Edited version of private ruling

Authorisation Number: 1011758554627

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Ruling

Subject : GST and development services

Question 1

Does Entity A make a taxable supply of development services to Entity B?

Answer

Yes. Entity A does make a taxable supply of development services to Entity B.

Question 2

Does Entity B make a creditable acquisition from Entity A in relation to the development services?

Answer

Yes. Entity B does make a creditable acquisition in relation to the development services it acquires from Entity A.

Relevant facts and circumstances

Entity A owned interests in land (Land) in Australia.

Entity A has been and proposes to continue to develop the Land and entered into Agreement A with the Council, relating to Entity A's development of the Land.

Under Agreement A with the Council, Entity A is required to undertake certain public infrastructure works (Works).

Entity B intends to construct premises and operate a specific enterprise on a portion of the Land (Enterprise Land) and which Entity B previously acquired from Entity A. Entity A's separate development of the balance of the Land will continue.

As part of the sale of the Enterprise Land to Entity B, Entity A entered into a Contract of Sale (Contract) with Entity B for the sale of the Enterprise Land.

In general, the Contract provides that:

Entity B is required to undertake, pay or meet the cost of specified works:

· where Entity A in fact undertakes or pays for the specified works, Entity B must pay to Entity A the costs so incurred by Entity A.

Entity B will fund any additional works that Entity A undertakes that are referrable to the Enterprise Land, that are over and above the works that Entity A would have otherwise performed.

Because the Enterprise Land forms part of the Land, Entity A, the Council and Entity B have entered into Agreement B with respect to the Enterprise Land. This Agreement regulates the relationship between those parties with respect to the works in so far as they relate to the Enterprise Land (Enterprise Works).

Under Agreement B, Entity A and Entity B are obliged to provide certain contributions, being the Enterprise Works. To some extent, these obligations overlap the obligations that Entity A otherwise was required to undertake in the works. That is, because the Land encompasses the Enterprise Land, some of the works that Entity A was required to undertake in respect of the Land necessarily encompass the Enterprise Works with respect to the Enterprise Land.

The obligations of the parties are outlined in the Contributions Schedule of Agreement B. These include the public infrastructure works in question.

Entity A's obligations to Council in relation to the Enterprise Works under Agreement B do not align with the obligations between Entity A and Entity B under the Contract - i.e. whilst under the Contract, Entity B was to be responsible for the specified works, because of the overlap and for practical purposes, as between Entity A and Council, Entity A is obliged to undertake part of the specified works as part of its Enterprise Works.

Entity A will undertake part of the Enterprise Works, predominantly public infrastructure works related to the Enterprise Land and has asserted that they will constitute the specified works such that Entity B is required to make payment to Entity A pursuant to the Contract.

Entity A asserts that such payments constitute consideration for a taxable supply made by Entity A (as supplier) to Entity B (as recipient) and therefore should be subject to GST. Entity B asserts that these payments do not constitute consideration for any supply made by Entity A.

Entity A and Entity B have entered into Agreement C which supplements Agreement B to resolve Entity B's payment obligations.

Agreement C provides that:

· the noted Items (eg Enterprise Works) are the specified works for the purposes of the Contract ;

· the apportionment of the costs to be incurred by Entity A in undertaking the specified works are agreed (in most cases) by way of a schedule with the actual cost (and for some items the apportionment) being agreed through other mechanisms in Agreement C;

· notwithstanding that Entity A may physically undertake the Enterprise Works as part of completing the works and that Entity B will make payment to Entity A, "… Entity A is not engaged by and does not undertake any works on behalf of Entity B" ;

Entity A will issue invoices to Entity B on an agreed basis for Enterprise Works costs payable by Entity B.

Pursuant to these arrangements, it is anticipated that Entity B will make payments to Entity A under separate invoices issued by Entity A.

Contentions

Entity A contends that it makes a supply to Entity B of the Enterprise Works, being a supply of services pursuant to paragraph 9-10(2)(b) of the GST Act.

