Edited version of private advice

Authorisation Number: 1052255123032

Date of advice: 2 August 2024

Ruling

Subject: GST and in specie distribution of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you make an in specie distribution of real property to a beneficiary?

Answer

Yes.

This ruling applies for the following period:

<date> - <date>

The scheme commenced on:

<date>

Relevant facts and circumstances

You are registered for GST in the capacity as a trustee for a trust.

You carry on an enterprise of leasing commercial property.

Individual A (beneficiary) is a beneficiary of the trust

You acquired a property located at <specified address>.

At the time of acquisition the property contained a residential premises.

You leased the property to an unrelated party from <date> until <date>.

You made the decision to demolish the original residential premises and subdivide the property into two lots and construct two new residential premises (one on each lot).

In <date>, a planning permit was issued for the construction of two dwellings on the property.

Your intention when you decided to develop and subdivide the property was to sell one (Lot 1) and retain the other (Lot 2).

You intend on transferring Lot 2 as an in specie distribution to the beneficiary.

The beneficiary will not provide consideration for the in specie distribution of Lot 2.

Construction of the two new dwellings on the property was completed on <date>.

You incurred development costs of <dollar amount> in relation to Lot 2.

You have claimed input tax credits in relation to the subdivision and development of the property (both Lot 1 and Lot 2).

Following the development of the Property:

•         Lot 1 was sold;

•         Lot 2 has been occupied by the beneficiary as their primary residence since construction was completed.

The estimated market value at the time of the proposed in specie distribution of Lot 2 will be more than <dollar amount>.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 40-35

Section 40-65

Section 40-75

Division 72

Section 72-5

Income Tax Assessment Act 1936

Subsection 318(3)

Reasons for decision

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999

Section 9-5 provides that you make a taxable supply if all of the following criteria are satisfied:

(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.

As Lot 2 is located in Australia and you are registered for GST, paragraphs 9-5(c) and 9-5(d) are satisfied.

The transfer, by way of an in specie distribution of Lot 2 will be a taxable supply if it is a supply made in the course or furtherance of an enterprise you, in your capacity as trustee of the trust carry on; and the supply is for consideration; and is neither GST-free, nor input taxed. There are no relevant provisions within the GST laws that would result in your in specie distribution being GST-free.

Enterprise

Subsection 9-20(1) provides, amongst other things, that an 'enterprise' includes an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Following the subdivision of the property and construction of the dwelling on Lot 2, the beneficiary has resided in Lot 2 as their primary place of residence effectively under a tenancy-at-will. By permitting the beneficiary to reside in Lot 2, you have granted a licence to occupy the property on a continuous basis. This satisfies the definition of an enterprise under paragraph 9-20(1)(c).

In specie distributions are 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? (GSTD 2009/1).

Paragraph 7 of GSTD 2009/1 explains that the phrase 'in the course or furtherance of' should be given a broad meaning so as to encompass supplies made in connection with the relevant enterprise. Paragraph 9 of GSTD 2009/1 continues, stating:

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.

Paragraph 10 of GSTD 2009/1 clarifies that the recipient's use doesn't affect whether the supply is made in the course or furtherance of the supplier's enterprise.

The transfer of Lot 2 of the property, by way of an in specie distribution will be a supply made in the course or furtherance of an enterprise that you carry on.

Consideration

Normally, a taxable supply must be made for 'consideration', however, Division 72 applies to some supplies made to an associate for nil or inadequate consideration. A beneficiary is defined by section 195-1 with reference to subsection 318(3) of the Income Tax Assessment Act 1936 as an 'associate' of a trustee of a trust.

Subsection 72-5(1) provides that the fact you make a supply to an associate for no consideration will not stop the supply from being a taxable supply if:

(a)  your associate is not registered or required to be registered; or

(b)  your associate acquires the thing otherwise than solely for a creditable purpose.

The beneficiary is neither registered nor required to be registered for GST. Therefore, the fact that the beneficiary will not provide consideration for the in specie distribution will not stop the distribution from being a taxable supply where all other requirements of section 9-5 are met.

Input taxed supplies

Generally, subsection 40-65(1) provides that a sale of real property that is residential premises to be used predominantly for residential accommodation is input taxed. However, paragraph 40-65(2)(b) provides that the sale is not input taxed if it is the sale of new residential premises.

New residential premises

Real property is new residential premises under paragraph 40-75(1)(c) if it has residential premises that have been built, or contain a building that has been built, to replace demolished premises on the same land. However, paragraph 40-75(2)(c) provides that a residential premises is not new residential premises if, for the period of at least 5 years since the premises were last built, the premises have only been used for making supplies that are input taxed by way of lease, hire or licence under paragraph 40-35(1)(a).

The premises that were built on Lot 1 and Lot 2 were built to replace the original residential dwelling on the land that existed when you purchased the property. Construction was completed on <date>. Therefore, if the premises on Lot 2 was only used for making input taxed supplies for a period of at least 5 years since completion, the premises is no longer new residential premises.

Lot 2 has been occupied by the beneficiary as their primary place of residence since construction was completed. You did not supply Lot 2 to the beneficiary by way of lease and the beneficiary was not required to pay rent. However, the beneficiary paid for the outgoings of Lot 2 such as council and water rates.

This means that you supplied the beneficiary a licence, or a right, to occupy Lot 2 and the supply is input taxed under paragraph 40-35(1)(a).

The circumstances in which residential premises are considered 'new residential premises' is also discussed in Goods and Services Tax Ruling GSTR 2003/3: Goods and services tax: when is a sale of real property a sale of new residential premises?

In the context of the exclusion to the definition of 'new residential premises' in subsection 40-75(2) discussed above, paragraph 91 of GSTR 2003/3 provides:

•         the period of 5 years must be a continuous period; and

•         a continuous period will not be broken by short periods between tenancies where the premises are actively marketed for rent following the departure by a previous tenant.

Paragraph 92 of GSTR 2003/3 further clarifies that 'a continuous period would not include periods when the premises are used for a private purpose or left vacant with no attempt to lease, hire or licence.'

Since the construction of the premises on Lot 2 was completed, it has been used solely as the primary place of residence of the beneficiary.

Lot 2 was used by the beneficiary for private purposes from the date construction was completed. As discussed above, the supply of Lot 2 to the beneficiary is an input taxed supply by way of a licence to occupy with premises. However, the exclusion from being new residential premises only applies if the premises has only been used for making input taxed supplies. Lot 2 has been used, and continues to be used, for the private purposes of the trust by allowing the beneficiary to reside in it. As such, this period is excluded when considering the use of the premises since it was last built for the purposes of paragraph 40-75(2)(c). Therefore, Lot 2 has not been used solely for making input taxed supplies pursuant to paragraph 40-35(1)(a) for a continuous period of at least 5 years from the date construction of the new dwelling on Lot 2 was completed and as such, the exclusion in subsection 40-75(2) will not apply. Consequently, Lot 2 is 'new residential premises' and as such, the supply of Lot 2 to the beneficiary via an in specie distribution will not be an input taxed supply.

Conclusion

The supply of Lot 2 to the beneficiary by way of an in specie distribution is not an input taxed supply and will therefore, be a taxable supply under section 9-5.