Private ruling: Property subdivision under a partition agreement
Date of advice: 4 July 2019
Published: September 2019

Ruling: Q1: Is the GST payable by you in respect to the taxable supply of land you make as a result of the Partition Agreement attributed pursuant to subsection 29-5(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in the tax period the State Revenue Office issued a Duty of Assessment for Transfer of Land? | A1: Yes Issue 2 - Income Tax | Q2: Do you derive assessable income under the partition agreement at the time the State Revenue Office issued the Duty of Assessment for transfer of land? | A2: Yes

Relevant facts and circumstances: 'A' as Trustee for 'B' (You) is registered for GST effective from 20xx. You account for GST on a cash basis and report GST quarterly. You and 'C' (collectively referred to as the Co-owners) acquired land (the Property) as tenants in common. You have a xx% ownership interest in the Property. 'C' has a xx% ownership interest. The intention when the Property was acquired was to construct X residential townhouses on the Property with each Co-owner owning XX townhouse each. You acquired the interest in the land with the intention to sell X of the townhouses for profit. The townhouses have been constructed. Lot X is occupied by 'C'. Lot Y is currently listed for sale. Separate titles for each townhouse were issued in 20xx. In 20xx the parties submitted a Partition Agreement application to the State Revenue Office (SRO). The partition of the Property was affected by the Partition Agreement between the Co-owners. The SRO issued a Duty of Assessment for Transfer of Land in 20xx where it was assessed that you had a nil amount payable in respect to stamp duty. The SRO issued a Duty of Assessment for Transfer of Land in 20xx with 'C' liable to pay stamp duty of an amount of $XX. The Partition Agreement provides the Co-owners appoint a Solicitor as their agent for the purpose lodging the plan of subdivision for registration with the Land Titles Office. The Solicitor will also be responsible for preparing and lodging transfers for registration together with the subdivision plan and certificate of title. The Solicitor will be responsible for doing whatever is necessary to ensure registration of the transfers for two titles to issue as follows: · Lot X in the name of 'C' · Lot Y in the Trust. The Partition Agreement also provides that the Co-owners agree that for the purposes of stamp duty each party exchanges on equal part of the whole of the Property and no amount of money is required to be paid by either party there being equality of partition by the agreement unless otherwise as assessed by the State Revenue Office due to the present holdings of xx/xx%.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-15 | Subsection 9-15(2) | Subsection 29-10(2) | Income Tax Assessment Act 1997 Section 6-5 | Section 10-5 | Section 102-5 | Section 104-10 | Section 112-25 | Section 118-20 | Duties Act 2000 Section 27

