Edited version of private ruling

Authorisation Number: 1011632135833

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Ruling

Subject: Lease and development agreement

Question 1:

What is the consideration for the crown lease granted by the Australian government agency (X) to developer in respect of the site?

Answer:

The consideration for the crown lease granted by X to the developer in respect of the site is $1 (inclusive of GST) per year (if demanded).

Question 2:

Is the cash contribution payable by X to the developer the consideration for the supply by the developer to X of the units?

Answer:

Yes, the cash contribution payable by X to the developer is the consideration for the supply by the developer to X of the units, but the acquisition of the units by X is not a creditable acquisition.

Question 3:

Is the surrender of the crown lease by the developer in exchange for freehold title to the site a taxable supply made by X?

Answer:

No, the surrender of the crown lease by the developer in exchange for freehold title to the site is not a taxable supply made by X because there is no consideration for the supply of the freehold title.

Question 4:

Does the developer supply the units to X and, if so, what is the consideration for that supply?

Answer:

Yes, the developer does supply the units to X and the consideration for that supply is the cash contribution payable by X to the developer.

Relevant facts and circumstances:

Background:

The X is the registered owner of the site and is eligible to receive Commonwealth Government funding under the National Building and Jobs Plan initiative for the development of the site provided that construction is completed by 30 June 2012.

Following release by X of an expression of interest and request for detailed proposals for development of the site, X and the developer entered into the development agreement and crown lease.

The development agreement provides:

The parties have agreed that the developer will develop the site, and that [X] will grant a crown lease over the site on and subject to the terms and conditions of this Agreement.

Crown lease:

The development agreement provides that, as soon as is practicable after execution of the development agreement, X must grant and the developer must accept a crown lease of the site on the terms set out in the development agreement. The development agreement also provides that X and the developer agree that the crown lease and the development agreement are interdependent, that if one is lawfully terminated the other likewise terminates, and the development agreement prevails in the event of an inconsistency between them.

The crown lease is stated to be for the purpose of granting tenure over the site to allow the developer to undertake the Development and comply with the developer's obligations under the development agreement and the developer must not, without X's consent, use the site for any other purpose. The term of the crown lease is three years, the annual rent is $1, and the developer must comply with the development agreement.

The discussion of typical development lease arrangements in GSTR 2008/2 states (paragraph 16) that the developer usually pays the government agency (that is, X) 'a monetary amount that reflects the price for the land sold…but not the development works effected by the developer'.

In the present case the developer pays nothing when the crown lease is surrendered in exchange for freehold title to the site. X's adviser stated that this was because the site had been used in the past for Government housing (which had been demolished), X was anxious to address a current shortage of low cost Government housing, and wanted to ensure that the units retained by the developer were sold at lower prices. Subsequently X's adviser stated that there were improvements to the site when the crown lease was granted because in addition to demolishing the old Government housing on the site, X had cleared and levelled the site.

Cash contribution:

The development agreement provides that X agrees to pay the developer a cash contribution to the construction cost of the development according to a payment schedule based on completion of various stages of the developer's works. The agreement provides that the developer may issue a tax invoice to X at the completion of each stage for the specified percentage of the cash contribution set out in the payment schedule and the agreement provides that X is not required to pay the developer until X has received the tax invoice and the independent certifier has certified that the relevant stage has been satisfactorily completed.

Surrender of crown lease and issue of freehold title:

The development agreement provides that upon the issue of all relevant Approvals such that the developer is able to register the plan of subdivision under the relevant act in respect of all the units on the site, the developer is entitled to surrender the crown lease in exchange for freehold title at no cost, subject to the developer paying any related administrative costs and registration fees.

Transfer of units to X:

The development agreement provides that in consideration for the X's promises contained in the development agreement, the developer must, at no cost to the X (except stamp duty and GST (which must be dealt with in accordance with the development agreement)) transfer the units to X on the date for transfer (that is, Y business days after registration of the plan of subdivision). X's adviser stated that X intends to rent out the units as subsidised Government housing.