As a practical matter, Entity A will undertake the Enterprise Works as an aspect of undertaking the broader works program. In turn, this will discharge the obligation of both Entity A and Entity B to undertake the Enterprise Works (ie in discharge of the obligations owed to the Council pursuant to Agreement B) and will create a separate obligation on Entity B to pay to Entity A an amount equal to those costs (or part of them) under the Contract.

In satisfying Entity B's obligation to undertake the Enterprise Works (under Agreement B or the Contract), Entity A makes a supply of services to Entity B, being the conduct of those Enterprise Works and is entitled to be reimbursed for those costs under the Contract.

Entity A contends that the Payments are made by Entity B to Entity A "…in connection with … in response to or for the inducement of …." the supply that Entity A makes to Entity B pursuant to the identified arrangements. As a result, that supply is made for consideration for the purposes of section 9-5(a).

The contractual arrangements display a clear nexus between the Payments and the supply Entity A makes.

If Entity A makes a taxable supply under the arrangements, Entity B will make a corresponding creditable acquisition pursuant to section 11-5 of the GST Act.

You have also provided an alternative view if Entity A does not make a supply in conducting the Enterprise works.

You have provided the following supporting documentation:

· Contract of Sale;

· Agreement A;

· Agreement B;

· Agreement C.

Your representative provided the following additional information:

The phrase, 'specified works', does not refer to works over and above that which Entity A was obliged to carry out under Agreement A.

It is possible that Entity B may have requirements which are beyond the scope of Agreement A. In this case, such works would be considered development services provided by Entity A to Entity B.

Reasons for decision

A supply is taxable if all the conditions of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

· You make the supply for *consideration; and

· The supply is made in the course or furtherance of an *enterprise that you *carry on; and

· The supply is *connected with Australia; and

· 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.

[*Denotes a defined term in the GST Act]

You have advised that Entity A satisfies the following elements of section 9-5:

· Entity A is registered for GST;

· Entity A is acting in the course of an enterprise it carries on;

· Any supply that Entity A makes will occur wholly within Australia;

· Entity A will not be making any GST-free or input taxed supplies.

Consequently, we are only required to consider paragraph 9-5(a) of the GST Act in your circumstances.

Section 9-10 of the GST Act stipulates that a supply is any form of supply whatsoever. Paragraph 9-10(2)(b) of the GST Act includes a supply of services.

Goods and Services Tax Ruling GSTR 2006/9- Goods and Services Tax: supplies (GSTR 2006/9), discusses a number of propositions that are considered relevant in characterising supplies and in analysing complex transactions. The principles contained in GSTR 2006/9 will be applied in determining whether Entity A has made a taxable supply to Entity B.

The propositions outlined in GSTR 2006/9 include (but are not limited to):

· for every supply there is a supplier (proposition 1)

· for every supply there is a recipient and an acquisition (proposition 5)

· 'supply' usually but not necessarily requires something to pass from one entity to another (proposition 6)

· the creation of expectations alone does not establish a supply (proposition 9)

· it is necessary to analyse the transaction that occurs and not one that might have occurred (proposition 10)

· where parties have outlined their arrangement in writing then this is the logical starting point (proposition11); and

· it is necessary to consider the total factual situation not merely the way the parties have described the arrangement (proposition 16)

Proposition 1: For every supply there is a supplier

The supplier of the development services is Entity A.

Proposition 5: to 'make a supply' an entity must do something

Paragraph 71 of GSTR 2006/9 states:

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'.^F27The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9,^F28 a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

Further, in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006], the Court noted that the ordinary meaning of 'supply' required a positive act.

Consequently, we need to consider what is 'furnished' or 'served' and what action is taken to make the supply. In this case, Entity A completed the Works. We consider this to be a 'positive act' by Entity A. However, the fact that Entity A is undertaking development works does not result in the automatic conclusion that the relevant services are being supplied to Entity B.

Proposition 6: 'supply' usually, but not necessarily, requires something to be passed from one entity to another

Paragraphs 92 to 94 of GSTR 2006/9 explain that while generally the term 'supply' requires something to be passed from one entity to another, not all forms of supply will have this characteristic. We must therefore consider whether development services have passed from Entity A to Entity B and whether these services were acquired by Entity B. To enable us to do this, we need to consider the contracts and agreements entered into by the parties (please see the discussion below under Proposition 11).

