Private ruling: GST and in-specie distribution of residential property
Published: February 2012
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Will the proposed in-specie distribution of your residential property (property) to your shareholder be subject to GST? Decision No, the proposed in-specie distribution of your property to your shareholder will not be subject to GST.

Relevant facts and circumstances: You, as a company in liquidation, came into being as a result of a resolution by the shareholders of the company to carry out a voluntary liquidation. Recently, a liquidator was appointed to liquidate you. The company originally carried on an enterprise of investments in different classes of assets. Our records indicate that you are registered for GST. Your shareholders in equal shares are X and Y. Shareholder X does not carry on any enterprise. X is not registered or required to be registered for GST. In the process of your liquidation, all your assets other than a particular residential property will be converted into cash. The company owned this property for over 20 years. At all times this property has been the private residence of X. The company leased this property to X for no consideration. In the process of your liquidation, you will distribute this property to X in-specie. After your distribution of the property, X will continue to reside in the property.

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 . | Section 9-40 of the A New Tax System (Goods and Services Tax Act) 1999. | Reasons for the decision | Section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines an 'incapacitated entity' to mean, among other things, an entity that is in liquidation or receivership. Therefore, you are an incapacitated entity. | Section 195-1 of the GST Act defines a 'representative' to be, among other things, a liquidator. Therefore, your liquidator is your representative. | In-specie distributions made from a representative to a shareholder | The ATO has published an issues register on its website www.ato.gov.au in respect of GST and representatives of incapacitated entities. Issue 5.1 of the issues register refers to the issue of whether an in-specie distribution made from a representative to a shareholder, a taxable supply. Issue 5.1 is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Issue 5.1 can be accessed using the following link. http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/15803.htm&page=6 | From 1 July 2010, issues labelled as a public ruling in this issues register will continue to be a public ruling even though section 105-60 of Schedule 1 to the TAA has been repealed. | Issue No 5.1 states: | As part of the winding up of a company, the liquidator may distribute assets of the company in-specie to members of the company. This commonly happens in members' voluntary liquidations. | One of the requirements for a taxable supply is that there is a supply for consideration. In the case of an in-specie distribution by a liquidator to the shareholders of the company, there is no consideration for the supply. A shareholder is entitled to the shareholder's share of the company's surplus property after the liabilities of the company have been satisfied, unless the company's constitution provides otherwise. | While a share may have associated rights to receive distributions on winding up, a shareholder does not provide consideration in the form of a release or surrender of those rights in return for a liquidator's distribution, whether the distribution is in cash or an in-specie distribution. No consideration is provided by the shareholder in those circumstances. | Although the in-specie distribution of assets by a liquidator to the shareholder is not for consideration, it may still be a taxable supply where Division 72 of the GST Act applies and the other requirements of a taxable supply are met. Division 72 removes the requirement for consideration for a taxable supply in certain circumstances where the recipient is an associate. The meaning of an associate is defined in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). | Under subsection 58-5(1) of the GST Act, any supply, acquisition or importation by an entity in the capacity of a representative is taken to be a supply, acquisition or importation by the incapacitated entity. Under subsection 58-5 of the GST Act, an in-specie distribution by a liquidator to a shareholder is deemed to be a supply made by the company in liquidation to the shareholder. Therefore, an in-specie distribution to a shareholder may be a supply to an associate if the shareholder is an associate of the company in liquidation pursuant to section 318 of the ITAA 1936. For example, a shareholder that holds a majority voting interest in the company is an associate for the purposes of section 318 of the ITAA 1936. | Under section 72-5 of the GST Act, a supply to an associate for no consideration, does not stop the supply from being a taxable supply if: · the associate is not registered or required to be registered, or | · the associate acquires the thing supplied otherwise than solely for a creditable purpose. | Therefore, the liquidator who makes an in-specie distribution to a shareholder who is an associate (as defined under section 318 of the ITAA 1936) of the company is liable for GST calculated on the GST exclusive market value of the asset/s if: | · the associate is not registered or required to be registered or the associate acquires the thing supplied otherwise than solely for a creditable purpose | · the other requirements of a taxable supply are satisfied; and | · the distribution is neither GST-free or input taxed supply for the purposes of the GST Act. | Transitional provisions (Item 50 of Tax Law Amendment (2009 Measures No 5) Act 2009 ) will prevent Division 72 of the GST Act from applying to past supplies by representatives to associates of incapacitated entities for no consideration or inadequate consideration. The new provisions apply in respect of any such supplies made on or after 4 December 2009. | Further, in the case of members' voluntary liquidations, Division 72 of the GST Act will not apply to any supplies by representatives to associates of incapacitated entities where the members' voluntary liquidation commenced before 16 September 2009 (the date the Amending Act was introduced in Parliament). Division 58 of the GST Act | Division 58 of the GST Act refers to representatives of incapacitated entities. Subsection 58-1 of the GST Act states: | This division sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes. In particular, supplies, acquisitions and importations and associated acts and omissions by the representative are, in most cases, treated as having been by the incapacitated entity. This ensures that a transaction by the representative has the same consequences under the GST law as if the incapacitated entity had no representative. | However, in most cases, GST related liabilities and