Private ruling: GST and matrimonial property distribution
Published: March 2014

Ruling: Q1: Does the entity make a taxable supply when it transfers the property to the spouse as part of the divorce settlement? | A1: No, the entity does not make a taxable supply when it transfers the property to the spouse as part of the divorce settlement. | Q2: Does an adjustment arise following the supply of an enterprise asset under divorce settlement? | A2: Yes, you are required to make an increasing adjustment to repay all input tax credit you have claimed on the property, where the transfer of the property under the Matrimonial Property Distribution (MPD) is before the end of the last adjustment period. | Q3: What is the GST consequence when the spouse sells the property? | A3: The spouse needs to consider the application of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the spouse's own circumstances. The supply will be a taxable supply if all the requirements for a taxable supply are met.

Relevant facts and circumstances: You, an entity, are registered for GST. You own land as trading stock. You acquired a piece of vacant land (property) as taxable supply and you have claimed input tax credit for the purchase. Your director transferred the property to his spouse as part of the property split of assets of the entity, under a divorce settlement.

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 11-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 129 | A New Tax System (Goods and Services Tax) Act 1999 Section 129-40 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 129-50(2)(b) | A New Tax System (Goods and Services Tax) Act 1999 Division 130

Reasons for decision: Summary: Goods and Services Tax Ruling GSTR 2003/6 (GSTR 2003/6) explains the GST consequences of a transfer of an enterprise asset to a spouse as a result of a Matrimonial Property Distribution (MPD) under the Family Law Act 1975 (FLA). The Ruling discusses whether the transfer is a taxable supply under section 9-5 of the GST Act. Paragraph 12 of GSTR 2003/6 explains the term enterprise asset. Enterprise asset means real property, tangible and intangible personal property that is owned by either or both spouses or a related entity and used or intended to be used in an enterprise of the entity that is registered or required to be registered. Enterprise assets include trading stock, plant, office equipment, motor vehicles and real property. Enterprise assets can be the subject of an MPD. When an enterprise asset is transferred, one has to consider the GST consequences of the transfer, that is, whether the transfer is a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act 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. According to GSTR 2003/6, the transfer of assets to either spouse because of relationship breakdown does not constitute taxable supplies for two reasons: • there is no consideration for the transfer of the assets; and • the transfer is not made in the course or furtherance of an enterprise. Paragraph 36 of GSTR 2003/6 states: 36. We take the view that there is no consideration with a sufficient nexus to the assets supplied by way of a property distribution. Therefore, under a property distribution resulting from a breakdown of a marriage or other relationship the supply is made for no consideration for paragraph 9-5(a) purposes. Also paragraphs 41 and 42 of GSTR 2003/6 state: 41. We consider that there is no 'discernible relationship' between the supply of an asset under an MPD and the enterprise. Our view is based on a combination of factors. The main factor is the private nature of a marriage breakdown. Other factors include the binding nature of an FLA order or agreement and the lack of commercial flavour in the absence of consideration. 42. Where the overriding essential character of the supply is that of something being disposed of due to the personal circumstances of the spouse, upon marriage breakdown or otherwise under the FLA, rather than business circumstances of the enterprise, that supply is not made in the course or furtherance of the enterprise. In this case, the supply of an enterprise asset, vacant land, due to marriage breakdown is not a taxable supply because it is not a supply made in the course or furtherance of any enterprise and the supply is not made for consideration. GSTR 2003/6 provides: | Detailed Reasoning - Whether an adjustment arises following the supply of enterprise assets: 47. The GST Act entitles you to claim input tax credits for things used by your enterprise to the extent of your creditable purpose. When the extent of your creditable purpose for an asset is changed by later events, adjustments may need to be made under Division 129 or 130 Divisions 129 and 130 are concerned with adjustments arising out of a change in creditable purpose. If a thing acquired for use in an enterprise is applied for a private or domestic use there is a change in creditable purpose. The result may lead to increasing adjustments. 48. The rationale for the increasing adjustments is that when something is applied to a private or domestic purpose and removed from the GST system, it is going into final consumption.As no input tax credits are available for assets outside the GST system, it follows that when an entity applies an asset to a private or domestic purpose, input tax credits previously claimed should be returned. The adjustments calculated under Divisions 129 and 130 effectively return the input tax credits. Although of limited application in MPD situations, Division 130 is discussed later. … | Detailed Reasoning - The meaning of the word 'apply': 50. The term 'apply' is used in both Divisions 129 and 130. The ordinary meaning of the word 'apply' is 'to put to use; employ or to devote to some specific purpose'. This ordinary meaning is extended by the statutory definition of 'apply' in section 129-55 of the GST Act, which, 'in relation to a thing acquired or imported, includes: (a) supply the thing; and (b) consume, dispose of or destroy the thing; and (c) allow another entity to consume, dispose of or destroy the thing.' 