Private ruling: GST and sale of interests in a co-owned commercial property
Published: October 2011

Ruling: Q1: Will the proposed sale by A, B and C of their interests in a commercial property to the Purchasers, be subject to goods and services tax (GST)? | A1: The proposed sale by A and B of their interests in the commercial property to the Purchasers will not be a taxable supply for the purposes of the GST Act. The proposed sale by C of her interest in the commercial property to the Purchasers will be a GST- free supply of a going concern provided all the requirements of section 38-325 of the GST Act are met.

Relevant facts and circumstances: The commercial property was initially purchased by A and B as joint tenants as to one half share as tenants in common and the Purchasers as joint tenants as to the other one half share as tenants in common. The purchase of the commercial property was paid for by A and B and the Purchasers from bank loans obtained separately by them and not secured on the commercial property. The commercial property is leased under a Lease Agreement and is used by the lessee to operate a business. The lessee is holding over under this Lease from month to month and pays rent in two separate payments, one to A and B and the other to the Purchasers. A and B transferred a part of their share of the commercial property to C as tenants in common. A, B and C entered into a Deed affecting this transfer. Under the Deed, C is entitled to all the rents and profits that relate to a one half share in the commercial property and is responsible for all rates, taxes, insurance, repairs and any other outgoings that relate to that one half share from the date of the Deed. However A, B and C still maintained an equal say in all matters in connection with the commercial property. There is no partnership agreement between the A, B, C and the Purchasers. The costs incurred in relation to the commercial property are paid 50% by C and 50% by the Purchasers. There is no mutual bank account for the purpose of operating the commercial property - the tenant pays two separate cheques every month - one to A, B and C and the other to the Purchasers. No business plan was prepared. The commercial property was purchased as a long term investment and was leased to the one tenant who has occupied it since the commencement of the lease. A, B and C are proposing to sell their interests in the commercial property to the Purchasers.


