Edited version of your private ruling

Authorisation Number: 1012472046576

Ruling

Subject: Goods and Services Tax (GST) and transfer of real property

Question 1

Are you making a taxable supply of property to Entity A?

Answer

No

Question 2

Are you making a taxable supply in exchange for the financial contribution from Entity A?

Answer

Yes. You will make a taxable supply of a right to the return of monetary consideration.

Question 3

Do you have an entitlement to input tax credits arising from Agreement B?

Answer

Yes - to the extent acquisitions are made for a creditable purpose.

Relevant facts and circumstances

· You entered into an Agreement A with Entity A.

· At a later time you entered into Agreement B with Entity A.

· Agreement A contains various clauses, the most relevant for the purposes of this ruling being:

· performance measures and obligations are imposed on Entity A;

· you have an interest in Land and Premises in various circumstances.

· Entity A is limited in its ability to:

· sell, assign, transfer, dispose, surrender, let or lease its estate or interest in any of the land or premises;

· mortgage charge or encumber its estate or interest in any Land or Premises;

· Remedies and procedures are outlined in the event that Entity A, in your opinion, fails to fulfil its obligations. Ultimately, you have the right to transfer ownership, possession and management of the Land and Premises to another Entity or to yourself;

· In the event the agreement is terminated and you transfer the Land and Premises, where Entity A has contributed money for the Land and Premises they will be entitled to a return of their monetary contribution.

· The stated purpose of Agreement B is to:

· transfer the Land and Premises to facilitate the objectives outlined in Agreement A.

· Relevant terms in this transfer include that Entity A must:

· Comply with all obligations outlined in Agreement A and Agreement B;

· Pay monetary consideration;

· If Entity A is in default under Agreement B and the agreement is terminated you may retake possession of the above property and transfer title to another entity;

· If Agreement B is terminated and you retake the property and/or transfer it to another entity after payment of the monetary consideration by Entity A, Entity A is entitled to recover the monetary consideration.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

A New Tax System (Goods and Services Tax) Act 1999 Division 11

Reasons for decision

Issue 1

Question 1

Are you making a taxable supply of property to Entity A?

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that 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.

(*Asterisked terms are defined in the Dictionary in section 195-1)

In this instance, the requirements in paragraphs (b), (c) and (d) of section 9-5 of the GST Act are satisfied.

The relevant question to be resolved is the requirement in paragraph (a) that there is a supply for consideration.

Under section 9-10 of the GST Act the term 'supply' is defined as any form of supply whatsoever and includes, among other things a creation, grant, transfer, assignment or surrender of any right.

You are making a supply within the definition of section 9-10 of the GST Act when you transfer the title to Entity A. However, the supply is not a supply of land because you retain your interest in the land under the terms and conditions of Agreement B. The various clauses dealing with breach, termination and determination of interests demonstrate that you retain an interest in the property. Under Agreement B, Entity A is not free to deal with the land as it sees fit. Therefore you are supplying the mere legal title and not the proprietary interest in the land.

To be considered taxable this supply must be for consideration.

Subsection 9-15 (1) of the GST Act provides that 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.

Thus there must be sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. (Refer to paragraph 50 of Goods and Services Tax Ruling GSTR 2001/6 GST: non monetary consideration)

Further, at paragraph 70 of GSTR 2001/6 consideration will be 'in connection with' property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement. (GSTR 2001/6: Paragraph 71)

As stated in clause x of Agreement B, in the event of termination of the agreement, Entity A will receive a return of its contribution. When Entity A makes the payment, it acquires the right to a return of its contribution in the event that Agreement B is terminated. We consider that the payment is not consideration for the transfer of legal title to the land. Rather, the payment is consideration for the right to a return to Entity A of their monetary contribution upon termination of the agreement. Whilst the payment is specified in Agreement B, as is the requirement to comply with its Agreement A obligations, the payment is only made as part of the general arrangement for Agreement B and Agreement A.

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as granting a right or performing a service or entering into an obligation (GSTR 2001/6: Paragraph 12).

For a non monetary thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for making that supply. (GSTR 2001/6: Paragraph 81)

Further, paragraphs 82 and 83 of GSTR 2001/6 provide that whether a payment is consideration for a supply depends on the character of the transaction. Where transactions involve exchange of various rights and obligations between parties to the transaction, the true character may characterise the payment (in-kind) as a condition of the contract rather than the provision of non-monetary consideration for the supply.

Of relevance is paragraph 86 of GSTR 2001/6 which explains that particular terms that form part of a transaction need to go beyond merely defining or describing the supply, or specifying rights that are to be retained by the entity making the supply, before the terms form a separate supply or additional consideration for a supply under the transaction.

In this instance, the over-arching Agreement A establishes the obligations entered into by Entity A. Agreement B does not impose any additional obligations to those imposed under Agreement A but reinforces that the obligations under Agreement A apply to this property as well.

We consider that the rights and obligations outlined in Agreement B are not non-monetary consideration. These rights and obligations do not confer on you any benefit that is not already contained in Agreement A. The rights and obligations assist in defining and describing the terms and conditions under which the supply is made.

As such, in entering Agreement B the rights and obligations do not have an economic value or independent identity that is separate from the transaction, being the supply of the transfer of the title.

Consequently, you do not receive any non-monetary consideration for the supply under Agreement B.

As there is neither monetary or non monetary consideration received for the transfer of the legal title, this transfer does not meet the requirements of subsection 9-5(a) of the GST Act. Consequently the transfer of legal title will not be a taxable supply.

Question 2

Are you making a taxable supply in exchange for the financial contribution from Entity A?

The detailed reasoning in response to Question 1 is relevant here. In summary:

· The definition of supply under section 9-10 of the GST Act includes among other things a creation, grant, transfer, assignment or surrender of any right.

· The payment by Entity A is consideration for the right to a return of their monetary contribution upon termination of Agreement B.

When you supply the right to a return of their monetary contribution to Entity A you will make a taxable supply under section 9-5 of the GST Act as:

· You make a supply for consideration;

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

· The supply is connected with Australia;

· You are registered for GST;

· There is no provision of the GST Act that would make the supply by you to Entity A, GST free or input taxed.

Question 3

Is there an entitlement to input tax credits for you arising from Agreement B?

You are entitled to an input tax credit under section 11-20 of the GST Act when you make a creditable acquisition.

Under section 11-5 of the GST Act 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, or are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered.

Section 11-15 of the GST Act provides the meaning of creditable purpose. Subsection 11-15(1) states that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Subsection 11-15(2) further states 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; or the acquisition is of a private or domestic nature.

To the extent that acquisitions you make relate to your supplies under Agreement B they will be for a creditable purpose. Providing the remaining elements of sections 11-5 of the GST Act are satisfied, they will be creditable acquisitions for which an input tax credit is available. (Refer to Goods and Services Tax Ruling GSTR 2006/4:determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose'.)

As explained in the reasoning for question 1, you do not make a creditable acquisition of the rights and obligations under Agreement B for the purposes of section 11-5 of the GST Act. Therefore you are not entitled to an input tax credit in relation to these rights and obligations.

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