Submissions in respect of crown lease:

The ruling request referred to Goods and Services Tax Ruling GSTR 2008/2 and submitted that the crown lease is a taxable supply by X for a consideration of $1, that, in accordance with Division 82 of the GST Act, any development works undertaken by the developer are not consideration for the supply of the crown lease by X, and that X's annual GST liability in respect of the supply of the crown lease is 1/11^th of $1.

Submissions in respect of cash contribution:

The ruling request advised that the cash contribution related to the construction of the units which are to be retained by X and was therefore consideration for a taxable supply made by the developer, that the developer would be required to remit GST of1/11^th of the cash contribution, and that Division 156 of the GST Act required each stage of the developer's Works as specified in clause 11 of the development agreement to be treated as a separate supply.

Submissions in respect of surrender of crown lease and issue of freehold title:

The ruling request referred to Goods and Services Tax Ruling GSTR 2008/2 (paragraphs 55 and 56) in support of a submission that this involves a supply of the land and not the works carried out by the developer. It was further submitted that, as there is no additional consideration for the supply of the freehold title, there is no taxable supply. X's adviser also considered whether the issue of freehold title was a GST-free supply under Subdivision 38N of the GST Act, but decided that there were improvements to the site at the relevant time as a result of the clearing and levelling undertaken by X.

Submissions in respect of transfer of the units to X

The ruling request noted that freehold title to the entire site must first be issued to the developer so that the developer can register the plan of subdivision for the formation of a scheme under the relevant Act, and then set out two alternative views in relation to the transfer by the developer to X of the units. The first, based on GSTR 2008/2 (paragraph 56) is that the transfer of the units by the developer to X merely reflects the economic reality that X pays for the construction of those units by paying the cash contribution to the developer and that there is no additional supply, and therefore no GST implications, when the developer transfers the units to X.

The alternative view is that even if the transfer of the units by the developer to X is a separately identifiable supply, Goods and Services Tax Ruling GSTR 2001/6 (paragraph 80) suggests that no consideration is provided for that supply as X's promises under the development agreement are not consideration for the purposes of the GST Act.

Submissions in respect of margin scheme:

The ruling request also included a submission that as there is no taxable supply in relation to the issue of freehold title to the developer (that is, refer to the submission above, in relation to surrender of the crown lease and issue of freehold title, that there is no consideration for the issue of freehold title and therefore no taxable supply), the developer can use the margin scheme in relation to the subsequent sale of the units retained by the developer.

Reasons for decision:

Question 1

Summary:

The consideration for the crown lease is the $1 (inclusive of GST) per year (if demanded) annual rent specified in the crown lease. The developer does not provide any additional non-monetary consideration for the grant of the crown lease by agreeing to carry out the development works as that is merely a condition of the primary transaction between X and the developer, that is, the supply of the freehold title to the site to the developer (GSTR 2008/2, paragraph 41).

Detailed reasoning:

The supply of the crown lease by X to the developer is a taxable supply: The definition of 'supply' in section 9-10 of the GST Act includes a grant of 'real property' (which is defined to include any interest in or right over land). The supply of the crown lease is made for consideration as the crown lease provides that the annual rent is $1 (inclusive of GST) if demanded. X carries on an enterprise as paragraph 9-20(1)(g) of the GST Act provides that an enterprise includes an activity carried on by the Commonwealth, a State, or a Territory. The supply of the crown lease is in the course or furtherance of X's enterprise because it has a connection with that enterprise as the site formed part of X's assets and the crown lease was granted as a transaction of X's enterprise (Goods and Services Tax Ruling GSTR 2004/8, paragraphs 29-30). The supply of the crown lease is connected with Australia as the land to which the crown lease relates is in Australia (subsection 9-25(4) of the GST Act) and X is GST registered.

The amount of GST payable on a taxable supply is 10% of the value of that supply, the value of the supply is 10/11ths of the price, and the price is the sum of the amount of monetary consideration for the supply plus the GST-inclusive market value of any non-monetary consideration.

