Edited version of private advice

Authorisation Number: 1012668093105

Ruling

Subject: National rental affordability scheme (NRAS)

Question 1

Will you be entitled to the NRAS tax offset under section 380-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will any gain arising from the transfer of the Allocations under the Deed to you be assessable under:

a) Division 230 of the ITAA 1997; or

b) section 6-5 of the ITAA 1997?

Answer

Yes, under Division 230 of the ITAA 1997

Question 3

Will any financial costs or incidental expenses incurred by you during the course of the arrangement be deductible under section 8-1 of the ITAA 1997?

Answer

Yes

Question 4

Is the transfer of the Allocations to you under the terms of the Deed a creditable acquisition by you?

Answer

Yes. The transfer of the Allocations to you under the terms of the Deed is a creditable acquisition.

Question 5

Will the obligations of the parties in relation to the Price and Rebate be treated as adjustment events to the consideration for the acquisition of an input taxed supply under the Deed?

Answer

No. However the obligations of the parties in relation to the Price and Rebate, may give rise to adjustment events in respect of the acquisition of the taxable supply made by the taxpayer under the Deed.

Question 6

Are the 'Payments' consideration for a creditable acquisition made by you?

Answer

No. However, they may give rise to adjustment events in respect of the acquisition of the taxable supply made by the taxpayer under the Deed.

Question 7

Are the 'Break Benefits' consideration for a creditable acquisition made by you?

Answer

No. However, they may give rise to adjustment events in respect of the acquisition of the taxable supply made by the taxpayer under the Deed.

Question 8

Are the Termination Payments and Break Costs consideration for a taxable supply made by you?

Answer

No. However, they may give rise to adjustment events in respect of the relevant taxable supply. Where a payment is made as a consequence of a default there will be no GST consequences.

This ruling applies for the following periods:

Year ended 2014.

Year ended 2015.

Year ended 2016.

The scheme is yet to commence.

Relevant facts and circumstances

1. The National Rental Affordability Scheme (NRAS) was established to encourage investment in affordable housing stock by offering a National Rental Incentive (Incentive) to providers of new rental dwellings. The objectives of the NRAS include encouraging large-scale investment in, and innovative delivery of, affordable housing. Management of affordable housing stock would generally be undertaken by charities or other not for profit organisations, however such entities are less likely to have access to the level of financing required to develop significant property stocks.

2. Based on an approved participant's compliance with the NRAS requirements the Housing Secretary will make offers of Allocation to the approved participant. An approved participant "means a person or entity approved under regulation 14 or 21" of the National Rental Affordability Scheme Regulations 2008 (NRAS Regulations).

3. An Allocation is defined to mean "in relation to an incentive period, means an allotment to an approved participant of an entitlement to receive an incentive for an approved rental dwelling in relation to an NRAS year that falls within the incentive period if conditions are satisfied in relation to the rental dwelling."

4. The incentive is comprised of a Federal Government contribution in the form of a refundable tax offset for each dwelling provided and a State or Territory Government contribution in the form of a cash payment per dwelling. The entitlement to the Federal tax offset is the subject of Division 380 of the Income Tax Assessment Act 1997 (ITAA 1997). The State/Territory payment is non-assessable non-exempt income of the entity deriving the payment: section 380-35 of the ITAA 1997.

5. Entitlements to the tax offset may pass to other entities where an Allocation is transferred to another approved participant or to another party.

6. The arrangement to be undertaken is:

a. An approved participant (the taxpayer) under regulations 14 of the NRAS Regulations will enter into an agreement (Deed) to receive an upfront payment you in exchange for the taxpayer making a request to have their Allocations transferred to you under regulation 21 of the NRAS Regulations.

b. The upfront payment will be at a discount to the nominal value of the existing Allocations.

c. On a yearly basis, at each Entitlement Date, the taxpayer will re-value each Allocation as if that entitlement were transferred on that date. Certain contingent payments (such as Deferred Purchase Price, Rebates or Residual Payments) may be required to be made between the parties to reflect changes in the valuation of the Allocations as set out in the Deed.

d. Where the arrangement is terminated a Termination Payment maybe payable by either the Seller or you to the other party including any Break Costs or Break Benefits in relation to the termination of any hedging arrangement.

7. The funding will be provided by you to another taxpayer at a discount to the nominal value of the Allocations and the Seller will repay funding as the Incentives (being the tax-offset certificates) under the NRAS scheme are released. You seek to make a profit by purchasing the Allocation at a discount.

8. You will incur interest cost on borrowed funds that it has used to pay the Initial Purchase Price and may incur further incidental costs under the arrangement.

