Private ruling: Goods and services tax (GST) and partitioning of property
Published: April 2013

Ruling: Q1: Are you making a taxable supply when you partition property? | A1: Yes.

Relevant facts and circumstances: A and B (You) are not registered for GST. You are related. You have built X townhouses. The property was inherited by A. As the property was already zoned for X town houses you decided to build the X town houses. The original intention was never to sell the properties. A would have Y town houses to rent out and B would have one town house to live in and one town house to rent out. You were advised by a solicitor for B to purchase a half share of the property prior to building and for you to enter into an agreement of intention to partition. B purchased a half share of the property. The transfer was a paper transfer and no money was paid. You have provided a copy of the agreement outlining your intentions. You have taken out a joint loan to build the town houses. However, the home loan is based on B's income and was required to be in both names as the property is in both names. B is paying the entire loan. Once the properties are partitioned B intends to refinance the loan so that it is only against their properties. A will have no loan. Construction of the town houses is complete. You have not partitioned the property. Z of the units are rented and the last unit is B's primary residence. The rental agreements are in A's name. There is no strata management plan. There is no joint bank account for paying expenses of the properties. You each have separate offset accounts attached to the loan. The rent for the properties is currently paid into A's offset account and the money offsets the loan. You want to proceed with the partition agreement but have been advised that you may have to pay GST on the transfer.

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 40-65, | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75, | A New Tax System (Goods and Services Tax) Act 1999 Section 75, | 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 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: You must pay the GST payable on any taxable supply that you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 Australia, 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. You have constructed X townhouses with the intention of partitioning the properties so that each of you (A and B) will have sole ownership of the properties rather than half ownership of all properties. A's intention was to rent out his Y properties and B's intention was to have one property to rent out and one property as their private residence. | Detailed Reasoning - Entity Structure: The word 'you' for the purposes of the GST Act, applies to entities generally. It is the entity that makes a taxable supply. You have entered into an agreement outlining your intention to build the X townhouses as joint venturers. However, you are currently renting Z of the units until the partitioning occurs. The meaning of 'entity' is considered in 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). The meaning of 'entity' is defined in subsection 184-1 of the GST Act to mean, amongst others, an individual, a partnership, or any other unincorporated association or body of persons. However, a non-entity joint venture is specifically excluded as an entity. For taxation purposes a tax law partnership may exist where persons are in receipt of income jointly. For example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. A tax law partnership is an entity in its own right. (Paragraphs 42 and 43 of MT 2006/1) Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a 'non-entity joint venture' to mean 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. As a non-entity joint venture is not an entity it cannot make taxable supplies. Each participant in the non-entity joint venture is taken to be an entity for GST purposes. | Detailed Reasoning - Non-entity joint venture or tax law partnership: The distinction between a joint venture and a partnership is explained in Goods and Services Tax Ruling GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes? (GSTR 2004/2). Paragraph 50 of GSTR 2004/2 explains that the distinction between a partnership and a joint venture was observed in the decision of the Supreme Court of NSW in A.R.M. Constructions Pty Ltd and Others v. Federal Commissioner of Taxation. In that case, Yeldham J stated: ...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 thereafter 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... Paragraph 51 of GSTR 2004/2 provides a table summarising the common features of a partnership and joint venture. | Detailed Reasoning - Joint Venture: Joint entitlement to profit or income Sharing of product or output in defined portions A continuing business Specific economic project One partner's actions may bind all of the partners Joint control of the venture Partners have indirect undivided interests in the partnership assets (a partner can individually deal with its interest in the partnership but not the underlying partnership assets.) Well-defined separation of interests, rather than a joint undivided interest, in assets contributed to the venture Partners in a partnership are agents of the other partners and are ordinarily jointly and severally liable for the expenses of the partnership Joint venture participants are usually liable for their own debts which they incur individually as principals A key characteristic of a joint venture for GST purposes is that each participant receives an agreed share of the product or output rather than a share of jointly earned profit. (Paragraph 31 of GSTR 2004/2) Your agreement states A will receive Y of the units and B will receive a number of the units. However, Y of the units are currently leased out to tenants. You have advised that the lease agreements are between A and the tenants. The rental income from the properties is being held in A's offset account against the loan. Another characteristic is that a joint venture is for a specified project, has