Edited version of your written advice

Authorisation Number: 1012846630722

Date of advice: 24 July 2015

Ruling

Subject: Agreement for Sale, Development and Lease

Question 1

For the purposes of subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is the transfer of the Property by A to H pursuant to the Agreement for Sale, Development and Lease (Agreement) a sale of real property that is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) which is input taxed?

Answer 1

Yes, for the purposes of subsection 40-65(1) of the GST Act the transfer of the Property by A to pursuant to the Agreement is a sale of real property that is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) which is input taxed.

Question 2

For the purposes of section 9-10 of the GST Act is the demolition of the existing buildings on the Property by H at H's sole cost and expense a supply made by H to A?

Answer 2

No, for the purposes of section 9-10 of the GST Act the demolition of the existing buildings by H at H's sole cost and expense is not a supply made by H to A.

Question 3

For the purposes of section 11-5 of the GST Act is an acquisition made by A in relation to the sale of the Property to H a creditable acquisition?

Answer 3

No, for the purposes of section 11-5 of the GST Act an acquisition made by A in relation to the sale of the Property to H is not a creditable acquisition.

Question 4

For the purposes of section 9-5 of the GST Act is the supply of Property Management Services by A to H pursuant to the Lease granted by H to A a taxable supply?

Answer 4

Yes, for the purposes of section 9-5 of the GST Act the supply of Property Management Services by A to H pursuant to the Lease granted by H to A is a taxable supply.

Question 5

For the purposes of section 11-5 of the GST Act is an acquisition used by A to supply the Property Management Services to H a creditable acquisition?

Answer 5

Yes, for the purposes of section 11-5 of the GST Act an acquisition used by A to supply the Property Management Services to H is a creditable acquisition.

Question 6

For the purposes of section 11-5 of the GST Act is the acquisition by A of services from a Managing Agent engaged by A to manage the units and provide the Property Management Services a creditable acquisition?

Answer 6

For the purposes of section 11-5 of the GST Act an acquisition by A of services from a managing agent engaged by A to manage the units and provide the Property Management Services is only partly a creditable acquisition.

Question 7

For the purposes of section 11-5 of the GST Act is an acquisition made by A in relation to A's obligations under the Lease to repair and maintain the units, bear the costs of a market rent valuation by a Market Valuer and bear A's costs of negotiating, preparing and executing the Lease a creditable acquisition?

Answer 7

No, for the purposes of section 11-5 of the GST Act an acquisition made by A in relation to A's obligations under the Lease to repair and maintain the units, bear the costs of a market rent valuation by a Market Valuer and bear A's costs of negotiating, preparing and executing the Lease is not a creditable acquisition.

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.

A and H have signed the Agreement which relates to land in Australia (Property) which is owned by A.

The existing buildings on the Property are residential premises that were used to provide housing since before 1 July 2000 and were occupied as residential premises until December 20XX.

Demolition of existing buildings:

The Agreement states that H must commence demolition of the existing buildings within 60 days of the Agreement Date (April 20YY) and complete demolition within 120 days of the Agreement Date.

The Agreement also states that demolition of the existing buildings will be at H's cost if the Agreement becomes unconditional (i.e. if by the Approval Date H obtains certain Approvals and A obtains a separate Certificate of Title in respect of the Property) or will be at A's cost if the Agreement does not become unconditional.

Sale of the Property:

A agrees to sell the Property to H and H agrees to buy the Property from A on the Terms of the Agreement.

The Agreement states that H shall pay the Deposit to A in favour of A and if H defaults in the performance of H's obligations under the Agreement A is entitled to apply the Deposit as A sees fit. Portions of the Deposit are to be released to H by A upon satisfaction of the last condition precedent to construction provided for in any Development Permit; and within 5 Business Days of the last to occur of either the issue of separate certificates of title in respect of units in Stages 3, 4 and 5 or payment of the final payment in accordance with the Agreement.

The Agreement obliges H to pay the Purchase Price to A in instalments as follows:

• upon satisfaction of the last condition precedent to construction provided for in any Development Permit;

• within 30 days of the first to occur of the issue of separate certificates of title in respect of Units in Stages 1 and 2 or December 20ZZ; and

• within 45 days of the first to occur of either the issue of separate certificates of title in respect of the units in Stages 3, 4 and 5 or May 20AA.