Proposition 9: creation of expectations alone does not establish a supply

Paragraph 102 of GSTR 2006/9 explains 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.

This requirement was emphasised by the New Zealand Court of Appeal in C of IR v New Zealand Refining Co. Ltd (1997). In this case, the New Zealand Court of appeal noted that there was an expectation among the parties that the refinery would continue to operate, but that there was no contractual obligation to that effect. Although the payments were intended as an inducement to keep the refinery open, they were not linked to any identifiable supply.

In this case, we need to consider whether the Contract and Agreements entered into between Entity A and Entity B create contractual obligations between the parties and whether the payments made by Entity B to Entity A can be linked to an identifiable supply.

Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply

Generally, the logical starting point in determining the supplies made (particularly in complex arrangements) is by reference to any written documentation or contracts that outline the terms of the arrangement. However, it is also necessary to look at the transactions entered into and the circumstances in which the transactions are made. The Australian Courts have held that a supply will not be characterised merely by the description given to it by the parties to the transaction.

Entity A's actions with regard to the Works are governed by the following documents:

· Agreement A with Council; and

· Contract of Sale between Entity A and Entity B; and

· Agreement B between Entity A, Council and Entity B; and

· Agreement C.

You have advised that Entity A's obligations to Council in relation to the Enterprise Works under Agreement B do not align with the obligations between Entity A and Entity B under the Contract of Sale - i.e. whilst under the Contract of Sale, Entity B was to be responsible for all the specified works, because of the overlap and for practical purposes, as between Entity A and Council, Entity A is obliged to undertake part of the specified works as part of its Enterprise Works.

We will now examine the contents of the Contract and Agreements entered into between Entity A and Entity B.

Agreement A with Council

Under Agreement A with Council, Entity A is required to undertake certain Works including in relation to public infrastructure. We understand that Agreement A was entered into prior to the Contract of Sale entered into between Entity A and Entity B in respect of the Enterprise Land.

Consequently, the original obligation to undertake the Works on the Land (including the Enterprise Land) was between Entity A and Council.

Contract of Sale between Entity A and Entity B

Entity A entered into a Contract of Sale in respect of the Enterprise Land with Entity B.

This document governs the relationship between the buyer and seller and creates a different set of obligations to that outlined in Agreement A between Entity A and Council.

Various clauses in the Contract of Sale clearly outline the obligations between Entity A and Entity B. One of the clauses, for example, clearly states that the property is sold subject to Agreement A and that the buyer must comply with this document.

Another clause deals with the novation of Agreement A. It states that the Buyer must enter into a deed of novation of Agreement A in respect of the Property.

Novation is an act whereby, with the consent of all parties, a new contract is substituted for an existing contract and the latter discharged. The contractual rights under the contract are assigned to another.

The novation of Agreement A to Entity B in respect of the Enterprise land, effectively assigns Entity A's obligations to Council, in terms of Agreement A, to Entity B.

This clause is one element of the contractual arrangement between Entity A and Entity B. It is not, however, determinative of the recipient of the development services supplied by Entity A.

Another clause considers the specified works. It states that the Buyer must undertake, pay for or meet the cost of any specified works. It provides further that, where the Seller undertakes or incurs costs in respect of any specified works, the Buyer must pay the costs incurred by the Seller.

The above clause clearly identifies the specified works as being those that exceed the requirements for the Sellers Original Development.

This is indicative of the intention of the parties that any services or infrastructure requirements which exceed the original specifications must be paid for by Entity B. There is a contractual obligation on Entity B to pay for or reimburse Entity A for the development services it has performed on the land so that Entity B can meet its obligations under the relevant Agreements.

Agreement B between Entity A, Council and Entity B with respect to the Enterprise Land

This Agreement outlines the relationship between the Agreement and Agreement A. It applies from the date that the Contract of Sale is entered into and:

· provides that there is a separation of the obligations to Council between the owners of the Enterprise Land (being Entity B) and the owners of the remaining Developable Area (being Entity A).