9. The accounting treatment of the proposed transaction is to be a loan by you to the taxpayer.

10. All parties are registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5(2),

Income Tax Assessment Act 1997 8-1,

Income Tax Assessment Act 1997 Division 230,

Income Tax Assessment Act 1997 230-45,

Income Tax Assessment Act 1997 230-55,

Income Tax Assessment Act 1997 Division 380,

Income Tax Assessment Act 1997 380-5,

Income Tax Assessment Act 1997 974-160(1),

Income Tax Assessment Act 1997 995-1(1),

A New Tax System (Goods and Services Tax) Act 1999 11-5,

A New Tax System (Goods and Services Tax) Act 1999 11-15 and

A New Tax System (Goods and Services Tax) Act 1999 11-20.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Question 1

Summary

You are entitled to the NRAS tax offset under section 380-5, as you satisfy the requirement of section 380-5.

Detailed reasoning

Subsection 380-5(1) provides that:

an entity is entitled to a tax offset for an income year if:

(a) the *Housing Secretary [the Housing Secretary means the Secretary of the Housing Department] issues an *NRAS certificate in relation to an *NRAS year to the entity (other than in the entity's capacity (if any) as the *NRAS approved participant of an *NRAS consortium); and

(b) the income year begins in the NRAS year; and

(c) the entity is an individual, a *corporate tax entity or a *superannuation fund.

The amount of the entity's *tax offset is the amount stated in the *NRAS certificate (subsection 380-5(2)).

You will satisfy the requirements of subsection 380-5(1) and will be entitled to the tax offset as you has, or will meet the relevant requirements in Division 380:

• Under the arrangement you will be entitled to an NRAS Certificate because the taxpayer will request the Secretary, (who is the Housing Secretary) to have its Allocation transferred to you under regulation 21 of the NRAS Regulations.

Regulation 21 of the NRAS Regulations provides that "[t]he Secretary may, on application by the approved participant [the taxpayer] for an approved rental dwelling, transfer an allocation to: (a) another approved participant; or (b) another person or entity. A person or entity to whom an allocation is transferred becomes the approved participant for the approved rental dwelling."

Therefore paragraph 380-5(1)(a) will be satisfied when the Secretary issues an NRAS Certificate to you who will not be a participant of an NRAS consortium as defined in subsection 995-(1) .

• Paragraph 380-5(1)(b) refers to the NRAS year which has the same meaning as in the National Rental Affordability Scheme Act 2008 (subsection 995-1 ). For the first year of the NRAS operation, its period began on 1 July 2008 and ending on 30 April 2009. For later years, it is the year beginning on 1 May 2009 and subsequent years beginning on 1 May. In relation to the arrangement it will commence in the income year ended 30 September 2014 which will begin in the NRAS year, beginning 1 May 2013 to 30 April 2014.

• Paragraph 380-5(1)(c) refers to a "corporate tax entity" which is defined as a company, a corporate limited partnership, a corporate unit trust or a public trading trust under section 960-115 . you is a company and is therefore a corporate tax entity for the purpose of paragraph 380-5(1)(c).

Question 2

Summary

Any gain arising from the transfer of the Allocations under the arrangement will be accounted under Division 230 for income tax purposes.

As subsection 6-5(2) provides where the "same amount" is taxed under both ordinary income provision and a specific provisions, unless the "contrary intention appears", the specific provision prevails.

Detailed reasoning

Broadly, Division 230 brings to account gains and losses from financial arrangements. A financial arrangement is the unit of taxation for the purposes of Division 230.

Financial Arrangement

For Division 230 to apply to a gain or loss, it is necessary to identify a financial arrangement.

'Financial arrangement' is defined in subsection 995-1(1) as having the meaning attributed in sections 230-45 to 230-55. Subsections 230-45(1), 230-50(1) and 230-50(2) provide tests which specify when you have a financial arrangement. Section 230-50 deals with arrangements involving equity interest which is not relevant to the facts of this case.

Section 230-55 provides rules concerning the grouping and disaggregating of arrangements. This section is part of the definition of 'financial arrangements' and is a provision that identifies what is the 'arrangement' as a preparatory act for the application of the balance of the definition of 'financial arrangements'; namely sections 230-45 and 230-50.

Generally what is determined pursuant to subsection 230-55(4) to be the 'arrangement' is consistent with the legal form of the arrangement, however subsection 230-55(4) can operate to identify as an 'arrangement' something other than the rights and/or obligations under a particular contract.

The Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (TOFA EM) states that for Division 230 purposes, an arrangement will coincide with a contract unless, applying the test in subsection 230-55(4), the form differs from the economic or commercial substance of the arrangement.

Subsections 230-55(1) and (2) state that where there are two or more financial benefits then for the purposes of Division 230 the taxpayer is taken to have a separate right or obligation to receive or provide those financial benefits.