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 | Detailed Reasoning - Issue 1 - Goods and Services Tax: Subsection 29-10(2) provides that if you account for GST on a cash basis, the GST payable on a taxable supply is attributable to the tax period the consideration is received. However, the GST payable is attributable only to the extent that the consideration is received or provided in that tax period. Section 9-15 contains the meaning of the term 'consideration' and includes: · any payment, or any act or forbearance, in connection with a supply of anything; and · any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. Subsection 9-15(2) provides that it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply. Prior to the partitioning of the Property, you held a xx% interest in the Property with 'C' holding a xx% interest. You entered into the Partition Agreement on ddmmyyyy agreeing to partition the Property under the terms and conditions of the agreement. In summary, the effect of the Partition Agreement will be: · 'C' will hold a 100% legal and beneficial interest in Lot X; and · you will hold a 100% legal and beneficial interest in Lot Y The mechanism to effect the partition will be: · a transfer by 'C' of her xx% legal and beneficial interest in Lot Y to you; and · the transfer of your xx% legal and beneficial interest in Lot X to 'C'. In this case, the Partition Agreement was lodged with the SRO and subsequently ratified. On xx/xx/xxxx the SRO made an assessment of the stamp duty payable pursuant to section 27 of the Duties Act 2000 (Duties Act). The Duties Act provides that stamp duty is payable on a transaction that results in a change in the beneficial ownership of 'dutiable property'. The goods and services tax (GST) consequences of the partitioning of real property among joint tenants or tenants in common (co-owners) is dealt with in Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land . It provides the following commentary 48. To effect a partition under an agreement, all the co-owners agree to divide the land and to mutually transfer or convey their respective interests in the parts to be taken and enjoyed in severalty by the other. Each transfer or conveyance is a supply. ... 50. The Commissioner considers that the subdivision of land by co-owners does not constitute a supply for the purposes of GST. All that results is that the subdivided land is held under different titles by the same owners. While the effect of the subdivision is to create new rights and titles in substitution of the original rights and titles, there is no change in the ownership of the subdivided land. Accordingly, where land is jointly held, a subdivision, by itself, does not involve a transfer of any interests in the land between the co-owners. ... 57. 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 or court order for co-owners to effect a partition is in connection with the enterprise and is a supply in the course or furtherance of that enterprise. ... Example 4 - Supply in the course or furtherance of an enterprise 66. ConstructCo and DevelopCo each carry on a separate enterprise of residential property development. Both are interested in developing the same piece of land. They enter into a joint venture to buy the land together in equal shares and to construct 8 strata titled residential units on the land. ConstructCo and DevelopCo agree to take 4 units each after the development is completed . 67. When the strata plan is registered at the Land Titles Office each of the 8 units is held jointly as tenants in common in equal shares . 68. On completion of the 8 units, under the partition, ConstructCo transfers its interest in units 1 to 4 to DevelopCo. In return DevelopCo transfers its interest in units 5 to 8 to ConstructCo . 69. The joint venture entered into by ConstructCo and DevelopCo is not an entity for GST purposes (that is, it is a non-entity joint venture ). 45 70. The transfer by ConstructCo of its interest in units 1 to 4 to DevelopCo is connected to the enterprise that ConstructCo carries on as the units were applied in ConstructCo's enterprise of property development. As part of that enterprise, ConstructCo will sell, dispose of or transfer units it has constructed. Similarly, the transfer by DevelopCo of its interest in units 5 to 8 is made in the course or furtherance of the enterprise that DevelopCo carries on . ... 86. The Commissioner considers that, under a partition by agreement or where a court orders the co-owners to effect a partition, 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. ... 98. The Commissioner considers that the transfer of an interest in a part of the land by a co-owner is 'in connection with', 'in response to' or 'for the inducement' of the supply by each of the other co-owners of their respective interests in a part of the land. In this case no amount of money is required to be paid by either party under the Partition Agreement. Section 9-75 contemplates that 'consideration' may be in the form of something other than money. In such cases the 'consideration' will be the market value of that something. In the context of circumstances similar to this case, Goods and Services Tax Ruling GSTR 2003/12; Goods and services tax: when consideration is provided and received for various payment instruments and other methods of payment discusses non-monetary consideration in a barter transaction. Paragraphs 68 to 70 of GSTR 2003/12 states the following: 68. A direct barter of goods or services can also occur (for example, A and B make supplies to each other, with A's supply being consideration for B's supply and vice versa). A time lapse might occur between the two supplies. Unless an earlier invoice has been issued, the supply that is made first will trigger the attribution of GST liabilities and input tax credits on the later supply, for which the first supply is consideration. 69. When the current supply is made by A, A has both made a supply and provided consideration for B's supply while B has neither made a supply, nor provided consideration for A's supply. At this point, unless an earlier invoice has been issued, any GST liabilities and input tax credit entitlements in relation to B's supply will become attributable to the current tax periods for A and B. A may claim an input tax credit for any GST included in the consideration it has paid for B's supply. Similarly, B has received a prepayment for its future supply, and therefore must account for GST on that supply. 70. The GST payable by B and the input tax credit entitlement of A are based on the value of the consideration paid by A for B's future supply, which is the GST-inclusive market value of A's supply. When B later makes its supply, A will have received consideration for its earlier supply, which will be equal to the GST-inclusive market value of B's supply. Given the above we regard the supply by 'C' of her interest in Lot Y to you is consideration for your supply to her. The consideration received, being your receipt of the beneficial interest of Lot Y, was received in the tax period the SRO effected the change in the beneficial ownership (and made an assessment of stamp duty payable). Therefore the GST payable in regard to your taxable supply is attributable to your quarterly tax period ending 30 June 2018. | Detailed Reasoning - Issue 2 - Income Tax: There are three ways profits from a land subdivision can be treated for taxation purposes: | Detailed Reasoning - Ordinary income: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693)(MyerEmporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. TR 92/3 defines the term 'isolated transactions' as: · transactions outside the ordinary course of business of a taxpayer carrying on a business; and · transactions entered into by non-business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered: a) the nature of the entity undertaking the operation or transaction b) the nature and scale of other activities undertaken by the taxpayer c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained d) the nature, scale and complexity of the operation or transaction e) the manner in which the operation or transaction was entered into or carried out f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction g) if the transaction involves the acquisition and disposal of property, the nature of that property, and h) the timing of the transaction or the various steps in the transaction. In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135 ( Casimaty ), the legal principles in relation to the subdivision of land were discussed at length. In concluding his judgment that the subdivision of the taxpayer was a mere realisation of a capital asset, Justice Ryan said, at 97 ATC 5152: Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. [Emphasis added] In addition to the above general factors, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the 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 as follows: · 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. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Market Value: It is reasonable for the market value of the land at the time the State Revenue Office issued the duty of assessment for transfer of land to be used when determining the profit or loss made on the change in ownership of lot x. | Detailed Reasoning - Capital gains tax: Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1 (section 104-10 of the ITAA 1997), occurs when you dispose of your ownership interest in a CGT asset to another entity. Under section 112-25 of the ITAA 1997, the subdivision of land does not result in a CGT event. As such, you are not making a capital gain or capital loss at the time of the subdivision. You make a capital gain or loss at the time you enter into the contract for the disposal of the subdivided land and this is when there is a change in ownership. Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 occurred due to the change in ownership of lot 'x, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997.

As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock. | As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose. | As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.