The crown lease provides that the monetary consideration for the supply is $1 (inclusive of GST) per year, if demanded. The issue is whether the developer provides any other monetary or non-monetary consideration for the supply under either the crown lease or the development agreement.

Goods and Services Tax Ruling GSTR 2008/2 suggests that the developer does not provide any other monetary or non-monetary consideration for the supply of the crown lease. GSTR 2008/2 states (paragraphs 36-42):

Is the grant of a development lease a supply made for consideration?

36. When a government agency grants a development lease to a developer to allow the developer to undertake the required development works on the land, it is making a supply of the land to the developer by way of lease.

37. Where the development lease expressly provides for a rental amount to be paid by the developer for the term of the lease, the rental payments are consideration for the supply by way of lease. In these circumstances, there is a clear nexus between the supply of the development lease and the rental payments. The rental payments do not form part of the consideration for the sale or the long-term lease of the land.

38. In some cases, a monetary amount reflecting the value of the land is paid by the developer upon the grant of the development lease by the government agency. In the circumstances covered by this Ruling, in the absence of any express statement or other evidence to the contrary, it is considered that the payment of this amount is properly characterised as consideration for the sale or the long-term lease of land rather than for the supply of the development lease.

39. As a development lease arrangement may create various rights and obligations for the parties to the arrangement, the question arises as to whether those rights and obligations are consideration (or additional consideration) for the grant of the development lease or for another supply. Ultimately, this is a matter of fact to be determined in the context of each case. GSTR 2001/6, which is about non monetary consideration, provides further guidance in this regard.

Is the undertaking of the development works on the land by the developer a supply of development services to the government agency?

40. The undertaking of the development works by the developer is neither a supply of development services from the developer to the government agency nor (non-monetary) consideration for any supply made to the developer.

41. While the undertaking of the development works by the developer is an obligation that needs to be fulfilled for the developer to become entitled to the freehold or leasehold title to the land, it does not have a separate identity or an independent value to the government agency. It is merely a condition of the primary transaction between the parties, being the sale or long-term lease of land by the government agency to the developer.

42. Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of, a supply but these things may be disregarded as consideration where they do not have economic value and separate identity.

43. Under the development lease arrangements, the development works undertaken on the land are not retained by the government agency for its own use. The terms of the development lease effectively require the government agency to transfer the freehold or long-term leasehold title in the land to the developer immediately upon completion of the works.

Applying GSTR 2008/2 to the crown lease, we consider that:

· the crown lease expressly provides for an annual rent of $1 (inclusive of GST) (GSTR 2008/2, paragraph 37);

· the crown lease does not require the developer to pay X a monetary amount which reflects the value of the site (GSTR 2008/2, paragraph 38);

· the developer's obligation to carry out the development is not consideration for any supply made by X to the developer (GSTR 2008/2, paragraph 40); and

· the developer's obligations under the crown lease to keep the site tidy and to take out insurance can be disregarded as not having economic value or separate identity (GSTR 2008/2, paragraph 42).

Consequently we consider that the sum of the amount of monetary consideration plus the GST-inclusive market value of any non-monetary consideration for the supply of the crown lease is $1 (inclusive of GST).

The ruling request included a submission that, in accordance with Division 82 of the GST Act, the supply of the development works by the developer was not consideration for the supply of the crown lease.

Subsection 82-10(1) of the GST Act provides that the supply, by an Australian government agency, of a right to develop land is treated as a supply that is not made for consideration to the extent that it is made in return for another supply that complies with requirements imposed by or under an Australian law.

Division 82 was inserted into the GST Act by the Taxation Laws Amendment Act (No. 3) 2002. Example 1.1 in the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 3) 2002 ('Explanatory Memorandum') refers to an 'Australian government agency' (a local council) providing:

planning approval in the form of a right to develop land under a State Planning Act'

Which suggests that the supply of a 'right to develop land' usually takes the form of an approval under applicable planning legislation. In our view subsection 82-10(1) of the GST Act does not apply to the supply of the crown lease as the supply of the crown lease is not a supply 'of a right to develop land'. The crown lease grants possession of the site to the developer for the purpose of undertaking the development.