'Financial benefit' is defined in subsection 955-1(1) as having the meaning in subsection 974-160(1) which states:

financial benefit :

(a) means anything of economic value; and

(b) includes property and services; and

(c) includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit;

even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

No regulations have been promulgated for the purposes of subsection 974-160(3).

In applying subsection 230-55(4), regard must be had to all of the matters referred to in paragraphs (a) to (f) of subsection 230-55(4), although in a particular case, it may be that one matter is more influential than others. In having regard to the matters referred to in the said paragraphs regard must include a consideration of how the matters interact.

Paragraphs 230-55(4)(a) to (f) are as follows:

(a) the nature of the rights and/or obligations;

(b) their terms and conditions (including those relating to any payment or other consideration for them);

(c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);

(d) whether they can be dealt with separately or must be dealt with together;

(e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole); and

(f) the objects of this Division.

In this case, you have a number of rights and obligations under the legal terms of the Deed which satisfy the definition of financial benefit, as defined in subsection 974-160(1).

Having regard to the factors in paragraphs 230-55(4)(a) to (f) the above multiple rights and obligations under the terms of the Deed will constitute a single arrangement for the purpose of Division 230 because:

• The rights and obligations will arise under a single contract, being the Deed.

• The nature of the rights are such that they are dependent on one another and termination or non-performance of one would lead to the termination or non-existence of others.

• The counterparties are the same and each right or obligation under the Deed cannot be defeased or assigned to third party separately.

• The parties to the Deed commercially regard the rights and obligations as a group or series that form a whole.

• Treating them as a single arrangement is consistent with the objects of Division 230, which seeks to minimise the extent to which the tax treatment of relevant arrangements distorts commercial decision making, to closely align the tax and commercial treatments and to minimise compliance costs.

Section 230-45 of Division 230

Section 230-45 is the general test to determine whether an arrangement is a 'financial arrangement' for the purpose of Division 230. Pursuant to subsection 230-45(1), you have a financial arrangement if:

under an *arrangement:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;

unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

The legislative structure of section 230-45 of Division 230 has two limbs. The first limb are paragraphs 230-45(1)(a), (b) and (c) and the second limb being paragraphs 230-45(1)(d), (e) and (f). These two limbs will be considered separately as they constitute two tests; a positive test and a negative test.

The term 'arrangement' is broadly defined in subsection 995-1(1) to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. The arrangement described in this case meets the definition of arrangement.

Subsection 995-1(1) refers to subsection 230-45(2) to give the meaning of 'cash settlable'. Subsection 230-45(2) provides as part of the definition of 'financial arrangement':

A right you have to receive, or an obligation you have to provide, a *financial benefit is cash settlable if, and only if:

(a) the benefit is money or a *money equivalent; or

(b) in the case of a right - you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another *financial arrangement; or

(c) in the case of an obligation - you intend to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

(d) you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

(e) you deal with the right or obligation, or with similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer's margin, or from both; or

(f) none of paragraphs (a) to (e) applies but you satisfy subsection (3); or

(g) you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements.

A reference in paragraph (b) or (c) to a financial arrangement does not include a reference to something that is a financial arrangement under section 230-50.

Subsection 230-45(3) which is referred to in paragraph (f) of subsection 230-45(2) above states:

you satisfy this subsection if:

(a) the *financial benefit is readily convertible into money or a *money equivalent; and

(b) there is a market for the financial benefit that has a high degree of liquidity; and

(c) either:

(i) the amount of the money or money equivalent referred to in paragraph (a) is not subject to a substantial risk of change in value; or

(ii) your purpose, or one of your purposes, for entering into the arrangement under which you are to receive or provide the financial benefit so that it may be converted or liquidated into money or a money equivalent (other than in the ordinary course of business).

'Money equivalent' is defined in subsection 995-1(1) as:

money equivalent means

(a) a right to receive money or something that is a *money equivalent under this definition: or

(b) a *financial arrangement (within the meaning of section 230-45).

In relation to the concept of financial arrangement and whether rights and obligations will be regarded as cash settlable the TOFA EM states the following at paragraphs 2.55 and 2.57 (and similar comments are made at paragraphs 2.73 to 2.77) emphasis added:

2.55 The rights and obligations embodied in such arrangements represent a promise by one party to the arrangement to provide something of economic value that is money or a money equivalent and a corresponding right of another party to receive something of economic value that is money or a money equivalent. Financially and economically, the value embodied in these commercial arrangements is based on the time value of money and risk.

2.56 In other situations, even though the rights and obligations associated with an arrangement are in respect of a non-monetary item, it is possible that the way in which the arrangement is settled or dealt with will have the same effect as the provision or receipt of a financial benefit that is in respect of money or a money equivalent.

