Edited version of your private ruling

Authorisation Number: 1012402539353

Ruling

Subject: GST and entitlement to input tax credits

Question 1

Is Entity A entitled to a decreasing adjustment under Division 132 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) arising from the sale of the Australian property assets to Entity B calculated in accordance with subsection 132-5(2) of the GST Act?

Answer

Yes, Entity A is entitled to a decreasing adjustment under Division 132 of the GST Act arising from the sale of the Australian property assets to Entity B calculated in accordance with subsection 132-5(2) of the GST Act.

Question 2

Will the Commissioner seek to apply Division 165 of the GST Act in relation to any ITC or decreasing adjustment which arises as a result of the relevant sales referred to in Question 1 above?

Answer

No, the Commissioner will not seek to apply Division 165 of the GST Act in relation to any ITC or decreasing adjustment which arises as a result of the relevant sales referred to in Question 1 above.

Relevant facts and circumstances

· Entity A is registered for the goods and services tax (GST).

· The enterprise activities carried on by Entity A include making input taxed supplies.

· Entity A is the representative member of a GST Group.

· Entity B is a subsidiary of Entity A.

· Entity B is registered for GST.

· Entity A and Entity B are not members of the same GST group.

· Australian property assets are predominantly held within Entity A, the parent company of the economic group of entities.

· Entity A has acquired property assets in relation to which input tax credits have not been claimed in full. GST was payable on the acquisition of the property assets. The restriction on input tax credits arises under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as those acquisitions relate in part to the making of input taxed supplies by Entity A (and/or the GST Group of which Entity A is the representative member).

· Entity A has identified an opportunity to create a new Property Operating Company model for managing property assets in Australia. The change will provide a more financially effective commercial model for managing assets.

· Entity B, as the Property Operating Company, will be providing property management services to the group of entities and Entity A will pay management fees to Entity B for those services.

· A project team was formed to manage and provide governance around the development of the concept of a centralised property operating model.

· The new operating model will be implemented over a number of phases.

· All property assets currently owned within the group (with the exception of Entity A's leasehold interests) are to be owned by a single entity, namely Entity B.

· The intention of this initiative is to extend this model across the Australian geography for those assets currently held within Entity A and expand the scope of services that Entity B provides to Entity A.

· Under the proposed arrangement, Entity A will make a supply of all the property assets (with the exception of entity A's leasehold interests) held in Entity A to Entity B. The supply will be by way of a sale and will satisfy the conditions of a taxable supply under Division 9 of the GST Act.

· The purchase of the assets by Entity B will be funded through a formal inter-company loan account from Entity A.

· It is anticipated that the assets will be acquired by Entity B at their current written down value.

· The current estimate of the value of the assets to be transferred would result in a decreasing adjustment.

· Entity A is also currently the tenant of leased premises (Entity A's property leases).

· As a result of a risk review, Entity A believes that the objectives of the establishment of a Property Operating Company model and a more cost effective/lower risk implementation can be achieved without assigning the rights under the leases to Entity B.

· Entity A will not assign any of its rights under its property leases. Instead, Entity B will manage Entity A's property leases (including negotiating contracts, maintenance relationships, etc) and occupancy costs as an agent for Entity A.

· There are a number of significant challenges in relation to the property asset portfolio. The most critical is that the structuring of property assets within the group in the past has not necessarily been optimised from a commercial perspective. It is anticipated that this property operating model would provide strategic alternatives for the economic group. Specifically, it will provide:

o consistent structure and governance for all property assets;

o development of a model and management structure which aligns more closely with the wider service culture objectives of Entity A;

o enhanced commercial management for the property assets;

o creation of a commercially linked service culture to enhance customer experience;

o the development and implementation of a proactive and consistent approach to managing property assets and reporting property costs;

o the establishment of the appropriate governance regime necessary to provide assurance to Entity A's directors that the Occupational Health & Safety (OH&S) obligations are being met, including the OH&S risks that relate to the property operations; and

o a vehicle to tender for property services. Entity B will be considered as an alternative provider of theses services where the value proposition is equal to or better than market conditions.

· It is anticipated that through its management service agreement with Entity A, this arrangement will deliver some savings to the economic group.

· While Entity B can perform property management services for other entities in the group without owning those assets, this does not achieve all the outcomes or objectives of the strategy. For instance, capital optimisation, governance and risk management through a central Board can only be achieved by streamlining the legal entity structure and having a single owner of property assets and services.

· The scope of this ruling request covers property assets held by Entity A or other members of the GST group and Entity A's leases with third party landlords. This ruling does not cover a sale of freehold interest in land.

· The property assets that are the subject of this ruling request are the leasehold improvements, furniture, fittings and other business assets.

· The property assets that are the subject of this ruling request are those assets acquired on and after the introduction of GST on 1 July 2000 on which full input tax credits have not been claimed either upon acquisition or through subsequent adjustments.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5;

A New Tax System (Goods and Services Tax) Act 1999 Division 132;

A New Tax System (Goods and Services Tax) Act 1999 subsection 132-5(1);

A New Tax System (Goods and Services Tax) Act 1999 subsection 132-5(2);

A New Tax System (Goods and Services Tax) Act 1999 Division 165;

A New Tax System (Goods and Services Tax) Act 1999 paragraph 165-10(1)(d);

A New Tax System (Goods and Services Tax) Act 1999 subsection 165-10(2); and

A New Tax System (Goods and Services Tax) Act 1999 subsection 165-15(1).