We understand, however, that planning approval has been or will be granted in relation to the development as the development agreement obliges the developer to apply to all relevant and necessary 'Authorities' for the 'Approvals' required to undertake the development and the development agreement refers to the developer lodging a development application with the 'development consent authority'. We therefore consider that an approval of the development of the site granted by the state development consent authority would be a supply of the 'right to develop land' for the purposes of subsection 82-10(1) of the GST Act.

Subsection 82-10(1) of the GST Act requires that the right to develop land is supplied

by an 'Australian government agency'…

Section 995-1 of the GST Act provides that 'Australian government agency' takes the meaning it has in section 995-1(1) of the Income Tax Assessment Act 1997, i.e.

a) the Commonwealth, a State, or a Territory; or

b) an authority of the Commonwealth, a State, or a Territory.

In Committee of Direction of Fruit Marketing v. Delegate of the Australian Postal Commission (1980) 144 CLR 577 (HC) Gibbs J stated that the expression 'authority of a State' means a body which is given by the State the power to direct or control the affairs of others on behalf of the State, that is, for the purposes of and in the interests of the community or some section of it. It would include a body such as the development consent authority. Consequently subsection 82-10(1)of the GST Act is relevant for determining whether the supply of any consent in respect of the development of the site is made for consideration (in which case X may be liable for GST).

Subsection 82-10(1) of the GST Act provides that a supply of a right to develop land made by an Australian government agency is not made for consideration

to the extent that it is made in return for another supply that complies with requirements imposed by or under an Australian law.

The Explanatory Memorandum explains this requirement as follows (paragraph 1.13):

Subsection 82-10(1) ensures that the supply, by an Australian government agency, of a right to develop land is treated as a supply that is not made for consideration to the extent it is made in return for the supply of an in kind developer contribution that complies with requirements imposed by, or under an Australian law.

GSTR 2008/2 provides the following example (paragraphs 46- 51) of the application of subsection 82-10(1) of the GST Act:

46. Division 82 applies if the developer makes a supply of the works in return for a supply, by a government agency, of a right to develop land. The supply of a right to develop land includes, for example, approval by a government agency for such things as subdivision and rezoning of land.

47. Under Division 82, the supply of the right to develop land is not treated as consideration for the supply of the works nor as a supply made for consideration if the supply of the works complies with requirements imposed by, or under, an Australian law. In other words, neither the supply of the works nor the supply of the right to develop land is a taxable supply where Division 82 applies.

48. However, Division 82 does not apply if the supply of the works is a condition of the sale or long-term lease of the land to the developer, rather than a condition of obtaining a right to develop the land.

49. For example, under a development lease arrangement with a State government department, the developer is required to carry out the following works on land that is not transferred to the developer:

·  sewers, roads and footpaths to provide infrastructure services to the subdivided land;

·  parkland facilities; and

·  a car park.

50. The construction of the infrastructure works (sewers, roads and footpaths) and parkland facilities is required as a condition of subdivision approval by the local council. Division 82 applies to the supplies of these works such that they are not taxable supplies by the developer and are not consideration for the supply of a right to develop land.

51. On the other hand, the construction of the car park is not required as a condition of obtaining subdivision approval by the local council. Nor is it a condition of obtaining any other right to develop land. It is a condition of the sale or long-term lease of the land by the State government department to the developer. In these circumstances, Division 82 does not apply. Rather, the construction of the car park is a taxable supply to the State government department and forms part of the consideration for the supply of the land by the State government department to the developer.

As we have not seen the detailed proposal and the plans and specifications referred to in the definition of 'developer's works' in the development agreement, we are unable to determine the extent to which the developer's works are required as a condition of any development permit issued under the Planning Act and therefore not consideration for the purposes of subsection 82-10(1) of the GST Act, but X should be able to determine that issue by applying the example in GSTR 2008/2 (paragraphs 46- 51) set out above.