2.57 For example, taxpayers holding rights or obligations to financial benefits that are non-monetary, may, through business practices, settle these rights or obligations with money, a money equivalent or by transfer or entry into another financial arrangement (monetary financial benefits). In other cases, taxpayers may by intention settle non-monetary rights and obligations in a way that result in the receipt or payment of monetary financial benefits. Even without this practice or intention, a non-monetary right or obligation that is able to be settled in monetary financial benefits may have the same effect as a monetary right or obligation if the taxpayer did not have the sole or dominant purpose of receiving or providing that non-monetary thing as part of its expected purchase, sale or usage requirements in the ordinary course of business.

In relation to the rights and obligations under the legal terms of the Deed, those rights and obligations will be settled or satisfied by either you providing or receiving money:

The above rights and obligations satisfy the definition in section 230-45 in that they are legal obligations and legal rights which are a financial benefit that is cash settlable as defined in subsection 230-45(2).

In relation to the right to receive the NRAS incentive attributed to an allocation, regulation 4 of the NRAS Regulations defines an allocation "as an allotment to an approved participant in an entitlement to receive an incentive" in respect of an approved rental dwelling. The incentive is defined under the same Regulation to mean "(a) [an NRAS] Tax Offset; or (b) an amount payable for an NRAS year." The amount of the NRAS Tax Offset is the dollar amount subject to indexation and to any reductions under regulations 26 to 29 of the NRAS Regulations.

The rights and obligations under the Deed represent a promise by the parties to provide and receive something of economic value. Financially and economically the value embodied in this commercial arrangement is based on the time value of money and risk. That is you will enter into the transaction with the expectation of making a profit where the value of the NRAS Incentive exceeds the cost of obtaining the allocations (the allocation being obtained at a discount to the present value of those allocations).

The right to have the allocations transferred to you under terms of the Deed will only be settled or satisfied once you receive the incentive attributed to those allocations. The value of the incentive is the amount determined under the NRAS regulations. This amount equals the refundable NRAS tax offset which you will receive. Upon receipt of the incentive, you will determine, pursuant to the terms of the Deed, whether financial benefits are required to be received or paid.

In relation to the right to receive the NRAS Incentive (in the form of the refundable NRAS tax offset) in connection with the allocations this is a right to a financial benefit because it has an economic value to you. Furthermore this financial benefit is cash settlable because it is a right that will be settled or satisfied by you receiving money or money equivalent.

Question 3

Summary

Financial costs or incidental expenses incurred by you during the course of the arrangement will be deductible under section 8-1 as they are costs and expenses incurred in in producing assessable income under Division 230.

Detailed reasoning

The financial costs and incidental expenses incurred by you on the costs associated with funding and the arrangement draw will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are first satisfied and it does not fall within any of the negative limbs in subsection 8-1(2) .

A loss or outgoing will satisfy the positive limbs of subsection 8-1(1) to the extent that the loss or outgoing is either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The financial cost and incidental expenses will be deductible under the first positive limb of subsection 8-1(1) if it is 'incidental and relevant' to the gaining or production of assessable income (Ronpibon Tin N.L. and Tongkah Compound N.L. v. FC of T (1949) 78 CLR 47 (Ronpibon)).

The financial cost and incidental expenses will be deductible under the second positive limb of subsection 8-1(1) if they are 'reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business' (FC of T v. Snowden Willson Pty Ltd 99 CLR 431; Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542).

In relation to the financial costs, whether they satisfy one of these limbs is generally determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put (Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613; FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52, and Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 (Steele)).

Under the arrangement you will make a profit or gain which will be bought to account under Division 230 as well as receive tax offsets under Division 380. The financial costs and incidental expenses incurred under that arrangement will have the necessary nexus to deriving assessable income and therefore will be deductible.

Question 4

Summary

The transfer of the Allocations to you under the terms of the Deed is a creditable acquisition.

Detailed reasoning

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), sets out the requirements of a creditable acquisition and states:

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.

An (*) refers to a term defined under section 195-1 of the GST Act.

Accordingly, to be a creditable acquisitions paragraph 11-15(b) of the GST Act requires that the supply of the thing to you is a 'taxable supply'. The requirements of a taxable supply are set out in section 9-5 of the GST Act which states:

Taxable supplies

  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.

Characterisation of the Allocations

Upon an approved participant accepting an offer of Allocations they obtain an entitlement to receive an incentive (provided that they meet the conditions in each NRAS year) which is either the NRAS Tax Offset or an amount payable. In this case, the taxpayer being an approved participant obtains the Allocation upon accepting the offer by the Secretary. However under the arrangement with you the taxpayer will apply to transfer this Allocation to you upon entering into the Deed.

