Edited version of private advice

Authorisation Number: 1052354501298

Date of advice: 31 January 2025

Ruling

Subject:GST - sale of vacant subdivided lots of land

Question 1

Did the Partnership make taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when the Partnership sold the subdivided vacant lots located at XXX to unrelated third parties?

Answer 1

Yes, the Partnership made taxable supplies pursuant to section 9-5 of the GST Act when it sold the subdivided vacant lots located at XXX.

This ruling applies for the following period:

XX XXX XXXX to XX XXX XXXX

The scheme commenced on:

XX XXX XXXX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The expressions 'You/you (or your)' and 'the Partnership' refer to the partnership of list of partners and are used interchangeably throughout this ruling.

You provided a number of supporting documents relevant to this private ruling.

The Partnership

You are a partnership comprising of the following partners and their share of interest in the property located at XXX (the Property):

•                     Name 1 - XX%

•                     Name 2 - XX%

•                     Name 3 - XX%

•                     Name 4 - XX%

•                     Name 5 - XX%

(the Partnership).

You applied for an ABN on XX XXX XXXX and were issued ABN number with effective start date of XX XXX XXXX. Your ABN application lists your main activity as land development or subdivision (except construction). The Partnership was primarily formed to complete a specific development project discussed further below.

You registered for GST effective from XX XXX XXXX and report your GST obligations on a prescribed reporting basis.

It is expected that the Partnership will be dissolved upon the completion of the development project detailed below.

About the partners

Name 1

Name 1 (ABN: XXX) operates a land development and subdivision enterprise.

It has been registered for GST since XX XXX XXXX and reports its GST obligations on a prescribed reporting basis.

Name 1 participated in the development project with the intention to build a home on XX of their XX allocated subdivided lots and to sell their remaining allocated subdivided lots to a friendly party or on the open market for a profit.

Over time due to disagreements and uncertainty of future plans, the directors of Name 1 decided it would be better to use another of its developments to stay.

The other partners/landowners were informed on XX XXX XXXX of this and an exit strategy was proposed but no agreement was reached.

Name 2

Name 2 (ABN: XXX) was registered in XX XXX XXXX for investment purposes, however it remained dormant for almost XX years.

It is not registered for GST.

The directors of Name 2 participated in the development project with the intention to build their home on XX of their XX allocated subdivided lots and to allocate the other lot to their children to construct their home or to sell the other lot to a friendly party or on the open market.

The directors intend to deregister the company on completion of the development.

Name 3

Name 3 the Trustees for Name 3 Trust (ABN: XXX) oversee the investment activities of this discretionary investment trust.

The Trust is not registered for GST.

In their capacity of Trustees, Name 3 participated in the development project with the intention to build their home on X of their X allocated subdivided lots and to allocate the other lot to their children to construct their home or to sell the other lot to a friendly party or on the open market.

Name 4 and Name 5

These individuals initially participated in the development project with the intention to build their home on their allocated subdivided lot.

They are not jointly nor individually registered for GST.

Purchase of the Property

You purchased the Property on XX XXX XXXX (contract date) for an amount of $XXXXX.00. Settlement took place on XX XXX XXXX. The Property was formally known as Lot XX on Diagram XXX being the whole of the land contained in Certificate of Title Volume XXX Folio XXX (Lot XXX).

When purchased, the Property of approximately XXm² in land size contained several trees and an existing XX bedroom XX bathroom house with a kitchen and living area.

When the Property was purchased, the vendor was permitted to remain in the Property for XX months after settlement without charge to assist the vendor in relocating. The dwelling remained vacant after the vendor vacated and was demolished in XXX XXXX

The purchase of the Property (including stamp duty and settlement adjustments etc) was fully funded, without joint borrowing, by the partners based on their land shareholding.

The land shareholding is held by the parties on a 'Tenants in Common' basis.

The capital contributed by the partners is recorded under 'Proprietors Funds' in the Balance Sheet of the Partnership and the Property is listed as a 'Non-Current Asset' of the Partnership.

The development project

Whilst the partners did not formalise their intended use of the Property via a formal written agreement, the initial verbal agreement between the partners was to demolish the existing residence, subdivide the land and allocate the subdivided land in accordance with their land shareholding. Each partner intended to build their own private residences and to live together as a community. It was also agreed that all costs were to be split in accordance with the land shareholding ratio.