We also considered whether the supply of the crown lease was a GST-free supply pursuant to subsection 38-450(1) of the GST Act which provides that a supply of land on which there are no improvements is GST-free if the supply is by way of lease (other than long term lease) and the lease is subject to conditions the satisfaction of which will entitle the recipient to the grant of a freehold interest in the land. As at the time the crown lease was granted, however, there were improvements to the site as it had been cleared and levelled by X. Goods and Services Tax Ruling GSTR 2006/6 states (paragraph 25) that clearing and levelling are improvements because they are human interventions which enhance the value of land.

Question 2

Summary:

The cash contribution payable by X to the developer is consideration for the supply of the units by the developer to X. The supply of the units by the developer to X will be a taxable supply of new residential premises but X will not be entitled to claim an input tax credit in respect of the acquisition of the units as that acquisition relates to making supplies that are input taxed because X intends to rent out the units as subsidised housing.

Detailed reasoning:

The ruling request indicated that X paid for construction of the units by paying the cash contribution to the developer:

This view suggests that the transaction of transferring the units back to the client is merely a step to reflect the contractual arrangement between the parties and that the client has paid for the construction of those units (i.e. the cash contribution above).

We agree. In our view X's cash contribution to the total cost of construction of the development pursuant to the development agreement is consideration for the construction of the units by the developer and the transfer of the units by the developer to X at no cost pursuant to the development agreement.

The developer will be liable to pay GST on the supply of the units to X as that supply will be a taxable supply. Generally supplies of residential premises are input taxed, but paragraph 40-65(2)(b) of the GST Act provides that a sale of residential premises is not input taxed to the extent that the residential premises are 'new residential premises' other than those used for residential accommodation before 2 December 1998. Section 195-1 of the GST Act defines 'residential premises' as land or a building that is occupied as a residence or for residential accommodation or is intended to be occupied, and is capable of being so occupied. Section 40-75 provides that residential premises are new 'residential premises' if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease.

GSTR 2008/2 indicates (paragraph 52) that the supply by X to the developer of the freehold title to the site when the developer completes the development in accordance with the development agreement and surrenders the crown lease is merely a supply of land, not land and the attached development works and states (paragraph 58):

Therefore when the developer supplies the completed residential premises by way of sale or long term lease, it is making supplies of 'new residential premises' as the premises 'have not previously been sold as residential premises and have not previously been the subject of a long term lease'.

Although the supply of the units by the developer to X will be a taxable supply, X will not be entitled to claim an input tax credit in respect of the acquisition of the units. Subsection 7-1(2) of the GST Act provides that entitlements to input tax credits arise on creditable acquisitions. Section 11-5 of the GST Act provides that you make a creditable acquisition if:

a) You acquire anything solely or partly for a creditable purpose; and

b) The supply of the thing to you is a taxable supply; and

c) You provide consideration for the supply; and

d) You are GST registered or required to be GST registered.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, but paragraph 11-15(2)(a) of the GST Act provides that you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Section 40-35 of the GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if:

The supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises);

The ruling request states that the surrender of the crown lease in exchange for freehold title is to allow for strata titles to issue to the developer and that the developer will then transfer the units to X. X's adviser stated that X intends to rent out the units as subsidised Government Housing.

'Residential premises' is defined in section 195-1 of the GST Act as land or a building that is occupied as a residence or for residential accommodation or is intended to be so occupied, and is capable of being so occupied, regardless of the term of the occupation or intended occupation. Goods and Services Tax Ruling GSTR 2000/30 states (paragraphs 24-26) that 'residential premises' includes an apartment:

The definition of 'residential premises' in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation or is intended and capable of being occupied as a residence or for residential accommodation.

The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.

The physical characteristics common to residential premises that provide accommodation are:

(i) The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

(ii) The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

In our view the requirement in paragraph 11-5(a) of the GST Act (that is, that X acquires the units solely or partly for a creditable purpose) is not satisfied because the acquisition of the units by X relates to making supplies that would be input taxed under section 40-35 of the GST Act.