Is the supply under the Deed a supply by the Taxpayer of a "debt" to you?

GSTR 2004/4 discusses assignment of payment streams that arise out of assignments of contractual rights. The Allocation and the related NRAS Tax Offset are not contractual rights but arise out of statute. Rather than considering whether a tax offset payable is properly construed as a debt, the Commissioner considers the better approach is to first examine the concepts in GSTR 2004/4 that relate to identifying whether the supply is of the underlying thing or the related payment stream. If the supply is properly characterised as of the underlying thing, then the existence or otherwise of a related debt is not relevant.

In GSTR 2004/4 the Commissioner explains how the GST Act and the GST Regulations apply to a supply of rights to a payment stream by way of an assignment. Relevantly at paragraphs 34 to 37 GSTR 2004/1 states:

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 real property in the form of the freehold in the building, to another person subject to the existing lease (the reversion), 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. Where real property subject to an existing lease is sold, upon the sale of the reversion, a supply continues to be made to the lessee.

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.

37. The same distinction between assignment of the payment stream and assignment of underlying property applies to sales of shares (discussed in Norman) and of an interest in a partnership as opposed to the income from the partnership interest (Everett's case). However, in these cases whether it is the payment stream, or the underlying property that is sold, the GST treatment of the supply will be the same because the supply of the shares or the interest in the partnership can be a financial supply in its own right. This is in contrast to the different GST treatment of the supply of the rental stream from the supply of the building which may be subject to GST.

Whether the transaction amounts to an assignment of an underlying property interest or an assignment of the right to a payment stream will depend on the analysis of the transaction. Particularly relevant in this case is paragraph 42 of GSTR 2004/4 which states:

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...

The cases referred at paragraph 37 of GSTR 2004/4 illustrate the distinction between assigning the underlying thing and assigning the right to a payment stream dissociated from the underlying property that gives rise to those payments. It follows that when the underlying property is assigned (e.g. intellectual property) this will often give rise to a payment stream (e.g. future royalty payment). However it does not follow that the supply should be characterised by reference to the payment stream, to the exclusion of the underlying thing that is being supplied.

Characterising the supply under the Deed

The Deed describes the taxpayer as making a sale or transfer of the Allocation to you. Regulation 21 of the NRAS Regulations allows the Secretary to make the transfer. The relevant meaning of transfer is 'The passing of a legal right from one person to another so as to vest that right in the other.' (Encyclopaedic Australian Legal Dictionary). That is, a transfer does not refer to an entity creating or issuing a right, it refers to conveying an existing right they hold to another entity.

In the current context the Secretary does not actually hold the relevant Allocation that it could then transfer to you. Rather, it is the Seller that holds the Allocation and then passes it to you. This is the intended operation of regulation 21 of the NRAS Regulations as set out in the Explanatory Statement. Whilst the transfer is at the discretion of the Secretary, once the Secretary approves the transfer, it is a transfer from the Seller to you, not a transfer from the Secretary to you. Therefore, the Seller makes a supply of the Allocation to you under the Deed.

From the time that the Allocation is supplied, you are the approved participant holding the relevant Allocation. You are the entity that is entitled to receive NRAS incentives if it (not the Seller) meets the conditions set out in section 7 of the NRAS Act and regulation 16 of the NRAS Regulations. Those conditions are relevantly that you, as approved participant, must:

• Ensure that the dwelling is rented at 20% below market rent to eligible tenants.

• Ensure that each approved rental dwelling, and the management of it, complies at all times with the landlord, tenancy, building, and health and safety laws of the State or Territory and local government area in which the dwelling is located.

• Lodge a statement of compliance for the NRAS year and then an NRAS certificate will be issued that provides an offset entitlement under s.380-5 of the ITAA1997.

Once the sale of the Allocation is completed, in the terms described in paragraph 42 of GSTR 2004/4, the taxpayer has no residual rights in the NRAS scheme in relation to the relevant Allocations. It has no other functions to perform as it is no longer an approved participant under the NRAS scheme. Therefore, you has not acquired a right to a payment stream that has been separated from the Allocation under the NRAS scheme. Instead, you have acquired the underlying thing, being the Allocation. Consequently, all of the rights together with the meeting of the conditions under the NRAS scheme now rest with you. Accordingly, the supply under the Deed of the Allocation does not have the characteristics of an assignment of a payment stream that has been separated from the underlying thing as contemplated in GSTR 2004/4.