Reasons for decision: Summary: GST is payable by the supplier of taxable supplies under section 9-40 under A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act 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. To establish whether a taxable supply occurs in this case, it is first necessary to establish who is making the supply, that is, whether the individuals are making a supply in their own right or whether they are making a supply in their capacity as partners in a partnership. A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states: partnership means: (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. The first limb of paragraph (a) reflects the general law definition of a partnership, whereas the second limb of paragraph (a) reflects tax law partnerships. Co-owners of rental property are generally not partners at general law. This is because the activity of leasing a property by itself would not, in the majority of cases, amount to the carrying on of a business sufficient for the association of persons to be a general law partnership. Tax law partnerships exist only for tax purposes. They generally arise because property is acquired or used to derive income jointly. Goods and Services Tax Ruling GSTR 2004/6 Goods and service tax: tax law partnership and co-owners of property (GSTR 2004/6) considers the issue of tax law partnerships and co-owners of property. Paragraphs 23 to 25 of GSTR 2004/6 state as follows: 23. In Yeung & Anor v. FC of T (Yeung ),F19 Davies J took the view that: It is sufficient for the existence of a partnership as defined in sec.6(1) of the Act that the properties were owned by the six members of the family as tenants-in-common, that the leases were in the names of the six and, therefore that the rents were derived by the six. 24. Persons who are in receipt of income jointly are, therefore, an association of persons and a tax law partnership for GST purposes. 25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income. In this case the commercial property is co-owned by A, B, C and the Purchasers. As the commercial property was acquired with the intention of carrying on an activity from which income was to be received jointly, the co-owners are partners in a tax law partnership. Paragraphs 103 and 104 of GSTR 2004/6 provide that tax law partnerships do not have capital and partners in a tax law partnership have neither interests in the capital of a partnership, nor interests in the partnership. The only interest that a partner in a tax law partnership has is an interest in the property, coupled with a right to a share of the net income or losses in accordance with that interest. As such a supply of a financial interest under item 10(d) of subregulation 40-5.09(3) of A New Tax System (Goods and Services Tax) Regulations 1999, does not arise in situations involving tax law partnerships. A tax law partnership is capable of carrying on an enterprise and as such is an entity for GST purposes. The circumstance in which a tax law partnership is considered to be carrying on an enterprise is set out in paragraphs 61 to 63 of GSTR 2004/6. Paragraph 62 of GSTR 2004/6 states as follows: The following factors may point to an enterprise being carried on by a tax law partnership, and not by each co-owner in their own right: · an oral or written agreement (for example, a syndicate agreement or agreement between family members) determines the mutual rights and obligations of the parties. The agreement may set out rules by which a co-owner might be admitted to a syndicate, or may indicate an intention to act for the mutual benefit of all family members. This agreement may be made before the acquisition of property (see Tikva and FC of T v. Walsh (PJ and BJ) (Walsh )), or it may be made later; · the income producing property is jointly acquired by the co-owners under a single contract (see McDonald, Walsh and Tikva ); · property is held by the co-owners as joint tenants; · the co-owners fund their acquisition of the income producing property out of joint borrowings or funds (see AAT Case 11, 324, Walsh, and Cripps v. Federal Commissioner of Taxation ); · the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners (see Yeung and MacDonald ); · the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise; · income from the income producing property is paid into a joint bank account of the co-owners; · expenses relating to the income producing property are paid from a joint bank account of the co-owners; and · the co-owners jointly pay all liabilities in relation to the income producing property. The circumstance in which a tax law partnership is not carrying on an enterprise is set out in paragraphs 64 to 67 of GSTR 2004/6. In particular paragraph 66 of GSTR 2004/6 states as follows: 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; · each co-owner's acquisition of their interest in property is made separately; · 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. Paragraph 68 of GSTR 2004/6 further provides that the presence of a single lease agreement is not decisive of an enterprise being carried on by a tax law partnership. Paragraph 72 of GSTR 2004/6 states: However, a preponderance of the factors mentioned in paragraph 66 of this Ruling would lead to a conclusion that an enterprise is carried on by each co-owner in their own right in respect of their interest in an income producing property. In these cases, we take the view that, although a tax law partnership may exist, it does not carry on any enterprise in relation to the property. Given the facts of this case, it is our view that there is a prevalence of factors mentioned in paragraph 66 of GSTR 2004/6 and as such although the tax law partnership may exist, it does not carry on any enterprise in relation to the commercial property. As such the tax law partnership in this case, is not an enterprise partnership. Each co-owner is dealing with the commercial property in their own right in respect of their interest in the commercial property (see paragraphs 242 to 246 of GSTR 2004/6). The supply made by the co-owners in their own right, may be a taxable supply if the requirements of section 9-5 of the GST Act are met, or may be the supply of a going concern that is GST-free if the requirements of section 38-325 of the GST Act are met. | Detailed Reasoning - A and B: A and B are proposing to sell their interests in the commercial property to the Purchasers. Paragraphs 9-5(a) and (c) of the GST Act are met as the proposed supply will be for consideration and is connected with Australia. The issue of "enterprise" needs to be considered in order to determine if paragraphs 9-5(b) and 9-5(d) of the GST Act are met. Section 9-20 of the GST Act provides that an enterprise is an activity, or series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of interest in property; or…………. Accordingly, an activity of leasing of a commercial property is generally considered to be carrying on an enterprise for the purpose of the GST Act. However subsection 9-20(2) of the GST Act states as follows: However, enterprise does not include an activity, or series of activities, done: (a)…… (b)….. (c) by an individual ………, or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or…… A and B transferred part of their interest in the commercial property to C by way of a Deed. However, the terms of the Deed provided that C was entitled to all the income from the commercial property in relation to A, B and C's interests in the property. Accordingly, A and B transferred to C, by way of a legal agreement as expressed by the Deed, their income entitlement not only in relation to the interests they had transferred to C, but also in relation to the interest they still held in the commercial property. On execution of the Deed, A and B were not entitled to any income from the commercial property. As such there is no reasonable expectation of profit or gain to them from their leasing activity. Given this and in accordance with paragraph 9-20(2) (c) of the GST Act, A and B are not considered to be carrying on an enterprise in relation to their respective interests of the commercial property. Furthermore, the proposed sale by A and B of their respective interests in the commercial property to the purchasers does not amount to a separate enterprise in the form of an adventure or concern in the nature of trade. According to paragraphs 258 to 261 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), their interests in the commercial property would be classified as an investment asset. This is because the commercial property was purchased as a long term investment and has been held for a reasonable period of time for income producing purposes as a rental property. The disposal of an investment asset is ordinarily considered not to be an adventure or concern in the nature of trade. As such, the proposed sale by A and B of their interests in the commercial property to the Purchasers of the commercial property, fails the requirements of paragraphs 9-5(b) and (d) of the GST Act and will not be a taxable supply for the purposes of the GST Act. | Detailed Reasoning - C: Following on from the above, the proposed sale by C of her interests in the commercial property meets the requirements of the positive limbs of section 9-5 of the GST Act. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed under the negative limb of section 9-5 of the GST Act. For the supply to be a going concern that is GST-free, the requirements of section 38-325 of the GST Act need to be met. Section 38-325 states: (1) The supply of a going concern is GST-free if: (a) the supply is for consideration; and (b) the recipient is registered or required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. (2) A supply of a going concern is a supply under an arrangement under which: (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier). Paragraphs 249 to 253 of GSTR 2004/6 state as follows: 249. As explained in paragraph 183 of this Ruling, the sale of a co-owner's interest in property may be a supply by that co-owner in carrying on a leasing enterprise in its own right. For the supply of an interest in leased property to be the supply of a going concern, an enterprise must be carried on in relation to that interest. 250. We consider that a leasing enterprise can be carried on in relation to a co-owner's interest in leased property. 251. If a co-owner carries on a leasing enterprise in relation to their interest in leased property, the supply of part or all of that co-owner's interest in the property is the supply of all things necessary for the continued operation of the enterprise. The requirements of paragraph 38-325(2)(a) are met because the purchaser of the interest acquires a reversionary interest in the interest in the property, that is, that interest subject to the rights and obligations pursuant to the existing lease. 252. Paragraph 38-325(2)(b) requires that the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part or a larger enterprise carried on by the supplier). We consider that if an interest in a property is used in a leasing enterprise carried on by a co-owner, the co-owner, as the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply. 253. The supply of an interest in leased property is GST-free as the supply of a going concern if it meets the requirements of section 38-325. In this ruling request, it was submitted that the proposed sale will be made on the basis that "the Vendors will transfer to the Purchasers everything that is required to carry on that enterprise" and "the Vendors will carry on the enterprise until the day on which the transfer is affected". Given the above and provided that both the vendor and the purchasers will agree in writing that the sale will be of a going concern, C's proposed sale of her interests in the commercial property to the Purchasers will be a GST- free supply of a going concern provided all the requirements of section 38-325 of the GST Act are met.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.