The Agreement states that transfer of the title to the Property shall take place on the Transfer Date, i.e. 20 Business Days after H provides to A the Approvals referred to in of the Agreement (which is conditional upon H obtaining by the Approval Date (December 20YY) all necessary Approvals to permit H to develop the Property and construct the Improvements.

Development of the Property:

The Agreement states that H agrees to conduct the Development in accordance with the Agreement.

H is obliged to undertake the Development at H's cost and risk and in accordance with the Drawings and Specifications and to make H's best endeavours to complete each stage of the Development by the relevant Target Date for Practical Completion (June 20ZZ (Stage 1), September 20ZZ (Stage 2), December 20ZZ (Stage 3), February 2018 (Stage 4) and April 20AA (Stage 5)).

Lease of units by H to A:

The Agreement states that H agrees to grant A leases of the units constructed by H in accordance with the Agreement. In addition, H grants A an option to take up leases of the Additional Units.

GST:

The Agreement states that the amount payable by one party to another for or in connection with a taxable supply is, unless stated otherwise, expressed inclusive of GST if applicable.

Lease:

A copy of the Lease of each unit to be entered into by H (as lessor) and A (as lessee) was attached to the Agreement.

The Lease states that H is responsible for performing the Property Care Services (which comprise the Repair and Maintenance Service, the Emergency Repair Service and the Restoration Service) and that the Property Care Service Fee included in the Rent is consideration for H's performance of the Property Care Services.

The Lease states that A covenants to maintain, repair, clean and keep up the Premises and provides for a review of rent and requires A to bear the cost of a market rent valuation by a Market Valuer before each Review Date.

The Lease makes A responsible for performing the Property Management Services (e.g. ensuring subtenants enter into written tenancy agreements) throughout the Term of the Lease and states that the Property Management Services are performed by A in return for the Service Fee (% of the Rent) and that the Service Fee will be deducted by A from the monthly rent payments and is inclusive of GST.

The Lease also states that each party will bear its own costs in relation to the negotiation, preparation and execution of the Lease.

It was stated in the ruling request that both A and H are registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

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

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

Reasons for decision

Question 1

Summary

For the purposes of subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) the supply of the Property by A to H is a sale of residential premises which is input taxed.

Detailed reasoning

It was stated in the ruling request that the Property consists of residential premises that have been used by A to provide housing since prior to 1 July 2000 and those residential premises will have been demolished and the Property will be vacant land when A transfers the Property to H. It was submitted that, per Goods and Services Tax Advice GSTA TPP 072 (GSTA TPP 072) the supply of the Property by A to H will be a sale of real property that is residential premises to be used predominantly for residential accommodation which is input taxed pursuant to subsection 40-65(1) of the GST Act.

Pursuant to the Agreement H is obliged to complete demolition of the Existing Buildings within 120 days after the Agreement Date (April 20YY), i.e. by August 20YY and transfer of title to the Property will take place on the Transfer Date, which is defined as 20 Business Days after H has provided to A the Approvals which H is obliged to obtain by the Approval Date (December 20YY). We assume that H would provide the Approvals to A shortly after the Approval Date (December 20YY). As the Agreement requires demolition of the existing buildings to be completed by August 20YY, the Property will be vacant land when it is transferred to H by A on the Transfer Date (presumably a date in January 20ZZ).

Subsection 40-65(1) of the GST Act states that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). Section 195-1 of the GST Act defines residential premises as land or a building that:

(a) Is occupied as a residence or for residential accommodation; or

(b) Is intended to be so occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home).

Paragraph 9 of Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) states that the requirement in subsection 40-65(1) that property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) is to be interpreted as a single test that looks to the physical characteristics of the property.

That test is determined at the time the property is supplied. In Marana Holdings Pty Ltd & Another v FC of T 2004 ATC 5068 (Marana Holdings) the Full Federal Court considered whether there had been a supply of residential premises when Hajuku Pty Ltd supplied a property to Tarfex Pty Ltd as that would mean that the subsequent supply of the property by Tarfex Pty Ltd to Ms Wells could not be a supply of new residential premises. The Full Federal Court (Dowesett, Howley and Conti JJ) stated (p. 5079):

As far as we can see, there is no evidence concerning the physical suitability as at the date of sale by Hajuku to Tarfex of the premises for use as a residence, as to whether they were then capable of being so occupied or as to whether such use would have then been lawful. As it was apparently necessary to modify the premises, obtain council permission for the change of use and convert the title to strata title, it seems likely that they were neither intended to be, nor capable of being occupied as a residence as at the date of the sale.

