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Ruling

Subject: GST & Assignment of Rental Income

Question

Are the Fees paid by the Trust to the not for profit entity (NFP) wholly consideration for an input taxed financial supply pursuant to section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and therefore, not subject to Goods and Services Tax (GST)?

Answer

Yes, the Fees paid by the Trust to the NFP is wholly consideration for an input taxed financial supply pursuant to section 40-5 of the GST Act and subregulation 40-5.09(3) of the GST Regulations and is therefore, not subject to GST.

Relevant facts and circumstances

Investors will acquire units in an Australian unit Trust (the Trust).

The Investors will be presently entitled to their share of the net income of the Trust, which will entitle the Investors to incentives under the National Rent Affordability Scheme (NRAS) pursuant to Division 380 of the ITAA 1997.

The Trust will pay fees to a not for profit entity (NFP) in consideration for the assignment of rents under lease agreements in relation to eligible NRAS dwellings.

The NRAS was established to encourage large-scale investment in affordable housing. The Scheme offers incentives where new dwellings are rented to low and moderate income households at a discount below market rates.

There are two benefits available under the Scheme: one provided by the Commonwealth Government and another provided by the State Government. The benefits are indexed annually to the Rents component of the Housing Group of the Consumer Price Index.

The benefit from the Commonwealth Government is in the form of a refundable tax offset: Division 380 and item 23 of section 67-23 of the ITAA 1997. The benefit from the State Government may be either a cash payment or an in kind payment, such as a reduction in rates. It is anticipated that the benefit from the State Government will be a cash payment made annually. The State Government benefit is Non Assessable Non Exempt (NANE) income: section 380-35 of the ITAA 1997.

These benefits may be reduced if a dwelling does not meet the rental and vacancy requirements in the Scheme regulation.

Relevant Transaction details

.The Trust will enter into an agreement with an NFP and an approved participant. Under the terms of the agreement, prior to the start of the NRAS year the NFP (as lessor), will assign to the Trust its right to receive rent under the lease agreement between the NFP and the eligible dwelling tenants. These amounts will be payable to the Trust by the NFP on a quarterly basis.

In consideration for the assignment of this right, the Trust will pay to the NFP a Fee, comprising a Quarterly Fee and an Annual Fee.

The Trust will issue units to Investors.

The Housing Secretary will issue a NRAS certificate to the approved participant, setting out the amount of the incentive in relation to each dwelling. The payment from the State Government (being the NANE income) is also expected to be received and retained by the approved participant.

The trustee of the Trust will make a distribution to Investors of the net income of the Trust. In any event, the Investors will, in aggregate, be presently entitled to the whole of the net income of the Trust pursuant to the Trust's Constitution.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 7-1;

Section 9-5;

Section 9-10;

Section 9-15

Section 40-5.

A New Tax System (Goods and Services Tax) Regulations 1999:

Regulation 40-5.09(1).

Regulation 40-5.09 (3)

Reasons for decision

Under subsection 40-5(1) of the GST Act a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

· the provision, acquisition or disposal of that interest is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia, and

· the supplier is:

· registered or required to be registered for GST, and

· a financial supply provider in relation to the supply of the interest.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit.

Goods and Services Tax Ruling GSTR 2004/4: Goods and services tax: assignment of payment streams including under a typical securitisation arrangement (GSTR 2004/4) explains the Commissioner's view on how the GST Act and the GST Regulations apply to the supply of rights to a payment stream by means of an assignment.

Paragraphs 10 and 30 of GSTR 2004/4 state the following:

10. Item 2 in subregulation 40-5.09(3) of the GST regulations refers to a debt, credit arrangement or right to credit, including a letter of credit. The examples applicable to item 2 in Schedule 7 include the right to an income stream under a securitisation arrangement.

30. Provided there has been an effective legal or equitable assignment of a right to all or part of a payment stream, or an agreement to assign the right to a payment stream that arises in the future there will be the supply of an interest in or under a debt. This is a financial supply under item 2 of subregulation 40-5.09(3) provided the requirements of subregulation 40-5.09(1) are also satisfied.

