Edited version of your private ruling

Authorisation Number: 1012571369985

Ruling

Subject: GST and nominal consideration

Question

Will the supply of the lots from you (Entity 1) to Entity 2 (a wholly owned subsidiary) where the consideration to be paid by Entity 1 to Entity 2 is nominal, being a peppercorn amount per lot, be GST-free for the purposes or section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· Entity 1 is an endorsed charitable institution for GST purposes in accordance with Division 176 of the GST Act and are an endorsed gift-deductible entity under item 1 of the table in section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

· Entity 1 is registered for goods and services tax (GST)

· Entity 2 is a wholly owned subsidiary of you and is registered for GST.

· Entity 2 is an endorsed charitable institution but is not an endorsed gift deductible recipient.

· Both Entity 1 and Entity 2 are Australian Charities and Not-for-profits Commission (ACNC) registered Charities.

· Entity 1 currently holds legal title to a number of lots containing a number of newly built dwellings. The lots were vested to Entity 1 from a Government Corporation. The dwellings are used by Entity 1 in providing social housing. The transfer was published in the State Government Gazette.

· One of the conditions for Entity 1 receiving the Lots from the Government Corporation is that Entity 1 must increase the number of dwellings it provides as social and affordable accommodation. One of the methods Entity 1 will use to fund the increase in supply of accommodation will be to borrow against the equity of the existing units.

· The intended use of the dwellings by Entity 2 is to lease the lots as affordable accommodation or social housing, where the rent received from the tenants will be less than 75% of the market value of the accommodation.

· Entity 1 wishes to raise a financing facility using the security of the lots and the underlying rental cash flows to service the borrowing. Entity 1 is currently in advanced discussion with a Financial Institution (FI) regarding obtaining the finance. In the context of obtaining a new financing facility, Entity 1 incorporated Entity 2.

· One of the primary reasons for incorporating Entity 2 was to provide a vehicle to establish the Master Financing Facility that is currently in negotiation with the FI. The increased funding is necessary to assist Entity 1 to satisfy its commitment to increase the number of dwellings it provides as social and affordable housing. Other reasons for incorporating the entity include

o To establish a company that in future years could be the vehicle for capital through the bond market.

o As a means of asset protection by separating the encumbered assets of Entity 2 from the unencumbered assets of the parent company.

o To provide the FI that provides the Master Funding Facility with clear and unambiguous title to the security underlying the facility.

o Provide Entity 1 with the ability to source loans in the future without needing to reconsider the Master Funding Facility.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 38-250

Section 72-5

Section 72-10

Section 72-70

Section 195-1

Reasons for decision

Summary

Where Entity 1's supplies satisfy section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) the supplies will be GST-free.

Detailed reasoning

Section 38-250

Subsection 38-250(1)(b)(i) of the GST Act provides that a supply is GST-free if the supplier is an endorsed charity and the supply is a supply of accommodation that is for less than 75% of the GST inclusive market value of the supply.

Subparagraph 38-250(1)(b)(i) of the GST Act states that:

(1) A supply is GST-free if:

(a) the supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and

(b) the supply is for *consideration that:

(i) if the supply is a supply of accommodation - is less than 75% of the *GST inclusive market value of the supply; or

(ii) if the supply is not a supply of accommodation - is less than 50% of the *GST inclusive market value of the supply

*an asterisk denotes a defined term in the GST Act.

The ATO have published the Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document to assist endorsed charities or gift deductible entities in establishing the GST inclusive market values of their supplies under subsection 38-250(1) of the GST Act.

These guidelines are available on our website at www.ato.gov.au.

The Guidelines provide that in determining the GST inclusive market value of a supply, a charity must apply the following successive tests:

Firstly, the charity must establish whether the same supply exists in the open market (the same supply test). Where it does, the price of the supply as defined by the market is the market value that the charity should use. The other suppliers in the market may be charitable or profit making organisations. It is the supply that is compared in the market not the recipient of the supply or the provider of the supply. The comparison should be based on quality, quantity and conditions of supply.