With a view to downsize for the partners planned to subdivide the Property into XX lots instead of XX lots so as to end up with a lot of a size that suited their purpose. The XX lots were to be distributed to the partners in accordance with their land shareholdings detailed above.

The partners to be allocated X lots each intended to use XX lot to construct the home of Name 2 (directors) and Name 3 respectively and to allocate the X lot to their children to also construct their home.

Name 1 who is to be allocated X lots, initially intended to develop X of their lots for sale and use X lot to construct a home for its director's use.

When undertaking the bushfire assessment of the Property in XX XXXX (prior to its purchase), it was found that the Property could only be subdivided into XX lots. Consequently, the partners made a decision to subdivide the Property in stages (refer below for further details), sell the X lots created in stage 1, distribute proceeds from the sales to the partners in accordance with their land shareholdings and transfer the X lots created in stage 2 to the partners in accordance with their land shareholdings in the Property.

It was expected that the sale of the X lots created in stage 1 would enable the owners to recuperate all of the development costs of stage 1 and the project management fee.

Project Manager

The partners engaged XX of Building Company 1 and entered into a formal written agreement (Management Agreement) proposed on XX XXX XXXX and executed on XX XXX XXXX (before contract to purchase the Property was executed), to manage the development project. Building Company 1 sourced and proposed the Property to the partners based on their requirements.

Building Company 1 is related to the Directors of Name 1.

Relevant extracts from the Management Agreement were considered.

Each partner had a representative involved in making the overall decisions based on recommendation from the Project Manager. Throughout the project the decision-making process by the partners was informal and done over social lunches/coffees in addition to text messages in between.

All subdivision activities undertaken by the Project Manager were done for and on behalf of the partners.

Stage 1

Subdivision of Lot XX into X lots

Subdivision commenced on XX XXX XXXX when you obtained approval to subdivide the Property into X lots as follows:

Table 1: Breakdown of stage 1

You provided a diagram of the subdivision of the Property.

The decision to stage the subdivision was made to avoid paying extra fees for subdivision and to allow the partners to recover some of their capital from the sale of the XX lots.

By XX XXX XXXX the directors of Name 1 had decided not to build their home on one of their allocated lots and they proposed an exit strategy to the parties, but no agreement was reached. The exit strategy involved allocating the lots created from Stage 2 to Name 1 and for the other parties to share in the XX lots created in Stage 2 in accordance with their ownership shareholding. The parties did not proceed with the exit strategy.

The titles for various Lots were issues on XX XXX XXXX

Sale of subdivided vacant Lots

You engaged real estate agent 1 to market and sell subdivided vacant Lots XX.

You engaged real estate agent 2 to market and sell subdivided vacant Lot XX.

Sale of lot XX

On XX XXX XXXX, you entered into a contract for the sale of subdivided vacant Lot XX located at XX for $XX Settlement took place on XX XXX XXXX.

Sale of lot XX

On XX XXX XXXX, you entered into a contract for the sale of subdivided vacant Lot XX located at XXX for XX. Settlement took place on XX XXX XXXX.

Sale of lot XX

On XX XXX XXXX you entered into a contract for the sale of subdivided vacant Lot XX located at XX for $XX. Settlement took place on XX XXX XXXX.

Proceeds from sale of Lots

The net proceeds (contract sale price minus real estate agent's commission, PEXA fees, settlement fees, adjustment for council, water rates and land tax etc) from the sale of these lots were distributed directly to the partners on settlement in accordance with the land shareholdings. Whilst the partners were free to deal with their portion of the net proceeds from the sale of the subdivided lots as they pleased, the partners intended to use the proceeds from the sale to cover their portion of stage 2 development costs and supplement the construction of their homes.

Transfer of ownership of Lot XX

On XX XXX XXXX, Name 3 in their capacity of Trustees for Name 3 trust executed a Deed to appoint the interest in subdivided Lot XX to themselves as Beneficiaries. This did not require a change to the Record of Certificate of Title, therefore, there was no requirement to register the transfer with Landgate and only nominal stamp duty was payable.

On XX XXX XXXX Name 2 transferred its interest in subdivided Lot XX to the individuals listed under name 2 (as joint tenants). The transfer was registered with Landgate on XX XXX XXXX. Stamp duty was payable on this transfer.