51. The transfer of the asset under an MPD falls within the statutory definition of apply as the thing has been both disposed of and supplied. Our view is that the asset has been applied in circumstances where it is transferred to a spouse under an MPD. Example 3: Applying an enterprise asset 52. Emma and Darcy are in the process of divorcing each other. Darcy is the sole shareholder in Countryside Pty Ltd. As part of the MPD Emma is to receive a motor vehicle owned by the company. The orders require Darcy to do all things necessary to transfer the motor vehicle to her. The transfer of the motor vehicle from Countryside Pty Ltd to Emma is an application of the motor vehicle by Countryside Pty Ltd. | Detailed Reasoning - Applied for private use: 53. It is our view that entities can hold assets for a private use and purpose. Assets may be owned by a registered entity but not have been acquired for a creditable purpose. These assets are not used or intended to be used in the entity's enterprise and are 'private assets' of the entity for the purposes of this Ruling. For example, a company can acquire a yacht for the private purposes of the company or its directors and shareholders. Similarly, an entity can apply enterprise assets to a private use. 54. We consider that when an enterprise asset of a sole trader or related entity is transferred under an MPD there is an application of the asset of a 'private nature' within the terms of paragraph 129-50(2)(b). The application consists of the process of the setting aside, the taking of it out of the enterprise and the transfer or disposal of the asset. There is a total change or conversion in its application as an enterprise asset to one of a private nature when it is transferred. | Detailed Reasoning - Whose application: 55. The application we are concerned with under Divisions 129 and 130 is the application by the entity carrying on the enterprise. This requires the entity itself to apply the asset to a private or domestic use. In a transfer of an asset under an MPD, it is the private or domestic application of the supplying spouse or related entity that is relevant. The use to which the asset is put by the recipient spouse under an MPD is not relevant for the purposes of Divisions 129 and 130. Example 4: Private application by a related entity 56. Jill is the sole director and shareholders of JJ Pty Ltd, a speedboat hire company. When Jake and Jill's de facto relationship ended, they entered into an agreement to distribute their assets. As part of this agreement Jill agreed that she would arrange for the company to transfer one of its speedboats to Jake. The transfer of the speedboat by the company is a private application by the company. Jake's proposed use of the speedboat is not relevant. | Detailed Reasoning - Whether there is a change in creditable purpose under Division 129: 57. Division 129 may require an increasing adjustment if the private or non-business application of the asset in an MPD is different to the intended or former application of the asset by the enterprise. However, there is no adjustment necessary if the transfer of the asset under the MPD occurs after the end of the last adjustment period. 58. If the requirements of Division 129 are met, section 129-40 provides a method statement to work out in five steps whether you have an increasing adjustment. However, in using the method statement, step 1 first requires you to work out the extent to which the asset or thing has been applied to a creditable purpose, which is the 'actual application of the thing'. In your case, as you have claimed input tax credit on the purchase of the property, an increasing adjustment would arise under either Division 129 or 130 of the GST Act. However Division 130 only applies to goods that have been applied to private use. Land and real property are not goods. As such, only Division 129 is applicable to this case. As the actual application of the property would be private use, you are required to make an increasing adjustment to repay all input tax credit you have claimed on the property, where the transfer of the property under the MPD is before the end of the last adjustment period. | Detailed Reasoning - Question 3: GSTR 2003/6 provides: | Detailed Reasoning - GST consequences for the recipient: 82. This Ruling has focussed upon the transfer of assets from a supplying entity to a recipient spouse under an MPD. For the sake of completeness the following two points which relate to aspects of the ownership of the asset by the recipient spouse are noted. 83. First, the recipient spouse will be unable to claim any input tax credits in respect of the acquisition under an MPD. We have stated in paragraph 34 that our view is that no consideration with a sufficient nexus to the supply is provided in such situations, and, for similar reasons, we consider that the recipient spouse is not liable to provide such consideration. We have also stated that there is no taxable supply. Consequently, there is no creditable acquisition by the recipient spouse as the tests in section 11-5 have not been satisfied. 84. Second, a subsequent supply made by the recipient spouse to another entity is not within the scope of this Ruling as it is not made under an MPD (unless the subsequent supply is also under an MPD). The GST Act will have its ordinary application to these supplies. Example 9: Subsequent supply by the recipient 85. Lil receives a car under an MPD from the former partnership of Larry and Lil (see example 5 in paragraph 67). The partnership previously had an increasing adjustment of $2,750. Lil now uses the car 100% in her new business, Lil's Lillies. Although Lil had a prior interest in an entity that had an increasing adjustment in relation to the car, the car was not supplied to her in a taxable supply. There was no GST on the supply of the car to her. As the supply to her was not a taxable supply Lil has not made a creditable acquisition of the car. She cannot claim any input tax credits in relation to the car. Two years later Lil sells the car to an unrelated party. This subsequent supply made by Lil is not under an MPD, and will be a taxable supply if all the tests in section 9-5 are met. In this case, when the spouse sells the property the spouse needs to consider the application of section 9-5 of the GST Act to the spouse's own circumstances. The supply will be a taxable supply if all the requirements for a taxable supply are met.