Reasons for decision

Question 1

Is Entity A entitled to a decreasing adjustment under Division 132 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) arising from the sale of the Australian property assets calculated in accordance with subsection 132-5(2) of the GST Act?

Summary

Entity A is entitled to a decreasing adjustment under Division 132 of the GST Act arising from the sale of the Australian property assets to Entity B calculated in accordance with subsection 132-5(2) of the GST Act.

Detailed reasoning

Division 132 of the GST Act provides that an entity may have a decreasing adjustment where an entity makes a supply of something that was originally acquired or imported for making financial supplies or for a private or domestic purpose, in the circumstances set out in that Division. If an entity is entitled to a decreasing adjustment under Division 132 of the GST Act, the amount of the decreasing adjustment is calculated using the formula contained in subsection 132-5(2) of the GST Act.

Pursuant to subsection 132-5 (1) of the GST Act, an entity has a decreasing adjustment if the following conditions are met:

· the entity makes a taxable supply of a thing or makes a supply of a thing that would have been a taxable supply had it not been GST-free under subdivision 38-J of the GST Act; and

· the supply is a supply by way of sale; and

· the acquisition, importation or subsequent application of the thing was solely or partly related to making financial supplies or was solely or partly of a private or domestic nature.

An entity makes a taxable supply under section 9-5 of the GST Act if all the following conditions are met:

· the entity makes the supply for consideration;

· the supply is made in the course or furtherance of the entity's enterprise;

· the supply is connected with Australia; and

· the entity is registered or required to be registered.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Entity A has advised that the supply of the relevant Australian property assets (comprised of leasehold improvements, furniture, fittings and freehold assets) to Entity B will be by way of sale and will be a taxable supply under Division 9 of the GST Act.

The Commissioner's view on the application of Division 132 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2004/8: Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8).

For an entitlement to a decreasing adjustment under Division 132 of the GST Act to arise, an entity needs to have been entitled, at least to some extent, to an input tax credit on the acquisition of the thing, if not for the acquisition or application of the thing being related to making financial supplies or of a private or domestic nature. This entails that at least some GST must have been payable on the supply of the thing to the entity.

The relevant property assets that were acquired by Entity A on and after the commencement of GST were acquisitions in relation to which Entity A has not been entitled to claim full input tax credits. The reason for the denial of full input tax credits was because the acquisitions related in part or in full to the making of financial supplies by Entity A. As such, Entity A will be entitled to a decreasing adjustment under Division 132 of the GST Act when it makes a taxable supply upon selling these property assets. The amount of the decreasing adjustment is calculated using the formula set out in subsection 132-5(2) of the GST Act.

Question 2

Will the Commissioner seek to apply Division 165 of the GST Act in relation to any ITC or decreasing adjustment which arises as a result of the relevant sales referred to in Question 1 above?

Summary

The Commissioner will not seek to apply Division 165 of the GST Act in relation to any ITC or decreasing adjustment which arises as a result of the relevant sales referred to in Question 1 above.

Detailed reasoning

Application of the general Anti-avoidance rule

The object of Division 165 of the GST Act is to deter schemes that give an entity a GST benefit. If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme.

Section 165-5 of the GST Act outlines when the Division operates and states:

165-5 When does this Division operate?

General rule

(1) This Division operates if:

(a) an entity (the avoider) gets or got a *GST benefit from a *scheme; and

(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the *GST law, the *wine tax law or the *luxury car tax law; and

(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:

(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or

(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and

(d) the scheme:

(i) is a scheme that has been or is entered into on or after 2 December 1998; or

(ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).

Territorial application

(2) It does not matter whether the *scheme, or any part of the scheme, was entered into or carried out inside or outside Australia.

Accordingly, for Division 165 of the GST Act to apply to the facts and circumstances you provided in your ruling application and the responses provided to the questionnaire issued by the Commissioner, three elements would need to be satisfied:

· there is a "scheme";

· a "GST benefit" is obtained from the scheme; and

· the dominant purpose or principal effect of the scheme is to obtain the GST benefit identified.

Scheme

Subsection 165-10(2) of the GST Act exhaustively defines a "scheme" as:

(a) any arrangement, agreement, understanding, promise or undertaking:

(i) whether it is express or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise'.

The arrangement that you have described in your private ruling application would constitute a scheme for the purposes of Division 165 of the GST Act.

The scheme would, in general terms, consist of the following steps:

· The supply of property assets currently owned within the Entity A's group to Entity B; and

· The provision of the property management services to the Entity A's group by Entity B.

GST Benefit

Under paragraph 165-10(1)(d) of the GST Act, a GST benefit includes a benefit where:

'all or part of an amount that is payable to the entity under this Act apart from this Division is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or part of the scheme'.

A GST benefit is obtained in the form of a timing benefit, resulting from the initial decreasing adjustment pursuant to Division 132 of the GST Act, which is mitigated over time through the Entity A's inability to recover ITCs on its acquisition of property management services from Entity B.

Dominant Purpose / Principal Effect

Division 165 of the GST Act must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1) of the GST Act.

The ruling request indicates that there are significant commercial reasons for the implementation of the scheme. Based on the information contained in the ruling request and further information provided to the Commissioner, it is considered that the scheme/arrangement described, with its particular facts and circumstances, in particular relating to:

· the form and substance of the scheme;

· the manner in which the scheme was/will be carried out;

· the timing of the scheme;

· the period in which the scheme was/will be carried out;

· the overall change in the applicants financial position and

· the circumstances surrounding the schemewill not be entered into or carried out with the dominant purpose or principal effect of securing a GST benefit and therefore Division 165 of the GST Act will not apply.

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