On XX XXX XXXX, Name 4 transferred their interest in subdivided Lot XX to their spouse. Stamp duty was paid on the transfer.

Stage 2

Subdivision of Lot XX

On XX XXX XXXX, you received approval to subdivide Lot XX contained in Certificate of Title volume XX folio XX into XX.

You provided a diagram of the proposed subdivision of Lot XX:

The driveway was required to provide access to the XX lots at the rear of the Property. The boundary lines at the rear of the Property dictated that the XX lots will be unevenly sized when keeping the width of each block the same (equal to or greater than XXm as any narrower than XXm will greatly affect house designs). Consequently, on completion of the subdivision, an independent valuation will be undertaken on each block and the parties will be compensating between themselves to even out the value of their land.

Allocation of lots

The parties will be free to deal with their allocated lot in their own right when the subdivision of Lot XX is completed and transfer of titles has taken place.

The lots are to be allocated as follows:

Table 2: Breakdown of stage 2

While Name 4 and Name 5 who held XX share of the Property, initially intended to construct their retirement home on their allocated lot, this is no longer feasible as they will not entirely own their allocated Lot. Lot XX will be sold on the market upon the completion of the subdivision as name 1 and Name 4 and 5 cannot agree on a common ground for the transfer of their XX % ownership between themselves.

Individuals under Name 2 and Name 3 still intend to construct their retirement homes on their allocated lots.

There is no intention to construct residential dwellings on the proposed subdivided vacant lots prior to transferring these lots to the parties.

Based on the sale of the other lots it is estimated that proposed Lots will be valued at approximately $XXXX each.

Development/Subdivision Costs

The expected total cost of both stages of the subdivision is approximately $XX and comprises of activities required to meet the minimum council subdivision approval conditions.

The subdivision/development costs are expected to be funded entirely without joint borrowings by the parties in proportion to their land shareholdings. The parties have funded their portion of costs via personal savings and distributed share of net proceeds from the sale of lots XX, XX and XX.

Accounting to the parties

Record keeping

The Project Manager is responsible for the record keeping of the development project. All receipts and invoices have been maintained and recorded by him in Excel spreadsheet format.

Company 1

A separate entity was registered with ASIC on XX XXX XXXX to facilitate the ease of entering into contracts with consultants. All consultants engaged for the purpose of the development project/subdivision of the Property have been engaged by Company 1 acting for and on behalf of the Partnership/parties and not directly by the Partnership. Other than undertaking this function Company 1 does not provide services to any other entity, does not have any source of income and will not make a profit from this or any other undertaking/activity.

There is no written agreement between the Partnership and Company 1.

The current directors of Company 1 include; XX, XX, XX and XX.

The shareholders of Company 1 include XX, XX, XX and XX in proportion to their initial land shareholdings.

Company 1 registered for GST from XX XXX XXXX and reports its GST obligation on a prescribe basis.

Whilst there is no bank account held in the name of the Partnership, a bank account was opened in the name of Company 1 to hold development cost contributions from the parties and used to pay construction costs. The signatories to the bank account are all of the parties.

Company 1 engaged tax agents XX to prepare financial reports based on information provided by the Project Manager and the reports are provided to the parties.

You provided the balance sheet of Company 1's as at XX XXX XXXX.

Reporting

Partnership

The Partnership has only claimed minor input tax credits on their business activity statements (BASs) in relation to costs incurred in acquiring the Property but has not claimed any input tax credits in relation to the subdivision costs of the Property to date pending the outcome of this private ruling.

The Partnership has reported the GST payable for the sale of Lots XX - using the margin scheme to calculate the GST payable.

The Partnership intends to report the GST payable on the sale of Lot XX - using the margin scheme to calculate the GST payable.

Company 1

Company 1 has claimed the input tax credits in relation to the demolition of the existing dwelling located on the Property and the subdivision costs of the Property up to stage 1 (subdivision of Lots XX) on their BASs up until the XXX XXXX to XX XXXX. However, as your tax agent began to query the GST reporting for this arrangement, reporting ceased from the XX XXX XXXX onwards pending the outcome of the private ruling.

The private ruling application was lodged on XX XXX XXXX.

Other

Development history of the parties

With the exception of Name 1, the other parties do not have experience in property development and are unfamiliar with the tax laws in Australia. Consequently, X of the X parties who have intentions to build their own residential homes set up entities to own their portion of the land without consulting their tax advisers.