Assignment of payment stream

Paragraphs 34-36 of GSTR 2004/4 relate to the assignment of a payment stream and to the assignment of underlying property. Those paragraphs have been reproduced below.

Assignment of payment stream and assignment of underlying property

34. It is necessary in some cases to distinguish the assignment of underlying property from the assignment of a payment stream arising from the property. For example if the owner of a building that is leased sells the freehold to another person subject to the existing lease, the purchaser will be entitled to the rent from the building as its owner. In an abstract sense it can be said that the former owner has assigned the right to rent but it is not an assignment of the rental stream in the sense that is generally understood in the law when referring to assignments of rights to payment streams (Mason CJ in Booth).

35. When there is a transfer of legal ownership by the owner of the freehold, the new owner will continue to make a supply after the sale. The GST consequences will be determined by reference to the circumstances of the new owner (for example, whether the new owner is registered or required to be registered).

36. If there is no sale of the building but only an assignment of the rental stream, there are two supplies relevant in applying the GST, the rental of the building by its owner, and the dealing in the stream of rental payments which will be a financial supply if the conditions of regulation 40-5.09 are satisfied.

Whether a transaction amounts to an assignment of an underlying property as opposed to an assignment of the right to the payment stream will depend on an analysis of the transaction. This is discussed in paragraph 42-47 of GSTR 2004/4. Particularly relevant are paragraphs 42 and 44:

42. If the original owner of the underlying property continues to have rights to the property or functions to perform, it is likely that the transaction will be characterised as an assignment of the payment stream, rather than a sale of the underlying property….

In this case the NFP would still hold the respective dwellings that generate the rental. On the first business day of the NRAS year, the Rental Debts will be assigned to the Trust by the NFP to the Trust in consideration for the payment by the Trust of the Fees (comprising the Quarterly Fee and the Annual Fee). Therefore, it is clear that the NFP still holds the underlying property which is the dwellings and deals merely with the rental payment stream.

Paragraphs 77-79 of GSTR 2004/4 then deals specifically with leases (both residential and commercial) and in particular paragraph 79 states that the assignment of "these forms of property" namely, the rental streams are interests in a debt for GST purposes. The disposal of such an interest is a financial supply provided the conditions of subregulation 40-5.09(1) is met. Paragraphs 77 to 79 state:

Residential/commercial property leases

77. A real property lease gives rise to a presently existing right to receive rental payments for the term of the lease. Typically leases also include options for further leases upon conclusion of the current term. A commercial property lease is a taxable supply provided the requirements of section 9-5 are satisfied.

78. The presently existing right to the payment stream under a current lease is property and an interest in debt for the purposes of regulation 40-5.02. The right to a payment stream under a lease yet to come into existence, because it is dependent on the exercise of an option, is future property.⁴⁵ A right to future property is also an interest for the purposes of regulation 40-5.02.

79. The assignment or agreement to assign these forms of property is the disposal of an interest in a debt for GST purposes. The disposal of the interest is a financial supply if the requirements of subregulation 40-5.09(1) are satisfied. Disposal of this interest does not affect the obligation of the assignor to remit GST on the taxable supply by way of a commercial property lease.

The next issue that must be determined is if the disposal of this interest in a debt is for consideration. Consideration is defined in section 9-15 of the GST Act and includes 'any payment … in connection with a supply…'. You submit that the relevant consideration is outlined in the form of the Fees. Additionally, you also highlight the unique circumstances of this arrangement, by submitting that the relevant consideration paid under these circumstances is dissimilar to most other income stream assignments namely, that the consideration here is a non-discounted payment. We are satisfied for the reasoning behind this unique situation which arises due to the tax offsets as outlined in the facts. Regardless, we agree with your submission which endorses the Tribunal Member's statement in Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22 that, for GST purposes the quantum or adequacy of consideration is a contractual matter to be decided between the relevant parties.

You have also advised us to assume that the rest of the conditions in subregulation 40-5.09(1) will be met. Therefore, the assignment of the respective rental debts in consideration for the Fees is an input taxed financial supply.

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