It is recognised that your Allocation will only give rise to an incentive if you can ensure that the dwelling to which the Allocation attaches (which you has no direct control (setting aside any mortgage held as security)) meets the NRAS conditions. The effect of clauses 2, 7.1(m) and 8 of the Deed is that the taxpayer is appointed as your Agent to do the things necessary under NRAS "as if'' the taxpayer has not sold the Allocations. This further illustrates that the supply under the Deed is of the Allocations and not a payment stream. Consequently, you must now meet the NRAS conditions and have engaged the taxpayer as Agent to ensure the conditions are met by you.

Therefore, whether the NRAS Tax Offset is a debt that is capable of assignment does not need to be determined, as the related payment stream does not represent the character of the thing supplied by the taxpayer, and acquired by you under the Deed. Therefore, the supply under the Deed is not the provision or disposal of an interest in or under a debt. The supply made by the taxpayer under the Deed is to supply the Allocations.

Alternative characterisation of the supply under deed

As stated above, the supply under the Deed is characterised as a sale (supply) of the Allocations. However, for completeness an alternative view such as the following can also be mounted. That is, the effect of regulation 21 of the NRAS Regulations (Secretary's discretion to transfer Allocations) means that the taxpayer cannot in fact supply the Allocations. Accordingly, all the taxpayer can do, is to agree to make an Application to the Secretary to transfer the Allocation to you. Therefore, the 'Allocations' under the 'Deed' is a supply of an entry into an obligation by the taxpayer under subparagraph 9-10(2)(g)(i) of the GST Act. If this was the case then the same conclusion would be reached regarding an interest in a debt. That is, the supply is of the entry into an obligation, and cannot be properly construed as a supply of an interest in or under a debt by the taxpayer.

Supply of a credit arrangement

In Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) the Commissioner provides the definition of a credit arrangement as follows:

Credit Arrangement

An arrangement under which an entity lends money on terms that include deferred repayment, or under which payment of a debt owed by one entity to another is deferred or time is allowed to pay.

…

Further at paragraph 37 of GSTR 2002/2 it states:

37. When an entity borrows money from a lender on terms that include payment of interest, it creates an interest in a debt that includes the payment of interest. The lender creates and supplies an interest in a credit arrangement. Aside from the operation of subsection 9-10(4) each entity would make a supply of a financial interest (under item 2 in subregulation 40-5.09(3)) to the other, and each supply would be consideration for the other.

In this case, the payment of the purchase price by you to the taxpayer is not lent to the taxpayer such that the taxpayer is required to repay the amount at a later time. Whilst there are numerous clauses that may adjust the purchase price and require the taxpayer to repay an amount, if the arrangement proceeds 'as intended' the taxpayer has no obligation to repay the purchase price.

What you contends as "repayments" are in substance NRAS incentives which it receives because it has acquired the relevant Allocations by way of being an approved participant and not because the taxpayer owes you a debt that it is obliged to repay. Accordingly, the transfer of the Allocations does not involve a supply of an interest in or under a credit arrangement.

The substance of the Deed

Whilst we do not necessarily dispute that what the parties wish to achieve, in substance, is a financing arrangement, it is not a case where 'the commercial or practical reality…(differs) …from a confined analysis of the terms and conditions of…( the deed)' as per Edmonds J at 39 of ATS PACIFIC PTY LTD & ANOR v FC of T, Federal Court of Australia, Full Court, 27 March 2014.

The Deed is unambiguous regarding the Transfer of the Allocations and intent that you will be an approved participant entitled to NRAS Tax Offsets and this reflects the reality of what the parties intend to do. Therefore, the taxpayer does not make a financial supply (including an acquisition-supply) that is input taxed under the arrangements set out in the Deed.

As outlined above, the Allocation is not an input taxed financial supply. The Allocation will be a taxable supply because the conditions of section 9-5 of the GST Act are met. That is, there is a supply namely, the entry into an obligation by the taxpayer as described above and this supply is made for consideration being the 'Initial Purchase Price' under the Deed. (At the 'Settlement Date' subject to the conditions precedent being satisfied, namely, that you becomes an Approved Participant, the Purchase Price represents consideration under paragraph 9-15(1)(a) of the GST Act for a supply made by the taxpayer). The supply is made in the course of the taxpayer's enterprise which is registered for GST and it is connected with Australia.

Entitlement to Input Tax Credit

As outlined above, subsection 11-15(1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it is acquired in carrying on its enterprise. However, under paragraph 11-15(2)(a) of the GST Act, a thing is not acquired for a creditable purpose to the extent that it relates to making supplies that would be input taxed.

Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) at paragraph 119 states:

119. For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Furthermore at paragraphs 136 -143 of GSTR 2008/1 the Commissioner states:

136. Some acquisitions have a direct relationship to a particular supply. Examples of these types of acquisition are repair services and letting services acquired for leased residential premises. Other acquisitions can relate to more than one supply or type of supply. For example, a company that has a number of pawn broker shops makes input taxed supplies of loans and taxable supplies of goods. Some of its acquisitions relate to both types of supplies.

