Co-owners of land or parcels of land often wish to exchange ownership interests to become sole owners of specific land or specific parcels of land.
This process of partitioning land may have adverse income tax, capital gains tax (CGT), goods and services tax (GST) and Victorian stamp duty consequences if done incorrectly.
The administrative approach adopted by the Federal Commissioner of Taxation (FCT) or the Commissioner of State Revenue (CSR) for partitions and bare trusts also varies significantly.
A partition of land occurs when W and B as co-owners of both ‘white acre’ and ‘black acre’ exchange their interests so that W solely owns white acre and B solely owns black acre or when W and B as co-owners of one parcel of land divided the land into separate lots and exchange their interests so that W solely owns lot 1 and B solely owns lot 2 (CSR (Vic) v Christian  2 VR 129 at 138 & 143).
A partition requires some of the co-owners to exchange interests and does not apply where co-owners transfer their interest to one or more of the co-owners without taking any exchange of land (CSR (NSW) v Webeck  NSWCATAP 279 at ).
Where land is subdivided and some lots are sold, a partition may occur in respect of the balance of the subdivided land (Maybelina Investments P/L v CSR (Vic)  VCAT 549 at ).
Where the value of the subdivided land exchanged is different, ‘owelty’ (equalisation money) may be paid (Croghan v. Grosvenor  SASC 3066 at ).
Legislative references are to the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GSTA 1999) and the Duties Act 2000 (Vic) (DAV 2000).
A similar result to a partition may arise when W and B as co-owners acquired one parcel of land on the basis that W is absolutely entitled to lot 1 and B absolutely entitled to lot 2 upon subdivision of the land.
A bare trust arises where the trustee holds property as a cypher for the beneficiaries without any interest in the property other than that existing by being a trustee and having legal title and without any duty or further active duty to perform except to convey it to the beneficiaries (Herdegen v FCT (1988) 20 ATR 24 at 32 - 33; Corumo Holdings P/L v C Itoh Ltd (1991) 24 NSWLR 370 at 398).
Care is required in preparing the documentation where the land will be held pursuant to a bare trust for development purposes as this may alter the co-owner’s rights so that there is no bare trust (White Rock Properties P/L v CSR (Vic)  VSCA 77 at ).
Separate bare trust deed and bare trust directions are commonly prepared to ensure the trustee has no active duties under the bare trust deed.
The transfer of land may be taxable as a disposal of a CGT asset, trading stock or a profit making scheme asset with different income taxation consequences.
There are no CGT, trading stock or profit making scheme consequences upon the subdivision of land into transferable interest (CGT Determination 7; Barina Corporation Ltd v FCT (1985) 4 NSWLR 96; FCT v Whitfords Beach P/L  HCA 8).
However, upon exchange of the interests for sole ownership of specific land, each co-owner disposes of their interests in the balance land with CGT, trading stock or profit making scheme consequences (Johnson v FCT  AATA 1322 at ; TD 45; TD 92/148; sec. 70-100 ITAA 1997; GSTR 2009/2 at  - ).
TD 92/148 provides the following example:
Example: A and B were joint owners of a one hectare block of land acquired in 1986. In 1992, they subdivide the land. A took a one-half hectare block (block 1) and B took the other one-half hectare block (block 2). A acquired a 50% interest in land constituted by block 1 in 1986 and acquired the remaining 50% interest from B in 1992. Similarly, B acquired a 50% interest in the land constituted by block 2 in 1986 and acquired the remaining 50% interest from A in 1992. A and B have each disposed of their 50% interest in that land constituted by blocks 2 and 1 respectively, in 1992.
The result is different when the land was acquired under a bare trust where each co-owner’s interest in the land is referable to an ‘absolute entitlement’ to specific land upon subdivision.
A bare trust is legislatively or administratively transparent so the beneficiary and not the bare trustee is subject to the tax consequences.
If a beneficiary is absolutely entitled to a CGT asset as against a trustee (disregarding any legal disability), the CGT consequences apply to the beneficiary and not the trustee (sec. 106-50 ITAA 1997).
The FCT considers that this CGT absolute entitlement provision does not apply where more than one taxpayer is beneficially entitled to the interest in the CGT asset (TR 2004/D25). Accordingly, a bare trust partition mighty only be effective if each co-owner takes sole ownership of specific subdivided land.
Where co-owners transfer land to a trustee to expressly subdivide and retransfer specific lots back to each co-owner, the land does not become trading stock (Starco P/L v FCT  AATA 6).
Income of a bare trust is assessable to the beneficiaries and not the bare trustee (Colonial First State Investments Ltd v FCT  FCA 16; cf PSLA 2000/2).