The reasoning in Marana Holdings was adopted in paragraph 72 of GSTR 2012/5:

The reference in Marana to premises being 'modified' recognises that the physical characteristics of premises may be altered after the premises are first designed and built. In each case, it is necessary to determine the suitability of the premises by reference to their physical characteristics at the time when the relevant supply is made.

Paragraph 47 of GSTR 2012/5 states

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

Paragraph 92 of GSTR 2012/5 states:

Vacant land cannot be residential premises. In Vidler v Federal Commissioner of Taxation Sundberg, Bennett and Nicholas JJ stated that 'vacant land is not land that is capable of being occupied as a residence or for residential accommodation'. This is because the vacant land, of itself, does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.

However GSTA TPP 072 indicates that there is a supply of residential premises pursuant to a contract for sale of residential premises which allows the purchaser to enter the property and demolish the residential premises before settlement. GSTA TPP 072 was originally issued in January 2006 but was consolidated in October 2012. GSTR 2012/5 was issued in December 2012. The question and answer stated in GSTA TPP 072 are as follows:

If a purchaser of residential units is granted possession of the units and demolishes them prior to settlement, is the real property supplied at the time possession is granted?

No; as the contractual arrangements provided for the supply of the residential premises at settlement. It is immaterial whether the premises are demolished by the time of settlement.

The second sentence in the answer supports the view that there is a sale of residential premises by A to H in the present case notwithstanding that H demolishes the existing buildings prior to settlement. The reasoning in GSTA TPP 072 also supports that view:

Background

A property developer who is registered for GST enters a contract on 12 July 2004 to sell three residential units. Settlement is to occur on 11 September 2004. On 30 July 2004 the property developer grants the purchaser possession of the units. The purchaser demolishes the units prior to 11 September 2004.

Explanation

The character of what is supplied is determined by all of the facts and circumstances surrounding the supply, primarily as reflected in the contractual arrangements between the supplier and recipient.

In this case, the contract is for the sale of the real property consisting of residential units, which it is assumed would have the characteristics necessary to satisfy the definition of 'residential premises' before they are demolished. Although the contract for the supply of the premises allows the recipient access to the premises, and the recipient actually demolishes the premises before title to the land passes, the thing supplied to the recipient is the residential premises. The purchaser is only able to demolish the premises pursuant to the agreement between the parties. Since it is residential premises that are supplied by the property developer, the supply is input taxed.

The ATO takes the same approach in relation to builders' terms arrangements, where a vendor selling land to a builder may allow the builder access for the purpose of constructing premises before settlement. Although there may be residential premises in existence when the land is finally transferred to the builder at settlement, the landowner is not making a supply of new residential premises.

If the current facts are varied, and the contract concerns the supply of vacant land, the whole of the circumstances surrounding the supply would result in the supply being a taxable supply of real property rather than residential premises. For example, if the sale contract required the purchaser to deliver vacant land and provide demolition services, there may be two supplies with the supply by the vendor being for the transfer of vacant land.

The present case falls within the second paragraph of the Explanation in GSTA TPP 072, i.e. the Agreement allows H to complete demolition the existing buildings within 120 days of the Agreement Date (April 20YY) before title to the Property passes on the Transfer Date (i.e. a date in January 20ZZ) pursuant to the Agreement. We therefore consider that the supply of the Property by A to H is input taxed pursuant to subsection 40-65(1) of the GST Act.

Question 2

Summary

The demolition of the existing buildings does not result in H making a supply to A.

Detailed reasoning

In the ruling request it was submitted that Halikos does not make a supply to CEO Housing if clause xx of the Agreement applies. Clause xx states:

Demolition of the Existing Buildings in accordance with this clause will be at the sole cost and expense of:

(i) H if this Agreement becomes unconditional…

By comparison, clause yy of the Agreement states that if the Agreement does not become unconditional, demolition of the existing buildings will be at the sole cost and expense of A.

The Agreement requires H to complete demolition of the existing buildings by August 20YY. Presumably the parties will then wait until H obtains the Approvals and A obtains a separate certificate of title in respect of the Property and the Agreement becomes unconditional. Assuming that those conditions are satisfied by the Approval Date (December 20YY) at the latest, A will transfer the Property to H in January 20ZZ. Thus, if the Agreement becomes unconditional, H will complete demolition of the existing buildings by August 20YY and acquire the Property by January 20ZZ.