137. Similarly, acquisitions such as contracted information technology services may relate to more than one division of a bank, and require apportionment if only some of the divisions make taxable supplies.

138. Other acquisitions do not directly relate to any specific type of supplies. Instead, they have an indirect relationship to all the supplies that the entity makes in carrying on its enterprise. If an entity makes both taxable and input taxed supplies, paragraph 11-15(2)(a) precludes these types of acquisitions from being for a creditable purpose to the extent that they relate to making supplies that would be input taxed.

139. The formulation of section 11-15 has similarities to the formulation of section 8-1 and its predecessor subsection 51(1) of the ITAA 1936, in that these provisions both use the phrase 'to the extent' to provide for apportionment.

140. The leading income tax case on apportionment under subsection 51(1) of the ITAA 1936 is Ronpibon . In that case the High Court observed that there are two types of expenditure that require apportionment. One kind consists of undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications that have been made of the things or services. The other kind of apportionable items involve a single outlay or charge which serves both objects indifferently. Of this, directors' fees may be an example. With the latter, there must be some fair and reasonable assessment of the extent of the relationship to assessable income. It is an indiscriminate sum apportionable but hardly capable of arithmetical or rateable division because it is common to both objects.

141. Examples of the first type of expenditure described in Ronpibon are likely to be overheads such as rent for premises occupied by a financier from which the financier makes both taxable and input taxed supplies; or direct costs such as materials used by a builder in building houses for both sale (taxable supply) and rental (input taxed supply).

142. Examples of the second type of expenditure described in Ronpibon are likely to be enterprise costs such as costs in restructuring the enterprise; or rent for head office premises. These types of acquisitions are referred to as enterprise costs in GSTR 2006/3 and GSTR 2006/4.

143. Enterprise costs may be apportioned on the basis of current supplies that are made by the entity in carrying on its enterprise, although this may not always be the case. The overarching principle is that apportionment should be applied on a fair and reasonable basis, having regard to the factual circumstances. GSTR 2006/3 and GSTR 2006/4 provide guidance on fair and reasonable bases for apportionment.

Creditable purpose

In considering if the acquisition relates to a supply that would be input taxed the following factors are taken into account:

You acknowledge that you enter into the Deed to acquire the Allocations so that it can derive a profit by way of paying a discounted purchase price for the expected NRAS Tax Offsets that arise from the Allocations. Whilst the substantive effect of the Deed may be similar to other financing agreements, when viewed objectively, the supply made under the Deed does not result in either the taxpayer or you making an input taxed financial supply.

The acquisition of Allocations under the Deed is intended to be used to receive NRAS Tax Offsets. Neither the act of paying the purchase price, or the receipt of NRAS Tax Offsets are consideration for, nor do they give rise to, any input taxed financial supplies.

In the scheme set out there are no other relevant financial supplies made by you in relation to entry into the Deed. The acquisitions are used to receive NRAS Tax Offsets, and are not akin to an overhead or enterprise cost, as discussed in GSTR 2008/1. Whilst you may make other financial supplies the relationship between those financial supplies and the acquisition of the Allocation is considered remote rather than substantial and real. Therefore, you has acquired the Allocations under the Deed wholly or partly for a creditable purpose and section 11-15 of the GST Act will be satisfied.

The remaining conditions of section 11-5 of the GST Act can be satisfied. This is because the relevant supply which you will acquire is a taxable supply for which it provides or is liable to provide consideration (Initial Purchase Price) and it is registered for GST. Accordingly, you will make a creditable acquisition when it acquires the Allocations under the Deed and consequently, will be eligible for input tax credits.

Question 5

Summary

The Price and Rebate is an adjustment event to the identified acquisition made under the Deed. However the obligations of the parties in relation to the Price and Rebate, may give rise to adjustment events in respect of the acquisition of the taxable supply made by the taxpayer under the Deed.

Detailed reasoning

As explained above it is our view that the acquisition by you under the Deed is not in respect of an input taxed supply. Rather, the acquisition made from the Seller would be a taxable supply where the relevant requirements of section 9-5 of the GST Act are satisfied. Accordingly, on this basis what remains to be determined is the GST treatment in respect of the Price and Rebate.

Goods and services tax ruling, GSTR 2000/19 provides the Commissioner's view regarding making adjustments under Division 19 for adjustment events. Pursuant to section 19-10 of the GST Act an adjustment event is defined as:

(1) An adjustment event is any event which has the effect of:

(a) cancelling a supply or acquisition; or

(b) changing the * consideration for a supply or acquisition;

(c) causing a supply or acquisition to become, or stop being, a * taxable supply or * creditable acquisition.