With the exception of Name 1, none of the other parties have previously undertaken, or plan to undertake in the future, any property subdivision activities jointly or with other parties.

Contention as to the type of agreement

You contend that both a tax law partnership and a joint venture exist as the situation has subsequently evolved from a sale of some of the lots and sharing of profits/losses to the sharing of the lots by the parties in accordance with their land shareholdings.

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 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 division 38

A New Tax System (Goods and Services Tax) Act 1999 division 40

A New Tax System (Goods and Services Tax) Act 1999 section 51-5

A New Tax System (Goods and Services Tax) Act 1999 section 51-10

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

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

Income Tax Assessment Act 1997 section 995-1

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 (GST Act)

•                     all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•                     all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-5 provides that you make a taxable supply if:

(a)           you make the supply for consideration,

(b)           the supply is made in the course or furtherance of an enterprise that you carry on,

(c)           the supply is connected with the indirect tax zone, and

(d)           you are registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively. In your case, there are no provisions in the Divisions under which your sale of the subdivided vacant lots would be a GST-free or an input taxed supply.

Entity

Section 195-1 states that if a provision of the GST Act uses the expression you it applies to entities generally. Section 184-1 sets out the meaning of entities which includes, amongst other things, individuals, companies, trusts, partnership (subsection 184-1(1)) in the definition of entity and specifically excludes non-entity joint ventures (subsection 184-1(1A).

Both 'partnership' and 'non-entity joint venture' are defined terms.

Section 195-1 of the GST Act contains relevant definitions including the following:

non-entityjointventurehas the meaning given by subsection 995-1(1) of the *ITAA 1997[1].

partnershiphas the meaning given by section 995-1 of the *ITAA 1997¹.

Section 995-1 of the ITAA 1997 contains these definitions:

non-entityjointventuremeans an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a)                under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

(b)                that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

partnershipmeans:

(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.

Division 51 provides that entities engaged in a joint venture can form a GST joint venture in which case the joint venture operator then deals with the GST liabilities and entitlements arising from the joint venture operator's dealings on behalf of the participants in the joint venture.

Therefore, it is necessary to determine the entity that is making the supply when considering whether or not a particular supply is a taxable supply pursuant to section 9-5 of the GST Act.

You contend that both a tax law partnership and a joint venture arrangement exists between the parties.

In this case, the type of entity that is relevantly making the supply of a subdivided vacant lot will be established based upon a proper characterisation of the arrangement. It needs to be determined whether the arrangement entered into by the parties constitutes a joint venture or a partnership (general law or tax law partnership) in order to determine the GST liabilities and entitlements arising from the development project.

The Commissioner's view on partnerships and joint ventures are contained in various rulings including:

•                     Goods and Service Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships (GSTR 2003/13)

•                     Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6)

•                     Goods and Services Tax Ruling 2004/2 Goods and services tax: What is a joint venture for GST purposes? (GSTR 2004/2)

•                     Taxation Ruling TR 94/8 Income Tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8)

GST joint venture

The term joint venture is not defined in the GST Act. Accordingly, it takes its ordinary meaning having regard to the context in which it appears in the GST Act.

GSTR 2004/2 provides guidelines including:

11.          For the purposes of the GST Act, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

•                     sharing of product or output, rather than sale proceeds or profits;

•                     a contractual agreement between the participants;

•                     joint control;

•                     a specific economic project; and

•                     cost sharing.

A joint venture that meets the requirements of section 51-5 is a GST joint venture.

Subsection 51-5(1) provides two or more entities may become the participants in a GST joint venture if:

(a)           the joint venture is a joint venture for the exploration or exploitation of mineral deposits, or for a purpose specified in the regulations; and

(b)           the joint venture is not a partnership; and

(c)           (Repealed by No 74 of 2010)

(d)           each of those entities satisfies the participation requirements for that GST joint venture; and

(e)           each of those entities agrees in writing to the formation of the joint venture as a GST joint venture; and

                                        (ea)                An entity is nominated in that agreement to be the joint venture operator; and

                                        (eb)                the nominated joint venture operator notifies the Commissioner, in the approved form, of the formation of the joint venture as a GST joint venture; and

(f)            if the nominated joint venture operator is not a party to the joint venture agreement - the nominated joint venture operator satisfies the requirements of paragraphs 51-10(c) and (f).