Secondly, if no other organisation offers the same supply, the charity may identify similar supplies that exist in the open market and calculate the market value of its supply by reference to the prices charged for those supplies (the similar supply test). When establishing the market value of a service, the charity should seek to compare the services it offers with services of a similar nature and quality, of similar size or time length, and with similar conditions.

Thirdly, in the unusual event that a market value cannot be established using the same supply test and the similar supply test outlined above, the charity can use a 'cost plus' method. This method allows the charity to use full absorption costing and then apply a mark-up appropriate to the general market of the particular supply. In using this method, the charity can include an imputed cost for donated goods and voluntary labour. The cost plus method is used as a last resort to determine the GST inclusive market value of a supply. This method has no application in determining the consideration charities provided, or were liable to provide for acquiring the thing supplied.

Importantly, these tests are successive tests for determining GST inclusive market value, they are not alternative tests. If, therefore, the market value can be established under the first test, the charity cannot calculate the market value with reference to the second or third tests.

A link to the Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document is provided below. (copy and paste this link into your internet browser)

http://atogov/Business/GST/In-detail/GST-industry-partnerships/Charities-consultative-committee-resolved-issues-document/?anchor=SectionBmarketvalueguidelines#SectionBmarketvalueguidelines

The same supply test

The same supply test requires a charity to work out whether a supply, the same as the one it makes, exists within the market they operate in. That is, in applying the same supply test, the charity compares its supplies to those in the market. The comparison is made between the supplies made by the charity and those by other suppliers. It is not made between the recipients of the supply or the suppliers.

The other suppliers in the market can be charities or profit making organisations.

If the same supply exists in the market, the price of this supply is the market value that the charity should use in their calculations.

Where you are entitled to treat the supplies as GST-free under section 38-250 of the GST Act , this GST treatment overrides any other possible treatment (such as whether the underlying supplies may otherwise be an input taxed supply) [see subsection 9-30(3) of the GST Act]. When a supply is GST-free no GST is payable on the supply, and an entitlement to an input tax credit for anything acquired to make the supply is not affected.

In this case the supply of the lots satisfies the requirements of section 38-250 of the GST Act.

Records

Charities must keep and maintain records that adequately document the process and information collected in working out the relevant market values which the consideration of the supplies the charity makes is to be compared to.

For example, the market values established and the methods used may be documented or minuted in the charity's books of account. This information should be captured in a way that will allow cross-referencing to accounting statements. It should also correspond to what is recorded on the charity's Business activity statements.

While you do not need to seek formal approval from the ATO where you conclude that the supplies or services are GST-free, you must use the above guidelines to calculate the market value or cost of supply to make and support your decision.

Division 72

Where supplies are made to an associate for no consideration or inadequate consideration, the special rules in Division 72 of the GST Act may bring such supplies within the GST system. Division 72 ensures that supplies to, and acquisitions from your associates without consideration are brought within the GST system and that the supplies to your associates for inadequate consideration are properly valued for GST purposes. As such, we need to consider if Division 72 of the GST Act has any application in your case.

The term associate is defined in section 195-1 of the GST Act and it has the meaning given by section 318 of the Income Tax Assessment Act 1936.

Section 72-10 of the GST Act deals with the value of taxable supplies made without consideration. It states that where a supply to your associate without consideration is a taxable supply, its value is the GST exclusive value of the supply.

Section 72-70 of the GST Act deals with the value of taxable supplies where consideration is inadequate. Under this section if a supply to your associate for consideration that is less than the GST inclusive market value is a taxable supply, its value is the GST exclusive market value of the supply.

Due to the operation of section 72-5 of the GST Act, the fact that there is no consideration for a supply does not prevent it from being a taxable supply. Such supplies can be taxable if the supply is made to an associate of the supplier and:

·Your associate is not registered or required to be registered for GST; and

· Your associate acquires the thing supplies otherwise than solely for a creditable purpose.

However, Division 72 of the GST Act only applies if the recipient of the supply is not entitled to a full input tax credit, because they are not registered or required to be registered or if the acquisition was not solely for a creditable purpose.

In this case Entity 2 is registered for GST; therefore Division 72 of the GST Act does not apply.

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