Edited version of your private ruling

Authorisation Number: 1012562596314

Ruling

Subject: GST and supply of land under a development lease arrangement

Question 1

Is the supply of the land under the development lease and the subsequent supply of the freehold interest in the land GST-free under Subdivision 38-N of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) where the land is unimproved at the time of the granting of the development lease?

Answer

Yes

Question 2

For the purposes of the GST Act:

(a) Is the consideration for the supply of the lease the rent payable under the lease?

(b) Is the consideration for the subsequent supply of the freehold interest in the land the monetary purchase price and/or the market value of the development activities?

Answer

(a) Yes

(b) Yes

Question 3

(a) In what period will GST payable on the supply of the freehold interest in the land be attributed for the purposes of Division 29 of the GST Act?

(b) If the answer to question 2(b) is that the consideration for the supply of the freehold is the monetary purchase price and the market value of the development activities performed by the lessee under the development lease, how is the GST to be attributed for the purpose of Division 29 of the GST Act for supply of the freehold interest in the land if the value of the development works and/or the monetary purchase price is not known when part of the consideration is first received by the lessor?

Answer

(a)

As you account on a non cash basis, the total GST payable on the supply of the freehold interest in land is attributable to the tax period when any of the consideration (monetary consideration or non monetary consideration) is received, or an invoice is issued.

In the absence of an invoice, the consideration that is received at the earliest time will trigger the attribution rules under section 29-5 of the GST Act. Under the development lease arrangements that you enter into, the non-monetary consideration (the development activities) is received at the time that the specified works required under the arrangement are completed. This means that if monetary consideration is not payable or the monetary consideration is paid at the time you supply the freehold interest in the land the total GST on the supply of the freehold interest in the land will be attributed to the tax period in which the specified works required under the arrangement are completed

(b) See the answer to question 3 (a).

Question 4

(a)Will the attribution period determined to apply for question 3(a) and (b) change if the land is subdivided and the freehold interest in the land is supplied in stages?

(b)Will the attribution period change if some of the initial development activities will be of benefit not just to the first stage but subsequent stages?

Answer

(a) No

(b) No

Relevant facts and circumstances

You are a state government department that is registered for GST and accounts on a non cash basis.

Your function involves the administration of Crown land.

You enter into development lease arrangements with developers which is authorised under state legislation.

The Crown land which is being leased under a development lease may be:

· land which has not been previously leased by the State and is land on which there are no improvements at the time of the grant of the lease; or

· the land is improved at the time of the grant of the development lease.

The development lease may be granted for the purpose of development of residential premises or commercial/industrial purposes.

The terms of the development lease provide for the supply of the freehold interest in the land to be supplied to the developer if they have completed any specific development obligations included in the lease, have paid the rent that was payable and have otherwise complied with the terms of the lease. The lease always contains provisions which cover the setting of the purchase price or specify the terms under which the purchase price is to be calculated.

The terms of a development lease and the activities that have to be completed before the land will be transferred in fee simple, varies from one transaction to the next.

The lessee's obligations in the lease may comprise carrying out all works to deliver:

· the development in a completed built form or

· to complete only part of the development such as obtaining planning approval, undertaking basic site works and installation of public utility services.

The site works may include removal of structures already on the land and remediation of contamination affecting the land.

A development lease is often granted to allow a staged subdivision of Crown land for residential or commercial/industrial purposes

You supplied sample lease agreements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-75.

A New Tax System (Goods and Services Tax) Act 1999 Section 29-5

A New Tax System (Goods and Services Tax) Act 1999 Section 29-25

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-445(1A).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-445(2).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-450(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

The GST law in respect of transactions arising from development lease arrangements will depend upon the terms of the contractual agreements. The advice in the reasoning is based on the sample lease agreements that you have provided.

Question 1

Is the supply of the land under the development lease and the subsequent supply of the freehold interest in the land GST-free under Subdivision 38-N of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) where the land is unimproved at the time of the granting of the development lease?