Goods and Services Tax Ruling GSTR 2006/9 (GSTR 2006/9) sets out a number of propositions in relation to the concept of supply for GST purposes. In relation to Proposition 6 - 'supply' usually, but not necessarily, requires something to be passed from one entity to another - paragraph 92 of GSTR 2006/9 states that the fact that 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax. Given that H demolishes the existing buildings at H's own expense only in circumstances where the Agreement becomes unconditional and the Property is then transferred to H, we consider that the service of demolishing the existing buildings is not something that passes from H to either A or any other entity.

We also consider that, in those circumstances, H is the only entity that benefits from the demolition of the existing buildings by H. Paragraph 95 of GSTR 2006/9 states that proposition 7 in GSTR 2006/9 - an entity cannot make a supply to itself - flows from proposition 6 and seems self-evident in a transaction based tax.

We therefore consider that the demolition of the existing buildings in the circumstances where clause xx of the Agreement applies does not result in H making a supply.

Question 3

Summary

For the purposes of section 11-5 of the GST Act an acquisition made by A which is related to the sale of the Property to H is not a creditable acquisition because that acquisition is not made for a creditable purpose.

Detailed reasoning

It was submitted in the ruling request that if the sale of the Property by A to H is input taxed then A is not entitled to claim input tax credits for GST included in the cost of acquisitions (e.g. advisory and negotiation services and preparation and execution of documents) made by A that relate to the sale of the Property. The submissions referred to paragraph in 149 Goods and Services Tax Ruling GSTR 2008/1 (GSTR 2008/1):

149. If advice is sought on a range of specific options that an entity is exploring and all options involve the making of supplies that would be input taxed, the acquisition of advice relates to supplies that would be input taxed and is therefore not creditable.

Subsection 7-1(2) of the GST Act states that entitlements to input tax credits arise on creditable acquisitions. Section 11-5 of the GST Act 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.

In the present case paragraphs (b) to (d) are satisfied in relation to acquisitions made by A related to the sale of the Property to H. The issue is whether such acquisitions are acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act sets out the meaning of 'creditable purpose':

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and

(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a),as relating to making supplies that would be input taxed to the extent that:

(a) the acquisition relates to making a financial supply consisting of borrowing (other than through a deposit account you make available); and

(b) the borrowing relates to you making supplies that are not input taxed.

Subsection 11-15(1) of the GST Act states that an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on the entity's enterprise. Paragraph 55 of GSTR 2008/1 refers to subsection 11-15(1) and states:

It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

In our view A is carrying on an enterprise within the meaning of paragraph (g) of the 'enterprise' definition in subsection 9-20(1) of the GST Act.

Paragraph 60 of GSTR 2008/1 states that the indicators relevant to identifying the enterprise being carried on include the activities that generate income for the entity, formation documents, contracts, business records and business plan. We consider that acquisitions made by A that relate to the sale of the Property to H have a connection with the enterprise carried on by A and therefore satisfy subsection 11-15(1) of the GST Act.

Subsection 11-15(1) is qualified by subsection 11-15(2) and paragraph 11-15(2)(a) states that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to supplies that would be input taxed. Paragraphs 35 and 36 of GSTR 2008/1 note the distinction between the test in subsection 11-15(1) and the test in paragraph 11-15(2)(a) and the implications of that distinction:

35. The structure of the GST provisions has a significant difference in that the negative test in paragraph 11-15(2)(a) uses different words from the positive test to describe the required connection. The positive test in subsection 11-15(1) uses the expression 'in carrying on your enterprise', whereas the negative test in paragraph 11-15(2)(a) has 'relates to making supplies that would be input taxed'.

36. The negative limb of paragraph 11-15(2)(a) has an independent operation. As such, the treatment of acquisitions is essentially governed by their relationship (if any) to the making of supplies that would be input taxed.

Paragraphs 37 to 45 of GSTR 2008/1 discuss the difference between the tests in subsections 11-15(1) and (2) and the test for availability of input tax credits under European VAT legislation. Under European VAT legislation an acquisition must be connected with an enterprise and have a sufficient connection with taxable supplies. In relation to the latter test, paragraph 40 of GSTR 2008/1 sets out the effect of the Directives issued under VAT legislation:

40. In light of the above Directives, a view has evolved in the UK and European courts that entitlement to deduct input tax on an acquisition depends on a 'direct and immediate link' between the acquisition and taxable transactions being established and the amount to be deducted as input tax having been borne directly by the various cost components of the taxable transaction.