· governs the development of the Enterprise Land and Entity B's obligations in respect of the Enterprise Land once the Contracts of Sale are signed. It specifically addresses the requirement for Entity B to enter into Agreement B with Council in relation to the contributions which Entity B must make to the development of the Enterprise Land.

· governs the novation of the Agreement B upon Sale of the Enterprise Land to a third party.

This clearly indicates that the requirements in respect of the Enterprise Land is a contractual obligation which Entity B has to Council and that this obligation must be novated to any new purchaser of the Enterprise Land.

The purpose and content of Agreement B is to ensure that the obligations which Entity A had under the original Agreement A are novated to Entity B, as the new owners of the Enterprise Land, in respect of the Works which must be completed on the Enterprise Land.

Agreement B is subsidiary to the Contract of Sale and flows from that Agreement. It ensures that Council has recourse to the new owner of the Enterprise Land in respect of the obligations to complete the Works on the Land. It is not however, determinative of the recipient of the development services supplied by Entity A. It simply outlines the obligations of Entity B to Council as a consequence of the sale of the Enterprise Land by Entity A to Entity B.

Agreement C

Agreement C seeks to clarify the parties obligations in relation to the development of the land for the Enterprise. It outlines:

· that Agreement C prevails over the Contract of sale and Agreement B;

· that all Items referred to in Agreement C are considered specified works and Entity B will be liable for its share of the costs incurred by Entity A in creating those works;

· the reciprocal obligations between Entity A and Entity B as well as the scope of the items. It is clear that Entity B is a full participant in the decisions being taken regarding the requirements concerning the Enterprise Land;

· the Items Works Budget and Invoicing.

It is clear that the purpose and intent of Agreement C is to supplement the Contract of Sale entered into by the parties. It outlines the reciprocal obligations between the parties and the financial requirements which must be fulfilled.

In summary

In this case, Entity A has furnished or provided development services.

The Contract of Sale and Agreement C create contractual obligations between Entity B and Entity A. In particular, that Entity B is obliged to undertake the 'enterprise works' and where as a practical matter, Entity A undertakes these works as part of the broader works program, that Entity B is liable to pay Entity A for the costs relating to the development services performed on the Enterprise Land. Further, Entity B is a full participant in the decisions taken regarding the requirements concerning the Enterprise Land.

The obligation to undertake the work on the Enterprise Land rests with Entity B as a result of the novation of Agreement A by Entity A to Entity B pursuant to the Contract of Sale.

Further, Entity A, pursuant to the Contract of Sale and Agreement C, provides the development services to Entity B so that Entity B can meet its obligations to Council.

The terms of the Agreements support the view that the payments made by Entity B represent consideration for these development services and are not merely third party payments made by Entity B.

GSTR 2006/9, examines the third party payer concept under Proposition 14. It considers the payment for the supply and whether there is sufficient nexus between the supply and the payment made.

Subsection 9-15 (1) of the GST Act provides that the consideration for a supply includes any payment 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration':

· the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

· regard needs to be had to the true character of the transaction; and

an arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all the transactions entered into and the circumstances in which the transaction are made.

The content of Agreement C is indicative of the nexus between the development services provided by Entity A and the consideration provided by Entity B for those services. Entity B is the recipient of the development services. There is a contractual flow (in terms of the Contract of Sale and Agreement C) to Entity B.

Agreement B, although defining the responsibilities and obligations of the respective parties to Council, is supplementary to the Contract of Sale and Agreement C, wherein the intentions of the parties are clearly outlined.

Conclusion

The content and reciprocal obligations outlined in the Contract of Sale and related Agreement C are indicative of a business arrangement wherein the service provider is accountable to the recipient for it's actions and progress regarding the construction of the Works relevant to the Enterprise Land.

Whether these are the specified works requested by Entity B or whether the Works are being carried out by Entity A on behalf of Entity B to enable Entity B to comply with it's obligations to Council, this is a fee for service arrangement and consequently the supply of development services by Entity A to Entity B will be a taxable supply.

Conversely, Entity B will make a creditable acquisition from Entity A in respect of the development services, in accordance with section 11-5 of the GST Act.

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