Detailed reasoning

The Commissioner's view in respect of land on which there are no improvements is contained in Goods and Services Tax Ruling GSTR 2006/6 GST: improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6). This ruling does not consider whether the land that is the subject of the development lease is 'land on which there are no improvements'

Development lease (short term lease): where there are no improvements on the land when the lease is granted

Subsection 38-450(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

(1) A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if:

(a) the supply is by way of lease (other than *long-term lease); and

(b) the lease is subject to conditions the satisfaction of which will entitle the *recipient of the supply to the grant of a freehold interest in the land or a long-term lease of the land.

The asterisked terms are defined in section 195-1 of the GST Act.

Based on the facts supplied, the leases that are entered into satisfy the requirements of section 38-450 of the GST Act.

In accordance with the view in paragraph 7 of Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory' (GSTR 2006/5) you are a department of an Australian State so you are 'the State' for the purposes of the GST Act.

In addition:

· you have advised that there are no improvements on the land at the time of the grant of the lease

· the leases are not long term leases as defined in section 195-1 of the GST Act as they are not expected to continue for at least 50 years.

· these leases require the lessee to complete specific development activities in respect of the land and if these conditions have been complied with the lessee will be entitled to the freehold interest in the land.

It follows that these short term development leases are GST free pursuant to section 38-450 of the GST Act if the land is unimproved.

Subsequent supply of the freehold interest in the land: where there are no improvements on the land when the development lease was granted

Subsection 38-445(1A) of the GST Act states:

(1A) A supply by the Commonwealth, a State or Territory of land is GST-free if:

(a) the supply is of a freehold interest in the land, or is by way of *long-term lease; and

(b) the Commonwealth, a State or Territory had previously supplied the land, by way of lease, to the *recipient of the supply; and

(c) at the time of that previous supply, there were no improvements on the land; and

(d) because conditions to which that lease was subject had been satisfied, the recipient was entitled to the supply of the freehold interest or the supply by way of long-term lease.

Subsection 38-445(2) of the GST Act provides that the supply is not GST-free if, since 1 July 2000, the land has already been the subject of a supply that is GST-free under this section.

On the basis that you satisfy the criteria in subsection 38-445(1A) of the GST Act, the supply of the freehold interest in the land will be GST free under subsection 38-445 of the GST Act provided that the land in question has not previously been treated as a GST free supply under this section of the GST Act.

Question 2

For the purposes of the GST Act:

(a) Is the consideration for the supply of the lease the rent that is payable under the lease?

(b) Is the consideration for the subsequent supply of the freehold interest in the land the monetary purchase price and/or the market value of the development activities?

Detailed reasoning

Determining the consideration for the purposes of the GST legislation is a question of fact and will depend upon the terms of the contractual agreements.

This ruling will not address supplies of land where the margin scheme has been applied to work out the GST on the supply.

(a) Development lease

Consideration is defined in section 9-15 of the GST Act to include any payment, or act or forbearance, in connection with, or in response to for the inducement of a supply of anything.

Based on the facts supplied, the development leases require the lessee to pay the rent amount (inclusive of GST) on rent payment dates specified in the lease to the lessor. If the lessor forfeits or terminates the lease, any rent that has been paid would not be repaid to the lessee.

There is a clear nexus between the lease of the land and the rental payments.

Therefore under section 9-15 of the GST Act the consideration for the supply of the land by way of the lease is the rental payments.

(b) Subsequent supply of freehold interest in the land for land that is not GST free under subsection 38-445 of the GST Act

The reasoning for question 2(a) explains the meaning of consideration for the purposes of the GST Act.

Goods and Services Tax Ruling GSTR 20001/6 Goods and services tax: non monetary consideration (GSTR 2001/6) provides guidance on what constitutes monetary and non-monetary consideration.

Paragraph 71 of GSTR 2001/6 states:

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, but by looking at all of the transactions entered into and the circumstances in which the transactions are made

Consideration is not limited to a payment of money. It includes a payment in a non-monetary form.

