership. The Partnership is not carrying on any other enterprise.

C is registered for GST.

C currently operates a specified business and uses the Property as a warehouse. C will continue to use the Property solely in its business after it purchases the Property from the Partnership.

A is not 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 9-70

A New Tax System (Goods and Services Tax) Act 1999 section 72-70

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

Reasons for decision

Question

Is the Partnership liable to pay GST on the full market value of the Property if it sells the Property to C for 50% of its market value?

Summary

As the Property is the asset of the Partnership, the Partnership is making a taxable supply when it sells the Property to C.

Division 72 of the GST Act does not apply if the Property is sold to C for 50% of its market value (inadequate consideration). This is because C is registered for GST and acquires the Property solely for a creditable purpose.

The Partnership therefore is liable to pay GST equal to 10% of the value for which it sells the Property to C.

Detailed reasoning

XXXX is a partnership under the second limb of paragraph (a) of section 995-1 of the Income Tax Assessment Act 1997, as it is an association of persons in receipt of ordinary income or statutory income jointly.

As such, XXXX is a tax law partnership and is a separate entity to its partners for tax purposes (section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)).

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

Paragraph 99 of GSTR 2004/6 provides that a tax law partnership can have assets and liabilities.

Paragraph 108 of GSTR 2004/6 provides that when an asset is used for the purposes of the enterprise of the partnership, the property becomes an asset of the partnership. Any subsequent supply of the property or an interest in the property, is a supply by the partnership.

In the present case, the Property is an asset of the Partnership as it has been used for the purpose of the leasing enterprise carried on by the Partnership. Therefore, the sale of the Property is a supply by the Partnership.

The supply of the Property by the Partnership is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Section 9-70 of the GST Act provides that the amount of GST on a taxable supply is 10% of the value of the taxable supply.

As the Partnership intends to sell the Property to C for less than its full market value, Division 72 of the GST Act needs to be considered.

Division 72 of the GST Act deals with supplies to associates without consideration or for inadequate consideration. Division 72 ensures that supplies to, and acquisitions from, associates without consideration are brought within the GST system, and that supplies to associates for inadequate consideration are properly valued for GST purposes. If Division 72 applies, the value of the supply is its GST exclusive market value.

The term 'associate' is defined in section 195-1 of the GST Act by reference to section 318 of the Income Tax Assessment Act 1936.

A partnership and its partners are associates under the GST Act. Therefore, Division 72 of the GST Act may apply to supplies between a partnership and its partners.

Subdivision 72-C of the GST Act may apply to a supply made between a partnership and its partners if the consideration for the supply is inadequate. This subdivision does not apply if the recipient is both registered and makes the acquisition solely for a creditable purpose. Section 72-70 of the GST Act states:

(1) If a supply to your *associate for *consideration that is less than the *GST inclusive market value is a *taxable supply, its value is the *GST exclusive market value of the supply.

(2) Subsection (1) does not apply if:

(a) your associate is *registered or *required to be registered; and

(b) your associate acquires the thing supplied solely for a *creditable purpose.

(3) This section has effect despite section 9-75 (which is about the value of taxable supplies).

(* Denotes a term defined in section 195-1 of the GST Act.)

In the present case, if the Partnership sells the Property to C for 50% of its market value, then the supply is for inadequate consideration. However, as C is registered for GST and acquires the Property solely for a creditable purpose, subsection 72-70(1) of the GST Act does not apply.

Accordingly, where the Partnership sells the Property to C for 50% of its market value, the Partnership will be liable to pay GST equal to 10% of that value.