Private ruling: GST and property
Published: May 2015

Ruling: Q1: Is GST payable on the transfer of your 50% interest in Unit C? | A1: No.

Relevant facts and circumstances: You are not registered for GST. You and your sibling, referred to as the co-owners, inherited a property in 200X as tenants in common in equal shares. The Property was the principal residence of your parents with the house being built in the 19XXs. After inheriting the Property you and your sibling rented the Property and derived rental income for the period 200X to 20XX. After this date the co-owners decided to demolish the existing residence and construct three new residential units on the land (Unit A, Unit B and Unit C). Construction commenced in 20XX and was completed in 20XX with the three units then being rented to residential tenants. Construction expenses were funded equally. After construction the co-owners each have a 50% share in the three units and distribute the rental income equally. There is no agreement (written or oral) detailing the rights and obligations of the co-owners. The construction of the three new dwellings was not funded out of the joint borrowings or funds of the co-owners. The construction was originally funded through a single bank loan in the names of the co-owners (and their spouses). The loan was extinguished with your sibling repaying 50% of the loan in cash with you re-financing and entering into a separate individual loan agreement for your portion of the original loan (effectively 50% of the construction costs). The joint activities of the co-owners relating to the properties are for the family's mutual benefit or the mutual benefit of all the co-owners. The co-owners of the income producing property jointly appointed a real estate agent to manager the rental properties. The co-owners do not act independently of each other in making decisions about their respective investments. The co-owners make all decisions jointly. Each co-owner does not make independent decisions with regard to the acquisition of an interest in income producing property. Any decision is made jointly. Rental income from the properties is paid to the real estate agent and held in a trust account. The majority of expenses are paid by the real estate agent from the rental proceeds with the balance paid into a joint account held in the names of the co-owners on a monthly basis. Any other expenses are paid either directly out of the joint account or from the personal funds of a co-owner with that co-owner then reimbursed from the joint account. You are considering transferring your 50% interest in Unit C to your sibling. In return, your sibling will transfer her 50% interest in Unit B to your spouse. Your long term intention is to rent the units.

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 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-10 | A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supply you make. The term 'taxable supply' is defined in section 9-5. 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. The question in this case centres around the supply of an interest in property. The first issue to consider is to determine who is making the supply, a partnership of the co-owners or each co-owner in their own right. GST and the co-ownership of property is examined in Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6). The term 'partnership' is defined for GST purposes as: (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 (b) a limited partnership. In this case, we consider the co-owners fall within the second limb of paragraph (a) of the definition above and is a partnership being an association of persons' receipt of ordinary income or statutory income jointly. Such partnerships are referred to as a 'tax law partnership'. The next step is to consider whether an enterprise is being carried on, and if so by whom. The term 'enterprise' is defined in section 9-20 and includes a 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. As such, we consider that the development and rental of the completed units constitute an 'enterprise' for GST purposes. Once it is established that an enterprise is being conducted, we need to determine whether it is the tax law partnership or each co-owner (in their own right) that carries on the enterprise. Paragraph 61 of GSTR 2004/6 provides that such a determination requires the objective evaluation of all the facts and circumstances of a case, including the conduct of the co-owners or the property. Paragraph 62 of GSTR 2004/6 lists a number of factors which may indicate that the enterprise is being carried on by the tax law partnership. Paragraph 66 of GSTR 2004/6 lists factors that may point to an enterprise being carried on by each co-owner in their own right, and not by a tax law partnership. In this case, with reference to the indicators in paragraphs 62 and 66 of GSTR 2004/6: • there is no agreement (either written or oral) detailing the mutual rights and obligations of the parties • the Property was acquired jointly under the terms of a deceased estate • the Property is held as tenants in common • the construction of the new dwellings was not funded from joint borrowings or funds • an initial bank loan was entered into for the costs of construction (as required by the bank) with your sibling paying out their portion of the loan in cash with you subsequently re-financing and entering into a separate loan agreement for your portion of the original loan • 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 • the co-owners of the income producing property jointly appointed a real estate agent to manager the rental properties • the co-owners do not act independently of each other in making decisions about their respective investments making all decisions jointly • each co-owner does not make independent decisions with regard to the acquisition of an interest in income producing property making any decisions jointly • rental income from the properties is paid to the real estate agent and held in a trust account • the majority of expenses are paid by the real estate agent from the rental proceeds with the balance paid into a joint account held in the names of the co-owners on a monthly basis • any other expenses are paid either directly out of the joint account or from the personal funds of a co-owner with that co-owner then reimbursed from the joint account. Given the above, we consider that it is each co-owner who is conducting a leasing enterprise in their own right in respect of their individual interest in the properties. Although a tax law partnership does exist, we consider that it does not carry on the enterprise. Therefore, it will be you, and not the tax law partnership which is making the supply of your 50% interest in Unit C. Paragraph 244 of GSTR 2004/6 provides that where 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. The next issue to consider is whether you, as the supplier of your 50% interest in Unit C, are making a taxable supply. As you are not registered for GST, it must be determined whether you are required to be registered for GST. Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000). As discussed above, it is considered that the rental of the completed units constitute an 'enterprise' for GST purposes. The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: (a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or (b) your projected GST turnover is at or above $75,000. The definitions of both current and projected GST turnover exclude the value of supplies that are input taxed. Supplies you make of by way of leasing the residential units are considered input taxed supplies and as such are not included in the calculation of your GST turnover. Paragraph 188-25(a) provides that when calculating your projected turnover you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether the supply of your 50% interest in Unit C is a transfer of a capital asset and excluded from the calculation of your projected GST turnover. Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSRT 2001/7) discusses what is regarded as a 'capital asset' at paragraphs 31 to 36. Whilst not specifically defined for GST purposes, the term 'capital assets' generally refers to those assets that make up the profit yielding subject of an enterprise and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. Capital assets are to be distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. In this case the residential units were constructed with the intention to generate rental income as part of carrying on your leasing enterprise. The transfer of your interest in Unit C was not and inherent in, or incidental to, the carrying on of that enterprise. Given the facts in this case we consider the transfer of your 50% interest in Unit C constitutes the transfer of a capital asset for the purposes of section 188-25 and will therefore be disregarded when calculating your projected GST turnover. As the value of your input taxed supplies of leasing residential premises and the value of your transfer of your interest in Unit C are excluded from the calculation of your GST turnover, you are not required to be registered for GST pursuant to section 23-10. | Detailed Reasoning - Conclusion: GST is payable on any taxable supplies that you make. One of the requirements of a taxable supply include that you are registered or required to be registered for GST. In this case, you are neither registered nor required to be registered for GST and as such will not be making a taxable supply when you supply your 50% interest in Unit C.