Paragraphs 43 to 45 of GSTR 2008/1 then sets out the ATO's view of the test under subsection 11-15(2) of the GST Act:

43. The 'cost component' analysis in the UK and European law results from the requirement of Article 2 of the First Directive that VAT is to be charged after deduction of the VAT borne directly by the various cost components. The Australian GST legislation has no equivalent of this requirement. The Commissioner considers that whether an acquisition is a cost component of a particular output may be a relevant consideration in determining whether the acquisition has been made for a creditable purpose in that this would tend to help establish whether the input 'relates to' the output. However, there is no legislative basis for viewing this consideration as a special or decisive factor.

44. In the Commissioner's view, you do not acquire a thing for a creditable purpose if the acquisition relates directly or indirectly to making supplies that would be input taxed (see paragraph 23 of this Ruling). Therefore, a conclusion that an acquisition has, in terms of the UK and European case law, a direct and immediate link with the making of taxable supplies is not decisive for Australian purposes because the acquisition may nevertheless also relate, directly or indirectly, to the making of other supplies that would be input taxed.

45. Despite this, from a consideration of whether an acquisition has (perhaps by analogy with the overseas case law) a direct and immediate link with the making of particular supplies, two conclusions could follow. Firstly, it is very likely that an acquisition that has that link would also 'relate to' the making of those supplies. Secondly this might, depending on the circumstances, be a relevant consideration to take into account in deciding whether the acquisition has a real and substantial (though indirect) relationship to the making of other supplies, if those other supplies would be input taxed.

Paragraph 44 of GSTR 2008/1 refers to paragraph 23 of GSTR 2008/1 (which quotes paragraph 3.26 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (which states that you do not have a creditable purpose if your acquisition of a thing relates 'either directly or indirectly' to a supply that you make which is input taxed)) and requires A to consider whether an acquisition related to the sale of the Property to H relates directly or indirectly to making of supplies that would be input taxed.

Part B of GSTR 2008/1 (Paragraphs 101 to 196) deals with whether an acquisition relates, directly or indirectly, to the making of supplies that are input taxed. Paragraph 104 of GSTR 2008/1 states:

104. Unlike subsection 11-15(1), paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) can be ascertained by its relationship with the other provisions of the GST Act. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future.

Paragraphs 109 to 118 of GSTR 2008/1 refer to the discussion of paragraph 11-15(2)(a) in HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571 which held that the acquisition of advice in relation to the acquisition by way of legal assignment of a number of debts (which was treated as an both an acquisition and a financial supply for GST purposes) related solely to the making of input taxed supplies. Paragraph 119 of GSTR 2008/1 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.

GSTR 2008/1 then outlines seven situations which involve establishing a connection between an acquisition and the making of input taxed supplies. The fifth situation - an acquisition is preparatory to the making of an input taxed supply - is discussed in paragraphs 149 to 171 of GSTR 2008/1. As noted in the ruling request, paragraph 149 of GSTR 2008/1 states:

149. If advice is sought on a range of specific options that an entity is exploring and all options involve the making of supplies that would be input taxed, the acquisition of advice relates to supplies that would be input taxed and is therefore not creditable.

We therefore agree with the submission in the ruling request that acquisitions made by A that relate to the sale of the Property relate to making supplies that would be input taxed for the purposes of paragraph 11-15(2)(a) of the GST Act and are therefore not made for a creditable purpose. Consequently those acquisitions do not satisfy paragraph 11-5(a) and are not creditable acquisitions.

Question 4

Summary

The supply of Property Management Services by A to H satisfies section 9-5 of the GST Act and is a taxable supply.

Detailed reasoning

The Lease makes A responsible for performing the Property Management Services in return for the Service Fee (7% of the Rent). Section 9-5 of the GST Act states:

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.

Paragraph 9-5(a) of the GST Act requires an entity to 'make' a 'supply'. 'Supply' is defined in paragraph 9-10(2)(b) of the GST Act to include a supply of services. The Property Management Services described in the Lease are services. In relation to 'make', Proposition 5 in Goods and Services Tax Ruling GSTR 2006/9 (GSTR 2006/9) states that, to 'make' a supply, an entity must do something, i.e. take some action. Again, the descriptions of the Property Management Services indicate that A is required to take some action.

