MGS Private

As part of the advice MGS Private provides on property development structures the much often used partition of property usually enters the discussion.

I am aware that there are some advisors who promote the use of partitions and do not report the GST or income tax consequences when the properties are partitioned. Although the income tax consequences can be significant it is the GST consequences that are usually substantial.

The Commissioner made it abundantly clear in GSTR 2009/2 issued on 8 April 2009 that a partition of real property is a taxable supply and if it is new residential it attracts GST. The Chief Commissioner of State Revenue provides the Commissioner of Taxation a list of all real property transfers every year. The Commissioner will find these and raise assessments and penalties where people are ignoring the law.

With the Commissioners view being 12 years old, little compassion will be afforded those ignoring the law. I have not heard the argument as to why GST is not payable upon a partition of new residential property.

As to the income tax consequences these have also been addresses. In Johnson v FCT [2007] ATAA 1322; 2007 ATC 2161 Senior Member McCabe said at paragraphs 15 and 16:

• Dividing the parcel in two for the purposes of a transfer to each joint owner effectively requires those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they are acquiring. It is as if the CGT assets contained in each share have to be unpacked and redistributed so that the taxpayer ends up holding half the number of shares in his or her own right – and those shares do not contain any CGT assets belonging to the other (former) joint owner.
  This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset and is therefore a CGT event: s 104-10. Subject to the legislation, tax is levied on the capital proceeds from a CGT event less the cost base of the asset. The capital proceeds are the sum of the money received in respect of the transaction (no money changed hands in this case) and the market value of any other property received (in this case, the market value of the interest acquired in the shares): s 166-20.

It is quite clear that both GST and income tax is payable. Although the income tax consequences may be mitigated the GST problem remains where it is ‘new residential property’.

MGS Private provides advice on alternative structures to partitions and partitions where they are suitable.