Private ruling: Sale of property
Date of advice: 18 December 2018
Published: April 2019
Ruling period: 19 December 2018-30 June 2022
Date scheme commenced: 19 December 2018

Ruling: Q1: Are you liable for GST in regard to the proposed transfer where partners transfer their of 50% interest in the property located within the indirect tax zone? | A1: No

Relevant facts and circumstances: You are registered for GST as a partnership. You carry on an enterprise of leasing commercial property located in the indirect tax zone. Two partners purchased the Property as joint tenants, a third partner purchased a 50% interest in the Property on xx/xx/xxxx. The Property is managed by all members of the partnership. All monies incoming and outgoing relating to the Property are dealt with in the partnership bank account. The only other asset of the partnership is shares that will be sold prior to the sale of the Property. There is no written partnership agreement. Two partners intend to sell their 25% shares (total 50%) of the Property to a new partner. The parties intend to agree that the transfer/sale is to be the sale of a going concern and will include a statement as such in the Contract. The value of the Property has been established as fair market value, by you. An independent valuation has not been performed Upon the implementation of the transaction, the Property will be owned by the third partner and the new partner A new partnership has been registered for the new ownership –and will continue to carry on the leasing of the Property. You will dissolve the existing partnership subsequent to the sale of the Property. There is a tenant in the premises and there will be a lease in place at the time of sale. There was no finance used to purchase the Property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Section 9-40 | Section 38-325 | Subsection 38-325(1) | Subsection 38-325(2) | Paragraph 38-325(2)(a) | Paragraph 38-325(2)(b)

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 on the supply of an interest in property. | Detailed Reasoning - What is the entity structure – a partnership or each co-owner?: GST and the co-ownership of property are 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 your 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 in receipt of ordinary income or statutory income jointly. Such partnerships are referred to as a ‘tax law partnership’. | Detailed Reasoning - What is the enterprise being carried on?: 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 rental of the Property constitutes an ‘enterprise’ for GST purposes. | Detailed Reasoning - Who is carrying on the enterprise – the Partnership or each co-owner?: 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. Paragraphs 81 to 84 of GSTR 2004/6 discuss tax law partnerships involving family members and present similar circumstances to your specific situation. In your situation we consider it is the tax law partnership that is carrying on the leasing enterprise in relation to the Property (referred to in GSTR 2004/6 as an ‘enterprise partnership’). Paragraphs 114 to 116 of GSTR 2004/6 provides that where a tax law partnership carries on an enterprise (i.e. the partnership is an enterprise partnership), supplies or acquisitions made by, or on behalf of, partners in a tax law partnership in their capacities as partners are taken to be supplies or acquisitions made by the partnership. Given the above, we consider in this case that the reference to ‘You’ in section 9-5 and section 9-40 referred to above is a reference to the tax law partnership of you. | Detailed Reasoning - Is the supply by way of transfer of the interest in the Property a taxable supply?: As discussed previously with reference to section 9-5, a supply will not be a taxable supply to the extent the supply is GST-free or input taxed. In your situation, the parties agree that the transfer/sale is to be the sale of a going concern and a statement as such will be included in the agreement for the sale of two partner’s interest. Subsection 38-325(2) provides that for GST purposes, 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 part of a larger enterprise carried on by the supplier). Once it is established that a supply is a supply of a going concern, subsection 38-325(1) provides that the sale of the going concern will be GST-free if: ● the supply is for consideration; and ● the recipient is registered or required to be registered; and ● the supplier and the recipient have agreed in writing that the supply is of a going concern. Paragraphs 183 to 190 of GSTR 2004/6 discuss supplies (by an enterprise partnership) of an interest in income producing property. Paragraph 184 of GSTR 2004/6 provides that an enterprise partnership can carry on a leasing enterprise, in relation to each co-owner’s interest in the leased property, as part of a larger enterprise involving all the interests. Paragraph 187 of GSTR 2004/6 states in part that a supply of an interest in leased property is the supply of all things necessary for the continued operation of an enterprise. This is because the purchaser acquires a reversionary interest, that is, the interest in the property subject to the rights and obligations pursuant to the existing lease. In your case the Property consists of a commercial building and is tenanted. The tenants will have a current lease agreement at the time of sale. We consider in your case, that the lease in place is necessary for the continued operation of the enterprise and paragraph 38-325(2)(a) has been satisfied. Paragraph 188 of GSTR 2004/6 provides that paragraph 38-325(2)(b) will be satisfied where property is used in a leasing enterprise at the time of the supply (settlement), the enterprise partnership, being the supplier of the interest, carries on an enterprise in relation to that interest until the day of the supply as is the situation in your case. As such, subsection 38-325(2) has been satisfied. In regard to subsection 38-325(1): ● the parties have agreed on a value they believe is indicative of market value to determine consideration for the sale; ● The new partnership is registered for GST (as a partnership); and ● the sale contract will contain a written statement that the parties agree that the transfer/sale is to be the sale of a going concern. Given the above, section 38-325 will be satisfied. In summary, the sale of the 50% interest in the Property will be a supply from one Partnership to the newly formed partnership. The supply will be a GST-free supply of a going concern and as such GST will not be applicable to the transfer where the requirements of section 38-325 as discussed above are satisfied.