Paragraph 9-5(a) of the GST act also requires that the supply is 'for consideration'. Subsection 9-15(1) states that consideration includes any payment in connection with the supply of anything and in response to or for the inducement of anything. The Lease states that the Property Management Services are performed by A in return for the Service Fee. We consider that the Service Fee is a 'payment' (and therefore consideration) notwithstanding that H does not pay the Service Fee to A and A instead deducts the Service Fee from the monthly rent payable by A to H. Paragraph 35 and Example 3 in Goods and Services Tax Ruling GSTR 2001/6 (GSTR 2001/6) confirm that where, as in the present case, two parties agree to partly offset mutual debts created as a result of mutual supplies for monetary consideration, the consideration for each supply is 'consideration expressed as an amount of money' within the meaning of paragraph 9-75(1)(a) of the GST Act:

35. We consider that a promise to pay an amount of money is consideration expressed as an amount of money. For example, if two parties set-off (in full or in part) mutual debts that were created as a result of mutual supplies for monetary consideration, the consideration for each supply is expressed as an amount of money.

Example 3 - setting off mutual debts

36. Bob supplies goods to Alice for $1,000. In a separate transaction, Alice supplies goods to Bob in return for $1,000. Neither Alice nor Bob have yet paid the money to each other for their supplies. The parties decide to offset their liabilities. The consideration for the supplies by both Alice and Bob are expressed as amounts of money, that is, $1,000 each.

Paragraph 125 of GSTR 2001/6 states that there is no setting off of prices, i.e.

Where there are mutual supplies for consideration, the GST law does not allow the price for one supply to be reduced by the price of another.

A footnote to paragraph 125 of GSTR 2001/6 notes that the same view was also expressed in paragraph 51 of Goods and Services Tax Ruling GSTR 2000/10 (GSTR 2000/10)

51. Even though there is a close connection between the supply to the recipient and the supply made by that recipient, each is a separate supply and the GST law does not allow the price for one supply to be reduced by the price of another. The GST included in the price of each supply must be included in the calculation of the net amount by each supplier and each recipient can then claim input tax credits for that tax.

Paragraph 9-5(b) of the GST Act requires that the supply of Property Management Services is made in the course or furtherance of an enterprise carried on by A. In the reasons for decision in Question 3 we concluded that A is carrying on an enterprise within the meaning of paragraph 9-20(1)(g) of the GST Act. We consider that the supply of Property Management Services is made in the course or furtherance of that enterprise.

Paragraph 9-5(c) requires that the supply is connected with Australia. Subsection 9-25(5) of the GST Act states that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia. We consider the Property Management Services to be a supply of services and paragraph 65 of Goods and Services Tax Ruling GSTR 2000/31 (GSTR 2000/31) states:

65. If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

Paragraph 9-5(d) requires that the Tenant is either registered for GST or required to be so registered. We have confirmed that A is GST registered.

For the reasons set out above we consider that paragraphs (a) to (d) of section 9-5 are satisfied. Section 9-5 also states that a supply which satisfies those requirements is not a taxable supply to that extent that it is GST-free or input taxed. In the ruling request it was submitted that Property Management Services are neither GST-free nor input taxed. We agree with that submission and consider that the supply of Property Management Services by A is a taxable supply.

Question 5

Summary

Paragraphs (b) to (d) of section 11-5 of the GST Act are satisfied in relation to such an acquisition. An acquisition used by A to supply the Property Management Services is a cost component of that taxable supply and therefore made for a creditable purpose. Although A makes an input taxed supply when A sub-leases each unit for residential purposes, an acquisition used by A to provide the Property Management Services to H does not relate to that input taxed supply. Consequently A is entitled to claim ITCs in respect of such an acquisition.

Detailed reasoning

Pursuant to the Lease A agrees to perform the Property Management Services. Some of those services (e.g. carrying out inspections of the premises and providing regular reports to H) may require A to acquire goods or services from third parties which are registered for GST.

Section 11-5 of the GST Act 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.

In the present case paragraphs (b) to (d) of section 11-5 are satisfied and the issue is whether an acquisition by A of goods or services used to supply the Property Management Services is made solely or partly for a creditable purpose. Section 11-15 of the GST Act sets out the meaning of 'creditable purpose':

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and

(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a),as relating to making supplies that would be input taxed to the extent that:

(a) the acquisition relates to making a financial supply consisting of borrowing (other than through a deposit account you make available); and

(b) the borrowing relates to you making supplies that are not input taxed.