The participation requirements for a GST joint venture are outlined in section 51-10. Section 51-10 provides:

An entity satisfies the participation requirements for a GST joint venture, or a proposed GST joint venture, if the entity:

(a)           participates in, or intends to participate in, the joint venture; and

(b)           is a party to a joint venture agreement with all the other entities participating in, or intending to participate in, the joint venture; and

(c)           is registered; and

(d)           (Repealed by No 176 of 1999)

(e)           (Repealed by No 176 of 1999)

(f)            accounts on the same basis as all those other participants.

(g)           (Repealed by No 176 of 1999)

In this case you registered a partnership in relation to the development of the Property. Additionally, not all parties to the development of the Property meet the GST joint venture participation requirements of being registered for GST. Name 2, Name 3, Name 4 and Name 5 are not registered for GST. Therefore, in this case we do not consider the arrangement meets the requirements of a GST joint venture.

Partnerships

Partnership for GST purposes is defined in section 195-1 as having the same meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Paragraph (a) of the definition of partnership in section 995-1 of the ITAA 1997 relevantly defines a partnership as being:

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.

The first limb of the definition, being 'an association of persons(other than a company or a limited partnership) carrying on business as partners' is commonly referred to as a general law partnership. The ATO view on general law partnerships is set out in GSTR 2003/13.

The second limb of the definition, being 'an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly' is commonly referred to as a tax law partnership. The ATO view on tax law partnerships is set out in GSTR 2004/6.

GSTR 2004/6 provides at paragraph 19:

19.          If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership.

Therefore, if the arrangement between the parties/landowners fits the definition of a tax law partnership and the definition of a general law partnership, it will be a general law partnership.

General law partnership

As discussed above, a general law partnership requires an association of persons carrying on business as partners. The definition reflects the definition of partnership in State and Territory partnership legislation.[2]

It must be determined whether the parties, namely XX are carrying on a business as partners.

Carrying on a business

Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) sets out the ATO view on when an entity is carrying on a business. Although TR 97/11 relates to a business of primary production, the characteristics are relevant for carrying on a business for GST purposes.

Paragraph 13 of TR 97/11 outlines the following indicators of carrying on a business[3]:

•                     whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•                     whether the taxpayer has more than just an intention to engage in business;

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•                     whether there is repetition and regularity of the activity;

•                     whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•                     the size, scale and permanency of the activity; and

•                     whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Paragraphs 16 to 17 of TR 97/11 provide these indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour'. However, the weighting to be given to each indicator may vary from case to case. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business.

As partners

Additionally, it must also be considered whether the business was carried out as a partnership. Jagot J usefully summarised the key principles in identifying a general law partnership in Yacoub v. Commissioner of Taxation [2012] FCA 678 at [23]-[28]:

23.          The existence of a partnership is determined by reference to the true contract and intention of the parties as appearing from all of the facts and circumstances relevant to the relationship of the parties (Amadio Pty Ltd v Henderson (1998) 81 FCR 149 at 172).

24.          The indicia of the existence of a partnership include: - (i) a mutual interest in the carrying on of the business for the purpose of profit or gain (in this regard, it has been said that all partnerships involve a joint venture but not all joint ventures involve a partnership, for example, Whywait Pty Ltd v Davison [1997] 1 QdR 225 at 231), (ii) mutual confidence that the parties will engage in the venture for joint advantage only (for example, Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 407-408), (iii) sharing of profits and losses from the venture or a so-called community of profit and loss (Fenston v Johnston (1940) 23 TC 29 at 34), and (iv) mutual agency in the sense that each party is a principal of the business and may bind the other (for example, Momentum Productions Pty Ltd v Lewarne (2009) 174 FCR 268; [2009] FCAFC 30 at [36]-[44] (Momentum Productions)).

25.          Statements of intention by the parties may be relevant but do not determine whether a partnership exists, as the issue is determined by reference to the "substance and reality of the transaction being adjudged to be a partnership" (Fenston v Johnston at 35-36).

26.          In United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 15-16 Dawson J said:

Perhaps in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. Enterprises of the latter kind are common enough in the exploration for and exploitation of mineral resources and the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit.