a finite life and when the project is completed the joint venture ends. (Paragraph 40 of the GSTR 2004/2) In this case upon partition, the interests in the properties will be transferred so that each of you will have ownership of a number of properties and the project will be completed. These two features point to the arrangement being a joint venture. We consider that the remaining features listed in the table above are neutral in determining whether you are a joint venture or a partnership. We have given a greater weight to your sharing of output than the other features and on balance conclude that you are a non-entity joint venture. As such, A will be a separate individual entity and B will be a separate individual entity and you will each have to individually account for the GST on any taxable supplies that you make. | Detailed Reasoning - Supply by Partitioning of New Residential Premises: Goods and Services Tax Ruling GSTR 2009/2 Goods and Services tax: partitioning of land (GSTR 2009/2) considers the GST consequences of partitioning property among joint tenants and tenants in common. It is the Commissioner's view that if land is applied or intended to be applied in an enterprise carried on by a co-owner, a supply of that co-owner's interest in the land under a partition by agreement is in connection with the enterprise and is a supply in the course or furtherance of that enterprise. (Paragraph 57 of GSTR 2009/2) Further, where the partition of that land results in the termination of the enterprise which was carried on, the supply of the interest in the land by the co-owners would still be in connection with the enterprise carried on by the co-owner and is a supply in the course or furtherance of the enterprise. (Paragraph 58 of GSTR 2009/2) Section 40-65 of the GST act provides that sales of residential premises are input taxed (i.e. there is no requirement to pay GST or entitlement to claim GST credits) to the extent the property is residential premises to be used predominantly for residential accommodation. However, the supply is not input taxed to the extent that the residential premises are 'new residential premises'. 'New residential premises' are defined in section 40-75 of the GST Act and include those premises that: · have not previously been sold as residential premises, or · have been built, or contain a building that has been built, to replace demolished premises on the same land. However, the residential premises are not new residential premises if they have been used for making input taxed supplies for at least five years. For example, you rent to a tenant. For newly constructed residential premises, the supply under a partition between co-owners, or participants in a joint venture, of their interest in the land, constitutes the first sale of new residential premises but only to the extent of the interest supplied by one co-owner or participant to the other. (Paragraph 172 of GSTR 2009/2) | Detailed Reasoning - Enterprise that you carry on: We must establish if you are carrying on an enterprise. Section 9-20 of the GST Act defines an 'enterprise' to include 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, or · on a regular or continuous basis, in the form of a lease, license or grant of an interest in property. However, enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. (Paragraph 262 of MT 2006/1) A list of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade are provided in paragraph 265 of MT 2006/1. 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: · 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 the 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. You have come together with the intention of building X townhouses. You have demolished the original dwellings on the land, sought advice from a solicitor in regards to the venture and entered into an agreement outlining your intention to build the residential premises as joint venturers and partition on completion. You have borrowed money to fund the subdivision and the erection of X buildings. We consider that your actions amount to carrying on an enterprise of property development for the purposes of partition and the subsequent carrying on of a leasing enterprise. Paragraph 78 of GSTR 2009/2 discusses instances where jointly owned land is applied in an enterprise of one or more co-owners but not applied in an enterprise of other co-owners. In these circumstances, a partition of the jointly owned land will result in some co-owners making a supply that is in the course or furtherance of an enterprise and other co-owners making a supply that is not in the course or furtherance of an enterprise. This is illustrated in the following example. Example 6 - Supply in the course or furtherance of an enterprise carried on by one co-owner and not the other co-owner 79. Two friends, Caroline and Shaun, purchase a block of land as tenants in common in equal shares with the intention to subdivide the land, to construct two houses and to take a house each. 80. Caroline's intention in entering into the arrangement is to use the house she acquired as her primary residence. Caroline is not carrying on an enterprise in these circumstances. In Caroline's case, the purpose of the arrangement is private and domestic in nature. 81. Shaun's intention in entering into the arrangement is to sell the house he acquires for a profit. Shaun is carrying on an enterprise in these circumstances 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. 82. Shaun and Caroline agree that Shaun will take Lot 1 which includes House 1 and Caroline will take Lot 2 which includes House 2. 83. Caroline and Shaun give effect to the partition, after the completion of construction, by Shaun transferring his interest in Lot 2 to Caroline and by Caroline transferring her interest in Lot 1 to Shaun. 