Subsection 11-15(1) of the GST Act states that an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on the entity's enterprise. Paragraph 55 of Goods and Services Tax Ruling GSTR 2008/1 refers to subsection 11-15(1) and states:

It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

In the reasons for decision in Question 3 we concluded that A is carrying on an enterprise.

Subsection 11-15(1) is qualified by subsection 11-15(2) and paragraph 11-15(2)(a) states that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to supplies that would be input taxed. Paragraphs 35 and 36 of GSTR 2008/1 note the distinction between the test in subsection 11-15(1) and the test in paragraph 11-15(2)(b) and the implications of that distinction:

35. The structure of the GST provisions has a significant difference in that the negative test in paragraph 11-15(2)(a) uses different words from the positive test to describe the required connection. The positive test in subsection 11-15(1) uses the expression 'in carrying on your enterprise', whereas the negative test in paragraph 11-15(2)(a) has 'relates to making supplies that would be input taxed'.

36. The negative limb of paragraph 11-15(2)(a) has an independent operation. As such, the treatment of acquisitions is essentially governed by their relationship (if any) to the making of supplies that would be input taxed.

Paragraphs 37 to 45 of GSTR 2008/1 discuss the difference between the tests in subsections 11-15(1) and (2) and the test for availability of input tax credits under European VAT legislation. Under European VAT legislation an acquisition must be connected with an enterprise and have a sufficient connection with taxable supplies. In relation to the latter test, paragraph 40 of GSTR 2008/1 sets out the effect of the Directives issued under VAT legislation:

40. In light of the above Directives, a view has evolved in the UK and European courts that entitlement to deduct input tax on an acquisition depends on a 'direct and immediate link' between the acquisition and taxable transactions being established and the amount to be deducted as input tax having been borne directly by the various cost components of the taxable transaction.

Paragraphs 43 to 45 of GSTR 2008/1 then sets out the ATO's view of the test under subsection 11-15(2) of the GST Act:

43. The 'cost component' analysis in the UK and European law results from the requirement of Article 2 of the First Directive that VAT is to be charged after deduction of the VAT borne directly by the various cost components. The Australian GST legislation has no equivalent of this requirement. The Commissioner considers that whether an acquisition is a cost component of a particular output may be a relevant consideration in determining whether the acquisition has been made for a creditable purpose in that this would tend to help establish whether the input 'relates to' the output. However, there is no legislative basis for viewing this consideration as a special or decisive factor.

44. In the Commissioner's view, you do not acquire a thing for a creditable purpose if the acquisition relates directly or indirectly to making supplies that would be input taxed (see paragraph 23 of this Ruling). Therefore, a conclusion that an acquisition has, in terms of the UK and European case law, a direct and immediate link with the making of taxable supplies is not decisive for Australian purposes because the acquisition may nevertheless also relate, directly or indirectly, to the making of other supplies that would be input taxed.

45. Despite this, from a consideration of whether an acquisition has (perhaps by analogy with the overseas case law) a direct and immediate link with the making of particular supplies, two conclusions could follow. Firstly, it is very likely that an acquisition that has that link would also 'relate to' the making of those supplies. Secondly this might, depending on the circumstances, be a relevant consideration to take into account in deciding whether the acquisition has a real and substantial (though indirect) relationship to the making of other supplies, if those other supplies would be input taxed.

Applying the test in paragraph 43 of GSTR 2008/1, we consider that an acquisition by A of goods and services which are used by A to supply the Property Management Services would be a cost component of that taxable supply and therefore made for a creditable purpose. However paragraph 44 of GSTR 2008/1 refers to paragraph 23 of GSTR 2008/1 (which quotes paragraph 3.26 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (which states that you do not have a creditable purpose if your acquisition of a thing relates 'either directly or indirectly' to a supply that you make which is input taxed)) and requires A to consider whether an acquisition used to make a supply of Property Management Services also relates, directly or indirectly, to the making of supplies that would be input taxed.

Part B of GSTR 2008/1 (Paragraphs 109 to 196) deals with whether an acquisition relates, directly or indirectly, to the making of supplies that are input taxed. Paragraph 104 of GSTR 2008/1 states:

104. Unlike subsection 11-15(1), paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) can be ascertained by its relationship with the other provisions of the GST Act. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future.