A bare trustee is generally exempted from lodging taxation returns, because it is a transparent trust (PSLA 2000/2).
The proposed taxation of trust reforms may modify this approach (Treasury, Taxing trust income - options for reform, October 2012 at Ch. 5 regarding the taxation of bare trusts).
There are no GST consequences upon the subdivision of land into transferable interest (GSTR 2009/2 at ).
However, upon exchange of the interests for sole ownership of specific land, each co-owner disposes of their interests in the balance land with GST consequences, if GST registered or required to be GST registered.
GSTR 2009/2 provides the following example:
Example 6 - Supply in the course or furtherance of an enterprise carried on by one co-owner and not the other co-owner
79. Two friends, Caroline and Shaun, purchase a block of land as tenants in common in equal shares with the intention to subdivide the land, to construct two houses and to take a house each.
80. Caroline's intention in entering into the arrangement is to use the house she acquired as her primary residence. Caroline is not carrying on an enterprise in these circumstances. In Caroline's case, the purpose of the arrangement is private and domestic in nature.
81. Shaun's intention in entering into the arrangement is to sell the house he acquires for a profit. Shaun is carrying on an enterprise in these circumstances because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.
82. Shaun and Caroline agree that Shaun will take Lot 1 which includes House 1 and Caroline will take Lot 2 which includes House 2.
83. Caroline and Shaun give effect to the partition, after the completion of construction, by Shaun transferring his interest in Lot 2 to Caroline and by Caroline transferring her interest in Lot 1 to Shaun.
84. The transfer by Caroline of her interest in Lot 1 to Shaun is not in the course or furtherance of an enterprise she carries on. Caroline's transfer of her interest in Lot 1 to Shaun does not have any connection with an enterprise that she carries on.
85. In contrast, the transfer by Shaun of his interest in Lot 2 to Caroline is in the course of furtherance of an enterprise he carries on. Shaun's transfer of his interest in Lot 2 to Caroline is connected with his enterprise of selling new residential premises for profit.
The result is different where the land was acquired under a bare trust and each co-owner’s interest in the land is referable to an ‘absolute entitlement’ to specific lots upon subdivision.
A bare trustee does not conduct a GST enterprise. The beneficiaries carry on the GST enterprise using the property held on bare trust. The beneficiaries make the supplies and are entitled to input tax credits (GSTR 2008/3 at ). Any supply or acquisition or election to apply the margin scheme or going concern exemption by the bare trustee is made on behalf of the beneficiaries (GSTR 2008/3 at  & ).
Transactions between the bare trustee and the beneficiaries are ignored (GSTR 2008/3 at ). The transaction between beneficiaries may be a supply if the beneficiary is GST registered or required to be GST registered (GSTR 2008/3 at ).
Where each co-owner’s interest in land is referable to a specific lot upon subdivision, each co-owner will be considered to be the owner of the whole of the specific lot allocated to the co-owner upon subdivision, so there are no supplies upon exchange of interests in the other lots to become sole owner.
In Victoria, a partition levies duty only on the relative transfer of value between co-owners (sec. 27 DAV 2000).
Ruling DA.017 provides the following example:
X and Y own land in Victoria valued at $100,000 with a respective 30% and 70% interests in the land. The land is partitioned under an agreement such that after the partition, each has an interest of $50,000 in the land.
No duty would be charged on the transfer of Y's interest in the land because the value of Y’s interest in the land prior to the partition (ie $70,000) exceeds the value after the partition (ie $50,000). Duty would be charged on the transfer of X's interest in the land because the value after the partition (ie $50,000) is greater than that before the partition (ie $30,000). Duty would therefore be charged on the transfer of the interest in land to X and calculated on a value of $20,000.
The result is different where the land was acquired under a bare trust and each co-owner’s interest in the land is referable to a ‘beneficial ownership’ to specific lots upon subdivision.
Under a bare trust, where each co-owners land is referable to a specific lot upon subdivision, each co-owner will be considered to be the owner of the whole of the specific lot allocated to the co-owner upon subdivision, so there are no supplies upon exchange of interests in the other lots to become sole owner.
If documented correctly, the transfer of the interests in land into sole ownership pursuant to the bare trust where each co-owner’s interest in referable to specific lots upon subdivision would be exempt (sec. 34 DAV 2000 property vested in an apparent purchaser or sec. 35 DAV 2000 transfer to and from a trustee or nominee White Rock Properties P/L v CSR (Vic)  VSCA 77 at  - ).
The partitioning or distribution of interests pursuant to a bare trust may operate differently in other jurisdictions.