84. The transfer by Caroline of her interest in Lot 1 to Shaun is not in the course or furtherance of an enterprise she carries on. Caroline's transfer of her interest in Lot 1 to Shaun does not have any connection with an enterprise that she carries on. 85. In contrast, the transfer by Shaun of his interest in Lot 2 to Caroline is in the course of furtherance of an enterprise he carries on. Shaun's transfer of his interest in Lot 2 to Caroline is connected with his enterprise of selling new residential premises for profit. In your situation, B (similar to Caroline in the above example) is not carrying on an enterprise in relation to the one house (for example Lot 1) that is their primary residence as this is of a private and domestic nature. B is carrying on an enterprise in relation to one property and A is carrying on an enterprise in relation to two properties. The transfer by B of his interest in Lot V to A is not in the course of an enterprise that they carry on. Therefore, the requirement that the supply is made in the course or furtherance of an enterprise that you carry on under subsection 9-5(b) of the GST Act will be not be satisfied. The transfer by B of his interest in Lot W is connected with their enterprise. Therefore, the requirement that the supply is made in the course or furtherance of an enterprise that you carry on under subsection 9-5(b) of the GST Act will be satisfied. The transfer by A of their interest in the remaining lots are connected with their enterprise. Therefore, the requirement that the supply is made in the course or furtherance of an enterprise that you carry on under subsection 9-5(b) of the GST Act will be satisfied. | Detailed Reasoning - Supply for Consideration: The Commissioner considers that, under a partition by agreement each co-owner makes a supply of land for consideration. In the absence of an owelty payment, the consideration received is entirely non-monetary in that each co-owner gives up their interests in parts of the land in return for the same from other co-owners. (Paragraph 86 of GSTR 2009/2) The value of the consideration is the sum of the GST inclusive market value of all the other co-owners' interests in the part of the land acquired by a co-owner plus any owelty money received in respect of the partition. (Paragraph 97 of GSTR 2009/2) An owelty payment is any sum of money paid by one co-owner to another co-owner to take account of any differences in the value of the portions of the land they receive. Therefore, the requirement that the supply is made for consideration under subsection 9-5(a) of the GST Act will be satisfied on partition. | Detailed Reasoning - Connected with Australia: The property is located Australia, therefore the requirement that the supply is connected with Australia under paragraph 9-5(c) of the GST Act will be satisfied. | Detailed Reasoning - Registration for GST: If you carry on an enterprise you must register for GST if your GST turnover meets or exceeds the registration turnover threshold. Your GST turnover meets or exceeds your registration turnover threshold if either: · your current GST turnover is $75,000 or more (excluding GST) and the Commissioner is not satisfied that your projected GST turnover is below $75,000 or $150,000 (excluding GST) · your projected GST turnover is $75,000 or more (excluding GST). Your 'current GST turnover' is the value of all supplies that you make, or are likely to make in the current month, plus all the supplies that you have made in the previous 11 months. Your 'projected GST turnover' is the value of all supplies that you make, or are likely to make in the current month, plus all the supplies that you are likely to make in the next 11 months. Certain supplies, including the following, are excluded from the calculation of current GST turnover and projected GST turnover: · supplies that are input taxed · supplies that are not for consideration · supplies not made in connection with an enterprise that you carry on For each of you (A and B individually), on partition of the townhouses, your GST turnover will include the market value (excluding GST) of the others interest in the property acquired by you including any owelty paid. You have not provided a market value but this is likely to be in excess of $75,000. Therefore the requirement that you are required to be registered under paragraph 9-5(d) of the GST Act will be satisfied where your GST turnover meets or exceeds $75,000. | Detailed Reasoning - GST-free or Input taxed: There are no provisions under the GST Act whereby the supply of residential premises by way of partition can be GST-free. We have already established above, that a supply of residential premises, that are new residential premises by way of partition are not input taxed. | Detailed Reasoning - Conclusion: In summary, and taking into consideration all the information above, if the X units are partitioned, and five continuous years has not passed since renting the town houses to tenants: · On partition, A and B will each be required to register for GST and remit 1/11 of the GST inclusive market value of each others respective interest in the properties, with the exclusion of the property being retained by B for private purposes. Should you decide to proceed with partition you may be able to claim GST credits on the expenses incurred in the construction of the townhouses (excluding the private residence) by applying the Commissioner to backdate your registrations. | Detailed Reasoning - Applying the Margin Scheme to a taxable supply of land: The Commissioner takes the view that the margin scheme can be applied to a taxable supply of land by a participant in a joint venture, as a result of the partitioning of the land between the joint venture participants, provided the requirements of Division 75 of the GST Act are met. (Paragraph 170 of GSTR 2009/2) Further information on the margin scheme is available on ato.gov.au | Detailed Reasoning - Further Information: Please note that a subsequent supply of the whole of the residential premises by a co-owner or participant in a joint venture would be partly a taxable supply of new residential premises (if all the requirements of a taxable supply under section 9-5 of the GST Act are satisfied) and partly an input taxed supply of residential premises. (Paragraph 174 of GSTR 2009/2)