Under some of the development lease arrangements that you enter into, the transfer of the freehold interest in the land may be conditional on the payment of a purchase price in addition to the rent payments. Where the agreements require a payment in addition to the rental payments for the supply of the freehold interest in the land, this payment has the necessary connection with the supply of the freehold interest. Therefore this monetary payment is consideration as defined in section 9-15 of the GST Act.

We will now consider whether the supply of the development activities is non-monetary consideration for the supply of the freehold interest in the land.

Paragraph 81 of GSTR 2001/6 explains the characteristics of non-monetary consideration:

For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire……..

Under the terms of the development lease, the supply of the freehold interest in the land will be permitted once the lessee has fulfilled their obligations to complete specified development activities. These development activities have an economic value and independent identity as they are capable of being valued and are things that you would usually and commercially pay money to acquire.

We consider that the undertaking of these development activities forms part of the consideration for the supply of the freehold interest in the land, as there is a sufficient nexus between these activities and the supply of the interest in the land. The development activities fall within the definition of consideration under section 9-15 of the GST Act.

It does not matter that the development activities may only comprise planning approval, subdivision or installation of public utility services. These activities will form part of the non monetary consideration as they are provided in connection with the supply of the freehold interest in the land.

Where the lessee is required to fulfil obligations to perform development activities under the development lease which have

· a nexus with the supply of the land; and

· an economic value and independent identity that is separate from the transaction,these obligations will form part of the non monetary consideration for the supply of the land.

This view is supported by the federal court decision Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia).

The Gloxinia decision handed down on 24 May 2010 concerned a development lease arrangement. In response to the Gloxinia decision, the Commissioner issued the ATO Decision Impact Statement Commissioner of Taxation v Gloxinia Investments Ltd as trustee for Gloxinia Unit trust (DIS) on 21 April 2011. Whilst the Gloxinia case concerns the supply of residential premises, the Commissioner considers that the principles in this case apply to other development lease arrangements.

In the DIS it states:

The Commissioner considers the effect of the decision in this case, under the current law to be as follows:

Development lease arrangements

A developer supplies development services to the land owner when they undertake development works pursuant to the terms of a development lease arrangement. Subject to the application of Division 82, the supply of those development services will be a taxable supply, and the land owner will make a corresponding creditable acquisition.

Upon transfer or grant of the freehold or leasehold title to the land comprising the completed works to the developer, the land owner makes a taxable supply to the developer. The consideration received from the developer will include the development works undertaken by the developer (except any works to which Division 82 applies).

In conclusion, under the GST law, the consideration for your supply of the freehold interest in the land is the non-monetary consideration in the form of the development activities as well as any monetary consideration (over and above the rent payments) which is specified in the agreement.

Valuation of the non monetary consideration

The amount of GST on a taxable supply is 10% of the value of the taxable supply. Under subsection 9-75(1), the value of a taxable supply is the price x 10/11, where the price is the sum of:

a. so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply; and

b. so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

As part of the consideration for the supply of the land is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. In accordance with paragraph 19 of GSTR 2001/6 we consider that where parties are dealing at arm's length, as in this case, we are of the view that the things exchanged are of equal GST inclusive market value.

As explained in paragraph 160 of GSTR 2001/6, the GST Act does not specify the time when the market value of non-monetary consideration is to be ascertained for the purposes of working out the value of the supply under paragraph 9-75(1)(b) of the GST Act. This paragraph provides that the time must be reasonable in the circumstances of a particular transaction. Depending on the circumstances, it may be:

· when parties enter into a binding agreement

· when economic risk is transferred, or

· when a recipient assumes effective control.

In particular, paragraph 162 of GSTR 2001/6 provides that the process of valuing non-monetary consideration can be done before or after the appropriate time as long as it reflects the GST inclusive market value at the time when it should be determined.

In your case a valuation of the development activities as at the appropriate time will be required so that you can ascertain your GST liability with respect to the supply of the land. As stated in paragraph 162 of GSTR 2001/6, the relevant valuation can be undertaken at a time before or after the appropriate time.

Question 3

(a) In what period will GST payable on the supply of the freehold interest in the land be attributed for the purposes of Division 29 of the GST Act?

