Private ruling: GST and the sale of a commercial property as tenants in common
Date of advice: 15 July 2015
Published: July 2015

Ruling: Q1: Will the sale of your share of the interest in the commercial property to X, subject to goods and services tax (GST)? | A1: Yes. The sale of your share of the interest in the commercial property to X will be subject to GST. | Q2: Will the sale of a commercial property by you and X, as tenants in common, subject to GST where: a. You are registered for GST? b. X is not registered for GST? | A2: The sale of your share of interest in the commercial property will be subject to GST. The sale of X's share of interest in the commercial property will not be subject to GST.

Relevant facts and circumstances: You and X inherited commercial properties as tenants in common. You have no intention to hold these properties. X stated that he/she would buy your share of the property but did not follow through. As a result, you and X continued to co-own the properties as tenants in common. You do not act for the mutual benefit or on behalf of X. You and X act independently of each other in making decisions about your respective share of interest in the commercial properties. You have no partnership agreement with X and have no intention or willingness to enter into a partnership with X. Your relationship with X has broken down. You stated that you act as an individual registered for GST in your own right. You have other investment properties in which you carry on a leasing enterprise. X is a non-resident, not registered for GST and is not required to be registered for GST as his/her lease income does not exceed $75,000 per annum. You have not registered for GST as partners. You and X have acted independently in your dealings with the agent for the property. You and X send individual emails to the agent to advise the agent on what you would like to do in relation to your share of interest in the commercial property. The property has been vacant and has high outgoings. A tenant has since become available and a new lease is now in effect. The tenant has received a period of free rent in return for the tenant undertaking the upgrades. The gross rental income will not be paid into and the expenses are not paid out of a joint bank account. Rather the agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income to you and X individually. X has since agreed to purchase your share of the property at market value. In the event that the sale to X does not go ahead, the commercial property may be sold at a public auction.