In order for the acquisition of the units by X to be a creditable acquisition all of the requirements in paragraphs 11-5(a) to 11-5(d) of the GST Act must be satisfied. For the reasons set out above, paragraph 11-5(a) is not satisfied and the acquisition of the units by X is not a creditable acquisition.

Application of Division 156 of the GST Act:

Section 156-10 of the GST Act provides that the input tax credit to which an entity is entitled for a creditable acquisition that is made on a progressive basis and for consideration that is to be provided on a progressive or periodic basis is attributable, in accordance with section 29-10 of the GST Act, as if each progressive component of the acquisition were a separate acquisition.

Given our view that X is not entitled to claim input tax credits on the acquisition of the units, the application of Division 156 of the GST Act is not an issue for X, but may be an issue for the developer (as the developer makes a taxable supply of the units).

As the developer is not an applicant in relation to this ruling request we are not obliged to provide a ruling on the application of Division 156 of the GST Act to the supply of the units by the developer. We note, however, that Goods and Services Tax Ruling GSTR 2000/35 indicates that Division 156 will not apply to that supply because title to the units does not pass progressively from the developer to X. The development agreement requires the developer to carry our and complete the developer's Works and provides for the developer to transfer the units to X on or before the 'date for transfer' (that is, Y business days from the registration of the plan of subdivision under the relevant Act in respect of all the units).

GSTR 2000/35 provides (paragraphs 109, 111-114):

109. Where a contract provides for milestone payments for construction of an item affixed to land owned by the recipient, the contract is for supply of goods and services (to be incorporated in fixtures) progressively, whether or not the plans or designs are owned by the supplier. For example, a contract for construction of a warehouse on land owned by the recipient where the supplier produces the plans in-house and the plans are owned by the supplier.

111. Where a contract provides for the achievement of milestones in the construction of an item, and title in each completed stage of the item passes to the recipient during the course of construction, the contract is for a progressive supply. For example, if a contract for the construction of a ship provides for title in each completed stage of the ship to pass on receipt by the supplier of the respective milestone payments, then Division 156 applies.

112. Conversely, if a contract for the construction of a ship provides for milestone payments with title to the ship passing only on its delivery, then Division 156 does not apply.

113. A contract may provide for milestone payments upon construction of an item or items and on supply of related services such as installation. Where property in the partly completed, or partly installed item or items passes at a time prior to completion of the contract the supply may be a progressive supply to which Division 156 applies. For example, where a contract for the supply and installation of a large centrifugal pump provides for title to pass on construction and the process of construction and installation takes several months to complete, the construction and installation is a progressive supply.

114. Where a contract provides that title does not pass to the recipient until the item or items have been delivered and installation completed, this will not be a progressive supply to which Division 156 applies. For example, the supply and installation of fittings and fixtures to a hairdressing salon where title in the fittings and fixtures passes on completion of installation is not a progressive supply.

Question 3

Summary:

The surrender of the crown lease in exchange for freehold title over the site involves a supply of the land and not the works carried out by the developer. As that supply is made for no consideration, it is not a taxable supply.

Detailed reasoning:

Supply of land, not land and works:

The crown lease provides that if the developer completes the development in accordance with the development agreement and complies with the crown lease, the developer may at any time surrender the crown lease in exchange for freehold title over the site.

The ruling request referred to GSTR 2008/2 (paragraphs 55 and 56) in support of a submission that this involves a supply of the land and not the works carried out by the developer. We agree. GSTR 2008/2 states (paragraph 52):

The sale of the freehold or grant of the long-term lease of the land to the developer is merely a supply of land; not land and the attached development works.

No consideration:

It was further submitted that, as there is no additional consideration for the supply of the freehold title to the developer, there is no taxable supply.