In A.R.M. Constructions Pty Ltd v Federal Commissioner of Taxation (1987) 87 ATC 4790 Yeldham J said at 4805:

I am clearly of the opinion that...there was merely a joint venture between the appellants to construct buildings, in contrast to an agreement to make profits for sharing, and it was the intention of the parties at all material times to retain the units and town houses so erected, except to the extent that sales might be necessary to repay moneys borrowed from lending institutions...In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could hereafter go their own respective ways. Their expressed intention so to do was duly manifested in what they thereafter did and achieved, and their agreement constituted in law something in the nature of a joint venture to construct the building, in contrast to an agreement to make profits for sharing, inter se. The only partnership for tax purposes related to such rental income as was received jointly before the date of the deed of partition...

According to Lindley & Banks on Partnership (19th ed, Sweet & Maxwell Ltd, 2010) at 5-23:

...persons who agree to share profits and losses will normally find themselves treated as partners, whether or not they have themselves used that word. However, it is not the necessary corollary of such an agreement that each party will enjoy all the rights and privileges normally associated with partnership, e.g. a right to participate in the management of the business, to dissolve the firm, or to share in the value of goodwill on a dissolution. Rather, the partners' rights and duties will in each case be determined by the terms of their agreement...

While the facts in your case indicate to an extent the existence of a commercial activity carried on in a business-like manner, the facts overall suggest that the indicators set out in paragraph 13 of TR 97/11 are not present to a sufficient degree to warrant the conclusion that you are carrying on a business as partners. We consider that the activities undertaken do not display the salient indicators of a business which are transactions entered into in a continuous and repetitive basis as well as for the purpose of profit and the prospect of profit from the activity.

In this case it was not the parties' initial intention to participate in the development of the Property to share in the profits from the sale of the subdivided lots. Each partner had different and/or personal motivations for participating in the development project with only one partner - Name 1 being motivated in part to make a profit from the sale of XX of their XX allocated subdivided lots. A collective decision was made to subdivide the Property into XX lots and to sell XX lots and distribute the profits from their sale amongst the partners in accordance with the land shareholding ratio when it became apparent that the Property you had selected to purchase could not be subdivided into XX lots to be distributed to the partners in accordance with their land shareholdings. The remaining lot (Lot XX) was set aside to further subdivide and distribute to the partners for the purpose of constructing their retirement homes (personal/private use).

Furthermore, the partners have not undertaken subdivision activities together in the past nor do they intend to develop or subdivide any further properties together in the future. Your activities are not of such a size and scale that would overcome the lack of recurrence or regularity to justify the finding of a business being carried on.

Tax law partnership

As discussed above, a tax law partnership requires an association of persons in receipt of ordinary income or statutory income jointly.

We consider that you satisfy the definition of a tax law partnership as there is joint receipt of income derived from the sale of subdivided vacant lots located at XX.

Paragraph 60 of GSTR2004/6 provides that as an entity for GST purposes, a tax law partnership is capable of carrying on an enterprise and making taxable supplies.

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. Carrying on an enterprise includes doing anything in the course of the commencement or termination of an enterprise.

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) provides guidelines on the meaning of carrying on an enterprise. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In the form of a business

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business which include those indicators contained in TR97/11 discussed above.

As discussed above we do not consider that you are conducting an enterprise with activities done in the form of a business.

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

'An adventure or concern in the nature of trade' is not defined in the GST Act.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade':

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 further explain that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal, are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or as a capital/investment asset held for either investment or personal enjoyment. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

The Commissioner has made the following comments about the badges of trade in MT 2006/1:

The subject matter of realisation

247.        This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

The length of period of ownership

249.        A trading asset is generally dealt with or traded within a short time after acquisition. ...

The frequency or number of similar transactions

251.        The greater the frequency of similar transactions the greater the likelihood of trade.

Supplementary work on or in connection with the property realised

252.        Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

The circumstances that were responsible for the realisation

253.        Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

Motive

254.        If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

255.        Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment.

Paragraphs 258 to 261 of MT 2006/1 further consider the character of an asset and distinguish between trade/revenue assets and capital/investment assets as follows:

Trade v. investment assets

258.        United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

259.        Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

260.        Assets can change their character but cannot have a dual character at the same time.

261.        Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

Isolated Property Transactions

Paragraphs 262 to 267 apply the 'badges of trade' concept discussed above to isolated property transactions, in order to determine whether an isolated property transaction can be considered to be an enterprise in the form of an adventure or concern in the nature of trade.