GSTR 2008/1 refers to the discussion of paragraph 11-15(2)(a) in HP Mercantile Pty Ltd v Commissioner of Taxation 2005 ATC 4571 and paragraph 119 of GSTR 2008/1 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.

Paragraph 123 of GSTR 2008/1 states:

123. If the acquisition is used or consumed in making an input taxed supply, there is a direct connection between the acquisition and the input taxed supply. For example, acquisitions made in constructing or maintaining residential premises that are supplied by way of an input taxed supply of a lease or licence relate to making that supply and consequently are not for a creditable purpose.

In our view A's position under the Lease is distinguishable from the example set out in paragraph 123 of GSTR 2008/1. Although A will make an input taxed supply when A sub-leases each unit for residential purposes, an acquisition made by A in order to provide the Property Management Services to H does not relate to that input taxed supply for the purposes of paragraph 11-15(2)(a).

Question 6

Summary

As any management fee paid by A to a Managing Agent for managing the units and providing the Property Management Services is consideration for an acquisition which is only partly for a creditable purpose and A is entitled to claim only a portion of input tax credits.

Detailed reasoning

To the extent that the management fees charged by the Managing Agent to A relate to the Managing Agent performing the Property Management Services on A's behalf, the reasons for decision in Question 5 apply, i.e. the acquisition by A of the services of the Managing Agent is a creditable acquisition within the meaning of section 11-5 of the GST Act. For the purposes of the requirement in paragraph 11-5(a) that the acquisition is made wholly or partly for a creditable purpose, that acquisition is acquired in carrying on A's enterprise (subsection 11-15(1)) and does not relate to making supplies that would be input taxed (paragraph 11-15(2)(a)).

To the extent that the management fees charged by the Managing Agent to A relate to the Managing Agent managing the sub-letting of the units by A, there is a direct connection between the acquisition and an input taxed supply as discussed in paragraph 123 of GSTR 2008/1 with the result that the relevant acquisition is not made for a creditable purpose:

123. If the acquisition is used or consumed in making an input taxed supply, there is a direct connection between the acquisition and the input taxed supply. For example, acquisitions made in constructing or maintaining residential premises that are supplied by way of an input taxed supply of a lease or licence relate to making that supply and consequently are not for a creditable purpose.

Section 11-25 of the GST Act states that the amount of the ITC for a creditable acquisition is reduced if the acquisition is only partly creditable. Section 11-30 states that an acquisition is partly creditable where the acquisition is made only partly for a creditable purpose. The formula in subsection 11-30(3) reduces the amount of the ITC on an acquisition that is partly creditable by multiplying the full ITC by the extent of creditable purpose expressed as a percentage of the total purpose of the relevant acquisition. Paragraphs 67 and 68 of Goods and Services Tax Ruling GSTR 2006/4 (GSTR 2006/4) confirm that apportionment is required in relation to acquisitions used partly to make supplies by way of lease of residential premises to be used predominantly for residential accommodation. Paragraph 34 of GSTR 2006/4 states that the apportionment method used must be fair and reasonable, reflect the planned use of the acquisition and be appropriately documented.

Question 7

Summary

None of the acquisitions referred to below are creditable acquisitions.

Detailed reasoning

Acquisitions related to A's covenant in the Lease to maintain and repair the premises have a direct connection with an input taxed supply as discussed in paragraph 123 of GSTR 2008/1 and therefore are not made for a creditable purpose:

123. If the acquisition is used or consumed in making an input taxed supply, there is a direct connection between the acquisition and the input taxed supply. For example, acquisitions made in constructing or maintaining residential premises that are supplied by way of an input taxed supply of a lease or licence relate to making that supply and consequently are not for a creditable purpose.

The same reasoning applies to A's obligation to bear the cost of a valuation by a Market Valuer for the purposes of the rent review process under the Lease. We consider that that acquisition is preparatory to the making of an input taxed supply (the sub-letting of the units by A in accordance with the Permitted Use under the Lease) as discussed in paragraphs 149 to 171 of GSTR 2008/1 (referred to in the reasons for decision for Question 3). Consequently those acquisitions do not satisfy paragraph 11-5(a) and are not creditable acquisitions.

Acquisitions made by A related to the negotiation, preparation and execution of the Lease are not creditable acquisitions for the reasons set out above in relation to A's obligation to bear the cost of a market valuation by a Market Valuer.

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