(b) If the answer to question 2(b) is that the consideration for the supply of the freehold is the monetary purchase price and the market value of the development activities performed by the lessee under the development lease, how is the GST to be attributed for the purpose of Division 29 of the GST Act for supply of the freehold interest in the land if the value of the development works and/or the monetary purchase price is not known when part of the consideration is first received by the lessor?

Detailed reasoning

Determining the attribution period under the GST legislation is a question of fact and will depend upon the terms of the contractual agreements.

(a)

The core attribution rules are set out in Division 29 of the GST Act. Under subsection 29-5(1) of the GST Act, the attribution rules require that if you account for GST on a non cash (accruals) basis the GST payable on a taxable supply is attributable to the tax period in which you receive any of the consideration, or an invoice is issued, whichever is the earlier.

Paragraph 166 of GSTR 2001/6 explains that the core rules for attributing GST payable apply whether or not the consideration for a taxable supply is monetary and/or non-monetary.

Paragraph 173 of GSTR 2001/6 explains that in applying the core attribution rules to transactions where the consideration is non-monetary, you need to identify when the consideration is received or provided. This is a question of fact and depends on the terms of the agreement and all the circumstances.

To determine when the consideration is provided we will consider the terms of the development lease agreement and the development activities that are supplied to you.

The lessee's obligations under the lease may comprise site works, completed buildings, installation of public utility services, removal of structures and remediation works.

The development activities that are carried out by the lessee in accordance with its obligations under the lease will result in affixations being made to the land. Affixations are permanent attachments to land (for example buildings, gas and water pipes). All of the activities that are carried out under the lease will form part of the completed works.

Primary Production Industry Partnership issues register 6.5.2 (Issue 6.5.2) is a public ruling for the purposes of the Taxation Administration Act 1953. Issue 6.5.2 concerns the GST consequences of fixtures attached to farmland by a tenant. The principles stated in Issue 6.5.2 can be applied to land held under lease that is not farmland.

The following advice is stated at paragraph 2 of Issue 6.5.2:

2. The GST treatment will depend upon whether or not the property in the fixture passes from the tenant to the landlord. This may occur on affixation or at the end of the lease.

a. Under a relevant State or Territory law, the property in the fixture may pass from the tenant to the landlord at the point of affixation. At this point, the tenant will make a taxable supply of the fixture provided that the requirements of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

b. If the property in the fixture does not pass upon affixation, the property will only pass from the tenant to the land owning entity if the tenant does not remove the fixtures at the end of the lease. Whether the supply is a taxable supply will depend on whether or not the requirements of section 9-5 of the GST Act are satisfied.

Under the sample agreements you have provided, the contractual terms vary the provisions in the state legislation that you are governed by so paragraph 2a of Issue 6.5.2 does not apply.

Paragraph 17 of Issue 6.5.2 states:

If property does not pass to the landowner:

1. There will only be a supply if the tenant does not remove the fixtures. If this is the case there will be a supply of the fixtures by the tenant to the landowner.

2. Where the tenant is entitled to compensation or the landowner exercises a right of purchase the consideration for the supply will be the amount of compensation or consideration received by the tenant.

3. Where all the requirements of section 9-5 of the GST Act are satisfied, this supply will be a taxable supply.

4. It may also be important to determine whether there is any non-monetary consideration in connection with the supply. Guidance for this can be found in GSTR 2001/6.

Under the development lease agreements that you enter into, the lessee is entitled to remove affixations to the land if the lease is terminated prior to the transfer of the freehold interest in the land. The lessee retains rights in respect of the affixations under these rights of removal. This means that the affixations made by the lessee will not pass until the surrender or expiration of the lease. Accordingly the time of receipt of the non monetary consideration in the form of the development activities is at the time these works have been completed.