We note that the discussion of typical development lease arrangements in GSTR 2008/2 states (paragraph 16) that the developer usually pays the government agency (that is, X) 'a monetary amount that reflects the price for the land sold…but not the development works effected by the developer'. In the present case the developer pays nothing when the crown lease is surrendered in exchange for freehold title to the site. By way of explanation for this, X's adviser stated that the site had been used in the past for Government housing (which had been demolished), X was anxious to address a current shortage of low cost Government housing and wanted to ensure that the units retained by the developer were sold at lower prices.

Paragraph 9-5(a) of the GST Act provides that an entity makes a taxable supply if, inter alia, the supply is made for consideration.

The developer is obliged to pay $1 per year rent (if demanded) under the crown lease and the crown lease does not require any payment when developer surrenders crown lease in exchange for freehold title, although the crown lease requires the developer to pay all the costs, charges, and expenses relating to the grant of freehold title.

The developer agrees to carry out the developer's works (the development agreement), but GSTR 2008/2 states (paragraph 40) that the undertaking of development works by a developer is neither a supply of development services by the developer nor non-monetary consideration for any supply made to the developer, and (paragraphs 41-42):

While the undertaking of the development works by the developer is an obligation that needs to be fulfilled for the developer to become entitled to the freehold or leasehold title to the land, it does not have a separate identity or an independent value to the government agency. It is merely a condition of the primary transaction between the parties, being the sale or long term lease of the land by the government agency to the developer.

Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of, a supply, but these things may be disregarded as consideration where they do not have economic value or separate identity.

GSTR 2008/2 qualifies this by also stating (paragraphs 44-51) that works carried out by a developer on land that is not transferred to a developer where the works are not a condition of obtaining a right to develop the land are not subject to Division 82 of the GST Act, are a taxable supply by the developer to the State government, and are consideration for the supply of the land by the State. In the present case the developer carries out works on land (that is, the units) which is transferred to the developer when the developer surrenders the crown lease but then transferred back to X by the developer. It was stated in the ruling request, however, that X pays the cash contribution for the works (that is, the units) carried out on land that X effectively retains. Consequently we do not consider that the works carried out by the developer on the units are non-monetary consideration for the supply of the freehold interest in the site.

For the reasons set out above we consider that the supply to the developer of freehold title to the site is made for no consideration and is not a taxable supply.

Question 4

Summary:

We do not agree with the view that the supply of the units can be ignored. In our view the cash contribution is consideration for the supply of the units to X by the developer.

Detailed reasoning:

We do not agree with 'Alternative View 1' put forward in the ruling request, that is, that the supply of the units by the developer to X can be ignored as it merely reflects the arrangement that X paid for the construction of the units via the cash contribution. Goods and Services Tax Ruling GSTR 2006/9 states (paragraph 102):

The Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other.

In the present case there are binding agreements (the development agreement and the crown lease) which oblige X to transfer freehold title to the site to the developer upon surrender of the crown lease and oblige the developer to then transfer the units to X.

'Alternative View 2' in the ruling request appears to be that there is a supply of the units by the developer to X but, based on GSTR 2001/6 (paragraph 80), that there is no consideration for that supply:

However, in reliance on paragraph 80 of Goods and Services Tax Ruling GSTR 2001/6 we do not believe there is any consideration provided for the supply as [NTA's] promises under the development agreement will not be consideration for the purposes of the [GST] Act.

 'Alternative View 2' appears to be at odds with the acknowledgement earlier in the ruling request that X paid for the construction of the units via the cash contribution. As discussed above in relation to Question 2, we consider that X's cash contribution to the total cost of construction of the development pursuant to the development agreement is consideration for the construction of the units by the developer and the transfer of those dwellings to X at no cost pursuant to the development agreement.

The ruling request also raised the issues of whether the developer can apply the margin scheme and, if so, the developer's cost for the purpose of calculating the margin, particularly whether the fact that the developer surrendered the crown lease in exchange for freehold title over the site for no consideration renders subsection 75-5(2) of the GST Act inapplicable. The developer is not an applicant in relation to this ruling request and should lodge a separate ruling request in respect of these issues.

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