Edited version of private ruling

Authorisation Number: 1011580723403

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Ruling

Subject: GST treatment of supplies

Question 1

Are you making a supply to a community group in return for payment of $250,000?

Answer

Yes, under the GST Act, the payment of $250,000 is consideration that you receive for the supply of an obligation to build new commercial premises for the community group.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for goods and services tax (GST).

You registered for GST from 1 July 2000.

You are a not for profit entity.

You have been approached by a community group to build an extension to your existing building for their exclusive use.

The community group is not registered for GST.

The extension will cost approximately $250,000 to build.

You will conduct a public tender process for a contract with a builder to construct the building.

Once the construction costs are confirmed you will notify the community group of the final costs. The community group will transfer the funds to your nominated bank account.

You will be the owner of the new extension which is built on your land.

The community group will be responsible for the costs of utilities, insurance, outgoings, the furnishing/fit out and ongoing maintenance of the facility/premises.

The community group will be given exclusive use of the premises and will pay a peppercorn rent of $100 per annum for 20 years, with the option to extend the lease.

When the construction of the building is complete you will obtain an occupancy certificate for the building.

You will then provide keys to the building when a written occupancy agreement has been ratified between yourself and the community group.

You have advised that the term 'occupancy agreement' is in fact a lease agreement which has not been drafted.

In a telephone conversation between our office, and your representative, you have advised that the $250,000 is an inducement for you to construct premises that are purpose built and suitable for their use.

Assumptions

The agreement provided is only a draft version.

The rental agreement for the lease of the premises has not yet been drafted.

Relevant legislative provisions

Section 7-1(1) of the GST Act

Section 9-5 of the GST Act

Section 9-10 of the GST Act

Section 9-15 of the GST Act

Section 195-1 of the GST Act

Reasons for decision

Subsection 7-1(1) of the GST Act states that

GST is payable on *taxable supplies …

Note that the asterisk denotes a defined term in the GST Act.

Section 9-5 of the GST Act also provides the requirements necessary for a supply to be taxable and states:

You make a taxable supply 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.

Supplies

The first consideration is whether you make a supply (paragraph 9-5(a)).

The meaning of a supply for GST purposes is provided by section 9-10 of the GST Act.

The Tax Office view on supplies is contained in Goods and Services Tax Ruling GSTR 2006/9. Paragraph 33 of GSTR 2006/9 confirms that the concept of a supply as provided by subsection 9-10(1) of the GST Act is intended to encompass supplies as widely as possible. Subsection 9-10(2) provides a list of things that are included as supplies. This list includes a supply of services and the entry into, or release from, an obligation to do anything.

A supply requires some act of provision, furnishment, conferral or giving of some thing (paragraph 76 of GSTR 2006/9).

For GST purposes an entity may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient (paragraph 108 of GSTR 2006/9).

Consideration for a supply

A supply is a taxable supply, if, among other things, the supply is made for consideration. Consideration is defined in section 195-1 of the GST Act which states:

consideration, for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition.

Section 9-15 of the GST Act relevantly states:

1) Consideration includes:

a) any payment, or any act or forbearance, in connection with a supply of anything; and

b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

Paragraph 9-15(1)(b) of the GST Act highlights the fact that a payment will be consideration for a supply if the payment is in connection with a supply and if it is in response to or for the inducement of a supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment which is provided for that supply for there to be a supply for consideration.

Therefore, consideration comprises two elements. The first element is the payment by one entity to another; the second is the nexus that must be established between that payment and a supply.

You receive a monetary payment of $250,000 from a community group.

It is therefore necessary, given the definitions of supply and consideration in the GST Act, to determine whether there are supplies made by you to the community group and whether there is a sufficient nexus between these supplies and the above listed payment.

Is the payment consideration for a supply?

You state that the community group is entering into a project agreement with you to construct a purpose built building for the community group's primary use where the community group will provide the funds to finance the building of the premises. The community group under the project agreement will cover all costs of construction.

You have estimated that the construction would cost $250,000, and you will manage the construction of the building. Upon completion of the building the premises will belong to you.

GSTR 2003/16: inducements to enter into a lease of commercial premises, explains how inducements provided by a landlord or tenant for the entry, or agreement to enter, into a lease of commercial premises is treated under the GST Act.

Paragraph 9 of GSTR 2003/16 states,

An inducement provided by a tenant for a landlord to grant a lease is commonly referred to as a 'premium'. This inducement may be provided by a tenant for a number of reasons, including a shortage of desirable premises, or to obtain preferential treatment.

Furthermore, paragraph 10 & 11 of GSTR 2003/16 states,

10. Premiums are consideration for the grant of a lease, rather than for an agreement to grant a lease. However, it is possible for an inducement to be provided by a landlord or a tenant in return for the agreement of the landlord or tenant to enter into a lease.

11. Inducements may consist of monetary consideration, or non-monetary consideration or a combination of each.

From the facts provided, the monetary payment from the community group is an inducement for you to provide an obligation to supply new commercial premises owned by you on your land for their primary use for at least 20 years. This inducement was to secure a purpose built and suitable premises for their use.

Therefore, the supply made by you is an obligation to provide new commercial premises to the community group for their primary use, and the consideration of $250,000 is connected with a supply of an obligation.

Taxable supply

Accordingly, you are making a supply for which the above payment is consideration. Paragraphs (b), (c) and (d) of section 9-5 of the GST Act are also satisfied as the supplies are made in the course or furtherance of your enterprise, are connected with Australia as they are made in Australia and you are registered for GST.

There are no provisions in the GST Act or any other Act that would allow the supplies to be GST-free or input taxed. Consequently, your supplies are taxable given they satisfy all the requirements of section 9-5 of the GST Act.

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