Relevant legislative provisions: A New Tax System (Good and Services Tax) Act 1999 section 9-5, | A New Tax System (Good and Services Tax) Act 1999 section 9-20, | A New Tax System (Good and Services Tax) Act 1999 section 188-15, | A New Tax System (Good and Services Tax) Act 1999 section 188-25, | A New Tax System (Good and Services Tax) Act 1999 section 195-1 and | Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Summary: The sale of your share of the interest in the commercial property to your sibling, XX, will be subject to GST. | Detailed Reasoning - Detailed reasoning: GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to taxable supplies and 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 Australia; 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) In your case, where the relevant property was owned by more than one entity, it is necessary to determine the 'entity' (nature of the entity) that made the supply, before ascertaining whether the sale of the property satisfied the requirements of section 9-5 of the GST Act. | Detailed Reasoning - Tax law partnership: Under taxation law, the owners of a property as tenants in common, will be considered as partners for taxation purposes even though they may not be partners under common law. The definition of partnership in section 195-1 of the GST Act has the same meaning as that given in section 995-1 of the Income Tax Assessment Act 1997: Partnership means an association of persons carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, but does not include a company. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) states that co-ownership of rental property is a partnership for income tax purposes. Paragraph 25 of TR 93/32 states: Under the extended income tax definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. Therefore, co-owners of rental property come within the definition of partnership for income tax purposes, not because they are partners at general law, but because they are in receipt of income jointly. Therefore the leasing of the commercial property held as tenants in common constitutes a tax law partnership. | Detailed Reasoning - Circumstances where a tax law partnership does not carry on an enterprise: Paragraph 9-20(1)(c) of the GST Act provides 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. You were carrying on a leasing enterprise in respect of the property. However, as each party owned 50% interest in the property, it is necessary to ascertain whether the leasing enterprise was carried on by each party in their own right or as a tax law partnership. Paragraphs 64 to 67 of the Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) outlines circumstances in which a tax law partnership does not carry on an enterprise. Paragraphs 65 and 66 of GSTR 2004/6 states: 65. In some cases, an objective evaluation of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership. 66. The following factors may point to an enterprise being carried on by each co-owner in their own right, and not by a tax law partnership: • the co-owner is registered for GST in its own right in relation to a broader enterprise and acquires an interest in property in carrying on that enterprise; • there is an agreement between the co-owners not to form a partnership nor to jointly carry on an enterprise; • each co-owner makes independent decisions with regard to the acquisition of an interest in income producing property; • any borrowings by a co-owner are to fund the acquisition of their interest in the income producing property only; the co-owners do not fund the acquisition of each of their interests out of joint funds or borrowings; • the co-owners act independently of each other in making decisions about their respective investments; • each co-owner acts independently with respect to the appointment of a manager or agent, even though the same manager or agent is usually appointed to act on behalf of all the co-owners; • the gross rental income may be paid into a single trust account operated by a property manager or agent and operating expenses may be met from this trust account. The income is not paid into and the expenses are not paid out of a joint bank account in the name of the co-owners; • the manager or agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income from the trust account to the co-owners on a regular basis; • each co-owner does not act for the mutual benefit or on behalf of the other co-owners and is primarily concerned with securing an enhanced value or return on their investment; • property is held as tenants in common, rather than as joint tenants; and • although contributing to a mutual fund to pay all liabilities in relation to the income producing property, each co-owner makes the payment in the course of carrying on their own enterprise. In your case: • You are registered for GST in your own right. You have other investment properties in which you carry on a leasing enterprise. X is not registered for GST and is not required to be registered for GST. You have not registered for GST as partners. • There is no partnership agreement between you and X. You have no intention or willingness to enter into a partnership with X. Your relationship with X has broken down. • You and X act independently of each other in making decisions about your respective share of interest in the commercial properties. • You and X have acted independently in your dealings with the agent for the property. You and X send individual emails to the agent to advise the agent on what you would like to do in relation to your share of interest in the commercial property. • The gross rental income will not be paid into and the expenses are not paid out of a joint bank account. Rather the agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income to you and X individually. • You do not act for the mutual benefit or on behalf of X. • You made sure that the property was held as tenants in common, rather than as joint tenants. Having examined your circumstances, we consider that the information you provided to us supports the conclusion that the leasing enterprise was carried on by each party as co-owners in their own right in respect of their interest in the property. Paragraph 244 of GSTR 2004/6 states: If each co-owner carries on a leasing enterprise in relation to their respective interest in property, the GST laws apply to each co-owner as a separate entity. Each co-owner may be registered for GST, make supplies or acquisitions in carrying on their enterprise, be liable to pay GST and be required to lodge an activity statement. | Detailed Reasoning - Application of section 9-5 of the GST Act: In your case, the supply of your share of interest to X will be made for consideration. Therefore it satisfies the requirement of paragraph 9-5(a) of the GST Act. You will be making your supply of interest in the commercial property in the course or furtherance of carrying on your leasing enterprise and therefore it satisfies paragraph 9-5(b) of the GST Act. The supply will be connected with Australia as the property is located in Australia and therefore it satisfies the requirement of paragraph 9-5(c) of the GST Act. You are registered for GST and therefore it satisfies the requirement of paragraph 9-5(d) of the GST Act. The sale of your interest in the commercial property is not GST-free or input taxed under any provision of the GST Act. Based on the facts of your case, the sale of your share of the interest in the commercial property to X satisfies all the requirements of section 9-5 of the GST Act. Therefore, the sale of your share of the interest in the commercial property to X will be subject to GST. You will be liable to pay GST on the sale. | Summary: The sale of your share of interest in the commercial property will be subject to GST. The sale of X's share of interest in the commercial property will not be subject to GST. | Detailed Reasoning - Detailed reasoning: GST is payable on taxable supplies. Section 9-5 of the GST Act refers to taxable supplies and 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 Australia; 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) In your case, the supply of the commercial property at a public auction will be made for consideration. Therefore it satisfies the requirement of paragraph 9-5(a) of the GST Act. As explained in the detailed reasoning in Question 1, we consider that you and X will each be making a supply of interest in the commercial property in the course or furtherance of carrying on a leasing enterprise in your own right in respect of the interest in the property, and therefore satisfies paragraph 9-5(b) of the GST Act. The supply will be connected with Australia as the property is located in Australia and therefore it satisfies the requirement of paragraph 9-5(c) of the GST Act. The sale of a commercial property is not GST-free or input taxed under any provision of the GST Act. Our records indicate that you are registered for GST. Therefore, you satisfy paragraph 9-5(d) of the GST Act. Based on the facts of your case, the sale of your share of the interest in the commercial property satisfies all the requirements of section 9-5 of the GST Act. Therefore, you will be liable to pay GST on the sale of your share of the interest in the commercial property. X is not registered for GST. However, section 23-5 of the GST Act provides that an entity is required to be registered for GST if it carries on an enterprise and its GST turnover meets the registration turnover threshold (currently $75,000 or $150,000 if it is a non-profit body). Section 188-15 of the GST Act provides that your current GST turnover during a particular month is the sum of the values of all the supplies you have made or likely to make during the 12 months period ending at the end of that month, other than input taxed supplies, supplies not for consideration and supplies not made in connection with an enterprise you carry on. His/her lease income from the property per annum was below $75,000. Therefore, his/her current GST turnover at the time of the sale of the commercial property will not meet the registration turnover threshold. Section 188-25 of the GST Act provides that in working out the projected GST turnover, you should disregard: • any supply made or likely to be made by the entity by way of transfer of ownership of its capital assets; and • any supply made or likely to be made by the entity solely as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise. You have stated that X is not registered for GST and is not required to be registered for GST. Based on the assumption that X is not registered or required to be registered for GST, he/she will not satisfy paragraph 9-5(d) of the GST Act. He/she will not be making a taxable supply in respect of the sale of his/her share of interest in the property. Therefore, he/she is not liable to pay GST on the sale of his/her interest in the property.