Further at paragraph 18 of GSTR 2000/19 it states:

Changes in the consideration for a supply or an acquisition

18. Where the consideration for a supply or acquisition changes for any reason you have an adjustment event. In the following paragraphs we consider payments and other amounts which may or may not change the consideration. Whether a payment or allowance changes the consideration for a supply will depend on the circumstances. The same commercial term could be used to describe various types of arrangements which may be quite different in substance. The substance of the arrangement or event will determine whether it is an adjustment event.

In this case the Price and Rebate is an adjustment event to the identified acquisition made under the Deed. That is, we accept that the Price and Rebate changes the amount of the consideration provided pursuant to the terms of the Deed.

Therefore, the adjustment event relates to an acquisition that is not input taxed. That is, any adjustment to the consideration provided under the Deed relates to the supply by the taxpayer which, provided the requirements of section 9-5 of the GST Act are satisfied, will be a taxable supply.

Questions 6 and 7

Summary

The relevant payments being the Payments and Break Benefits would represent a change in consideration in respect of the supply made under the Deed. However based on our response above, the relevant acquisition is not treated as an input taxed supply.

Detailed reasoning

Under the Proposed Payments may arise based on the difference between the actual amount received by you in respect of an Allocation claimed on the Entitlement Date and the Expected Allocation amount. Essentially, if you expect to receive an amount which is less than the amount actually received, you will be required to make a Payment to the taxpayer.

Break Benefits are payments that might need to be made by you to the taxpayer upon the termination of any hedging arrangement by you as a result of the termination of the broader arrangement. You must pay the taxpayer a Break Benefit under the Deed as required in a circumstance where you is 'in the money' on termination of its hedging position.

It is submitted by you that Payments and Break Benefits are either not consideration for any supply made by the taxpayer or alternatively should be treated as an increase in the consideration for an input taxed supply (being the transfer of the Allocations). In the case of the latter the Payment and Break Benefits therefore, is not consideration for a creditable acquisition.

In this case, based on the circumstances of the arrangement, the Commissioner accepts that the relevant payments by you would represent a change in consideration in respect of the supply made under the Deed. However based on our response above, the relevant acquisition is not treated as an input taxed supply.

Question 8

Summary

The Termination Payments and Break Costs are not consideration for any supply or for the reacquisition of any input taxed supply. However, they may give rise to adjustment events in respect of the relevant taxable supply. Where a payment is made as a consequence of a default there will be no GST consequences.

Detailed reasoning

Termination Payments are calculated based on the amount that has already been paid by you for the Allocations. Break Costs are intended to cover the out of pocket hedging costs incurred by you in relation to the termination of an 'out of the money' hedge.

You have advised that both Termination Payments and Break Costs arise either because a default has occurred or because you has agreed to transfer the Allocations back to the taxpayer and the payment is designed to return you to its previous position.

You submit that Termination Payments and Break Costs are either not consideration for any supply made or alternatively should be treated as consideration for the reacquisition of an input taxed supply, being the Allocation, by the taxpayer from you.

We agree with your submission that the Termination Payments and Break Costs are not consideration for any supply or for the reacquisition of any input taxed supply. However, we are of the view that how the Termination Payments and Break Costs will provide the following GST outcome.

In GSTR 2000/19 the Commissioners view in respect of the cancellation of a supply or an acquisition is set out in paragraph 16 which states:

Cancellation of a supply or an acquisition

16. The cancellation of a supply or an acquisition is an adjustment event.⁷ Generally, the return of a thing, or a part of it, to a supplier is an adjustment event (whether or not the return involves a change of ownership). If, on the facts, the return does not have the effect of cancelling the supply, it will not be an adjustment event. For example, the return of a thing for repair or maintenance is not an adjustment event. In the case of exchange of goods, where the exchange does not result in a cancellation of the supply or a change in the consideration, it will not be an adjustment event. This will depend on the facts and the contractual arrangements between the parties.

Further in GSTR 2001/4 the Commissioner states:

Where the subject of a claim is not a supply

71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.

73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

Default

Under a default by the taxpayer the receipt of the Termination Payments and Break Costs by you will be akin to damages and will therefore not be consideration for supplies.

Request made between the parties to have the Allocation transferred to the taxpayer

Where either party makes a request for the Allocation to be transferred the Deed requires the parties to make and lodge an Application to Transfer with the Secretary. In such a case the Secretary must agree to the Transfer of the Allocation to the taxpayer in order for such transfer to be effected. Where the Secretary's agreement is obtained the transfer is effected and the taxpayer's obligations would cease. Therefore, the Payments and Break Costs are made in connection with the cancelling of the taxpayer's obligations under the Deed and hence will constitute an adjustment event.

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