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.

Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty).

Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265.       From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

•                    there is a change of purpose for which the land is held;

•                    additional land is acquired to be added to the original parcel of land;

•                    the parcel of land is brought into account as a business asset;

•                    there is a coherent plan for the subdivision of land;

•                    there is a business organisation - for example, a manager, office and letterhead;

•                    borrowed funds financed the acquisition or subdivision;

•                    interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•                    there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•                    buildings have been erected on the land.

In addition to the above, paragraphs 266 and 267 of MT 2006/1 provide that there may be other relevant factors outside this list that present on the facts of a given case, and that no individual factor is determinative to the question of whether an enterprise is present:

266.        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. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

267.        No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

In relation to land bought with the intention of resale paragraph 270 of MT 2006/1 specifically provides:

Land bought with the intention of resale

270.        In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade.

The initial intention of all the parties was to subdivide the Property and distribute the subdivided lots to the parties in accordance with the land shareholdings to allow the parties to construct a retirement home (for themselves, for the directors or beneficiaries) on one of their allocated lots and to allow those parties who were to be allocated more than one lot to either distribute it to their children or to sell for a profit. To achieve their goal, the parties engaged Building Company 1 to conduct research, identify a suitable property and provide development and building management services. While it was not the original intention of the parties, by the time they formally entered into the Management Agreement on XX XXX XXXX and the contract for the purchase of the Property on XX XXX XXXX, all parties intended to sell the X stage 1 vacant lots and to retain the balance lot for their own private purposes as evidenced by clause XX of the Management Agreement.

The intention of the parties changed, at least in relation to a portion of the land, to that of subdivision and resale for a profit. The parties expected the sale of the X lots would enable them to recuperate all the development costs and management fee. Overall, this indicates that the activities undertaken to subdivide and sell X out of the X lots created in Stage 1 are activities in the conduct of a profit-making undertaking or scheme and are therefore an enterprise in the form of an adventure or concern in the nature of trade.

Property addresses

The supply of the subdivided vacant lots located at XX will be taxable providing all the requirements of section 9-5 are met.

In this case you are registered for GST, each supply of the vacant lots was connected with the indirect tax zone as all of the lots are located in Australia, the supplies were for consideration and made in the course or furtherance of the enterprise that you carry on.

As you have met all the requirements under section 9-5, your supplies of the subdivided vacant lots located at XX were taxable supplies. GST was payable on the sale of the vacant lots under section 9-40.

Please note that this ruling and the decision made above relate only to the applicant of this private ruling being the Partnership entity.

Additional Information

Lot X

Of relevance in this case is whether the remaining Lot X was held by the Partnership as part of its enterprise. Land that is not held in reserve for future development as part of an enterprise is not treated as trading stock.

Taxation Determination TD 92/124 Income tax; property development: in what circumstances is land treated as 'trading stock'? provides some guidance on when land is treated as trading stock for income tax purposes that is relevant in this case. TD 91/124 provides:

1.             Land is treated as trading stock for income tax purposes if:

•                     it is held for the purpose of resale; and

•                     A business activity which involves dealing in land has commenced.

2.             Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

3.             It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

By contrast land that is held for the personal enjoyment or private purposes of the owners and that is not held for the purpose of resale, not purchased or used in the course of an enterprise will not be treated as trading stock[4].

In this case, Lot X was set aside to be subdivided and distributed to the parties in accordance with their ownership shareholding for their personal enjoyment. Accordingly, we consider the subdivision and distribution of lots created from Lot X to the partners does not form part of the enterprise carried on by the Partnership. Lot X was not held as trading stock but rather as land reserved for the personal enjoyment or private purposes of the co-owners.

[1] Income Tax Assessment Act 1997 (ITAA 1997)

[2]Partnership Act 1895 (WA). 7. Meaning of 'partnership' (1) Subject to subsection (3) partnership is the relation which subsists between persons carrying on a business in common with a view of profit. (2) In deciding whether a partnership does or does not exist in any particular case, the court shall have regard to the true contract and intention of the partners as appearing from the whole facts of the case. ...

[3]Paragraph 13 of 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) discusses the indicators of carrying on a business.

[4]Paragraph 258 of MT 2006/1