entitlements are allocated to the representative for transactions that are within the scope of the representative's responsibility or authority. | Subsection 58-5(1) of the GST Act states: | Subject to this Division, any supply, acquisition or importation by an entity in the capacity of a *representative of another entity that is an *incapacitated entity is taken to be a supply, acquisition or importation of the other entity. | * Denotes a term defined in section 195-1 of the GST Act. Therefore, the in-specie distribution of the property by your liquidator to X can be treated as a supply from you to X. | Supply to an associate | As mentioned above at Issue 5.1, "an in-specie distribution to a shareholder may be a supply to an associate, if the shareholder is an associate of the company in liquidation pursuant to section 318 of the ITAA 1936. For example, a shareholder that holds a majority voting interest in the company is an associate for the purposes of section 318 of the ITAA 1936". | Under paragraph 318(6)(c) of the ITAA 1936, for the purposes of this section, an entity or entities hold a majority voting interest in a company, if the entity or entities are in a position to cast or control the casting of more than 50% of the maximum number of votes that might be cast at a general meeting of the company. In this case, the two shareholders are in a position to cast 100% of the votes at a general meeting of the company. Therefore, the two shareholders can be treated as your associates. | Accordingly, the in-specie distribution of the property by the liquidator to X can be treated as a supply of the property by you to your associate. | Taxable supply | Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make. | Section 9-5 of the GST Act states: | You make a taxable supply if: | · you make the supply for consideration; and | · the supply is made in the course or furtherance of an enterprise that you carry on; and | · the supply is connected with Australia; and | · 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 mentioned at the issue 5.1 above, "while a share may have associated rights to receive distributions on winding up, a shareholder does not provide consideration in the form of a release or surrender of those rights in return for a liquidator's distribution, whether the distribution is in cash or in-specie distribution. No consideration is provided by the shareholder in those circumstances". | Therefore, in this case, when you distribute the property to X in-specie, X will not provide any consideration. Consequently, paragraph 9-5(a) of the GST Act will not be satisfied and you will not make a taxable supply under section 9-5 of the GST Act. Subdivision 72-A | Subdivision 72-A refers to supplies without consideration. Section 72-5 of the GST Act states: The fact that a supply to your *associate is without *consideration, does not stop the supply from being a *taxable supply if: | · your associate is not *registered or *required to be registered; or | · your associate acquires the thing supplied otherwise than solely for a *creditable purpose. | This section has effect despite paragraph 9-5(a) (which would otherwise require a taxable supply to be for consideration). | In this case, your associate X is not registered or required to be registered for GST. In addition, X will acquire the property for residential purposes and not for any creditable purpose. Therefore, the fact that the property will be supplied by you to X for no consideration, will not stop the supply being a taxable supply. Therefore, the in-specie distribution of the property to X could be a taxable supply. | Section 72-20 of the GST Act refers to supplies and acquisitions that would otherwise be sales etc and states: | If, apart from a lack of consideration: | · a supply to your associate from you; or | · a supply to you from your associate; | would be a sale or some other kind of supply, the supply is taken for the purposes of the GST law to be a supply of that kind. | In this case, had there been consideration from X for the in-specie distribution of the property, it would have been a sale of the property by you to X. Therefore, for the purposes of GST Act, your in-specie distribution of the property for no consideration will be treated as a sale of the property to X. Input taxed supply | Section 72-25 of the GST Act states: | The fact that a supply to or from your associate is without consideration does not stop the supply from being any of the following for the purposes of the GST law; | · a GST-free supply; | · a supply that is input-taxed; | · a financial supply. | Therefore, it is necessary to consider whether your in-specie distribution of the property will be GST-free or input taxed to any extent. | Section 40-65 of the GST Act states: | a sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation, (regardless of the term of occupation). | However, the sale is not input taxed to the extent that the *residential premises are; | · *commercial residential premises; or | · *new residential premises other than those for residential accommodation (regardless of the term of occupation) before 2 December 1998. | In this case, the property being supplied to X has been X's residential premises. The property will continue to remain X's residential premises after transfer of the title to X. Therefore, subsection 40-65(1) of the GST Act will be satisfied to treat the supply of the property to X as an input taxed supply. It is necessary to consider whether subsection 40-65(2) of the GST Act will apply to deny the input taxed status of the supply. | The property being supplied does not satisfy the definition of commercial residential premises as defined in section 195-1 of the GST Act. Therefore, paragraph 40-65(2)(a) does not apply to the supply. GSTR 2003/3 | Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) refers to when is a sale of real property a sale of new residential property. Paragraph 13 of GSTR 2003/3 states: | 13. Sales of housing which has been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not subject to GST as new residential premises. The exceptions are where new residential premises are created through substantial renovations or are built to replace demolished premises on the same land. | The property being supplied to X has been used for residential accommodation before 2 December 1998. Technically, the company has used it for rental income production. However, as an associate of the company, X has not paid any rent to the company. In addition, the property has not been created through substantial renovations or built to replace demolished premises on the same land. Therefore, the supply of this property is not subject to GST as a supply of new residential premises. | Conclusion | As per the above analysis, the proposed in-specie distribution of your property to X, will be an input taxed supply and will not be subject to GST.


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