In your case, monetary consideration is paid by the lessee at the time of the supply of the freehold interest in the land (if any) and the non-monetary consideration is received at the time of completion of the works. This means that in the absence of an invoice, the consideration that is received at the earliest time will activate the attribution rules under section 29-5 of the GST Act. Under the development lease agreements that you enter into, the non-monetary consideration is received at the time that the specified works required under the arrangement are completed. Accordingly, the total GST on the supply of the freehold interest in the land will be attributed to the tax period in which the specified works required under the arrangement are completed.

In conclusion you will attribute the GST payable on the supply of the freehold interest in the land in accordance with the attribution rules under subsection 29-5(1) of the GST Act.

Under subsection 29-5(1) the total GST payable in respect of the supply of the freehold interest in the land is attributable to the tax period in which you receive any of the consideration (monetary or non monetary) or an invoice is issued, whichever is the earlier.

(b)

The reasoning at question 3(a) explains the attribution rules for GST payable on your supplies of freehold land that are subsequent to a development lease.

On the basis of the facts that you have presented, we consider that the total consideration is known when any of the consideration is received.

In your circumstances, the non-monetary consideration (the development activities) is known because the development lease includes specific development obligations which must be fulfilled by the lessee in order for the freehold interest in the land to be supplied.

The monetary consideration is also known because the development lease contains provisions which cover the setting of the purchase price or specify the terms under which the purchase price is to be calculated.

On the basis that the monetary and the non-monetary consideration is known, the attribution rules in the reasoning to question 3(a) apply. Refer to Valuation of the non monetary consideration outlined above for further information on the quantification of the non-monetary consideration.

In the event that there are instances where the supply occurs before the total consideration is known, the Commissioner may determine special attribution rules under section 29-25 of the GST Act.

The determination under paragraph 29-25(2)(e) may apply in circumstances where the total consideration is unknown when any of the consideration is received for the supply and the ascertainment of the total consideration depends on a future event or events that is not entirely within your control.

This determination is attached as Schedule 5 to Goods and Services Tax Ruling GSTR 2000/29 Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25 (GSTR 2000/29). Paragraphs 92 to 98 of GSTR 2000/29 provide guidance on this determination.

Question 4

Detailed reasoning

Determining the attribution period under the GST legislation is a question of fact and will depend upon the terms of the contractual agreements.

(a)Will the attribution period determined to apply for question 3(a) and (b) change if the land is subdivided and the freehold interest in the land is supplied in stages?

(b)Will the attribution period change if some of the initial development activities will be of benefit not just to the first stage but subsequent stages?

(a)

The reasoning at question 3(a) explains the attribution rules for GST payable on supplies. These attribution rules also apply where the land is subdivided and the freehold interest in the land is supplied in stages.

Under the staged supply development lease arrangements, the leased premises may be developed in stages and on practical completion of a stage, the lessee will be entitled to transfer of the fee simple of that part of the leased premises comprising the completed stage in return for payment of the stage land purchase price.

In the absence of an invoice, the consideration that is received at the earliest time will trigger the attribution rules under section 29-5 of the GST Act. Under the development lease agreements that you enter into, the non-monetary consideration (the development activities) is received at the time that the specified works required under the arrangement are completed. The total GST payable on each supply of freehold land is attributable to the tax period in which the specified works on that land have been completed if monetary consideration is not payable or the monetary consideration is paid after the non-monetary consideration is received.

(b)

The reasoning at question 3(a) explains the attribution rules for GST payable on supplies under Division 29 of the GST Act. These attribution rules will still apply where initial development activities will be of benefit not just to the first stage but subsequent stages. However an apportionment is required to reflect the relevant non monetary consideration for each stage of land.

An apportionment of the development works (the non-monetary consideration) in respect of the entire land is necessary to allocate the appropriate portion of non monetary consideration to each particular supply of the subdivided freehold interest in land

As previously stated, the supply of the development activities is received by you at the time that the works are completed. Accordingly, subsection 29-5(1) of the GST Act provides that the total GST payable in respect of the supply of the freehold land is attributable to the tax period in which you receive any of the consideration (monetary or non-monetary) or an invoice is issued, whichever is the earlier. The non-monetary consideration (the development activities) is received when the works for each stage of the land has been completed.

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