Edited version of your written advice

Authorisation Number: 1051312438195

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO’s view of the relevant law.

This notice must not be taken to imply anything about:

● the binding nature of the private advice issued to the applicant

● the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 13 December 2017

Ruling

Subject: Goods and Services Tax (GST) and supply of a going concern

Question 1

Did A make a supply of development services to the agency in relation to the development of real property?

Answer

Yes

Question 2

Were the development services provided by A to the agency non-monetary consideration for A’s acquisition of the land from the agency?

Answer

Yes

Relevant facts and circumstances

A (you) is registered for GST.

The commercial arrangement entered into between A and the agency for development of the land involved:

● A acquiring the land from the agency under a contract of sale and pursuant to a Crown Lease granted to A; and

● A agreeing to develop the land by constructing residential units and commercial/other facilities in accordance with an agreement that was simultaneously entered into with the agency.

The agency was established by state legislation and its functions included developing land.

The functions of the agency have been carried on by an agency authority.

A is a fixed unit trust. On X 20XX, the agency entered into a contract for sale with A for the sale of the land for a monetary price of $X (the Price).

Completion of the contract occurred on X 20XX and a Crown Lease was granted on X 20XX (the Crown Lease).

The contract included a number of mechanisms to ensure that A satisfactorily completes the development services within the agreed timeframe.

The agency agreed to grant, or procure the grant of, a Crown Lease to A upon completion of the contract; and

Relevant clauses in the Special Conditions to the Contract

● A and the agency entered into the agreement with effect from the making of the contract.

● A must deliver to the agency upon completion of the contract $X being X% of the contract price, as security for the performance by A of its obligations under the contract and agreement.

Relevant clauses in the Crown Lease

● The Crown Lease is for a term of X years commencing on X 20XX.

Relevant clauses in the agreement

● The agreement was entered into on the same date as the contract, and its purpose is to set out the obligations of A with respect to developing the land.

● A must design and construct all buildings on the land consistent with the development outcomes and with the terms and conditions contained within the agreement.

Following the completion of development services by A in satisfaction of its obligations under the contract, A lodged the approved units plan with the state land authority. The Crown Lease was also required to be lodged with this form.

The state authority registered the units plan on X 20XX, upon which A then became the holder of an estate in leasehold in each unit for the same term as the original Crown Lease.

Assumption

This ruling is issued on the assumption that you have considered Division 82 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and that it does not apply to your circumstances.

Relevant legislative provisions

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

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

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

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

Reasons for decision

Question 1

Did A make a supply of development services to the agency in relation to the development of real property?

The meaning of ‘supply’ is given in section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). A supply is any form of supply whatsoever and includes:

● A supply of goods,

● A supply of services, or

● An entry into an obligation to do anything.

It is clear that pursuant to the contract of sale, Crown Lease and the agreement and the facts set out hereunder, A made a supply of development services to the agency:

● the Crown Lease was granted to A for a specified purpose, including the construction of a specific number of residential dwellings and another facility;

● the Crown Lease contained specific ‘commence and complete’ clauses with respect to the development services;

● the Crown Lease required A to obtain written approval prior to commencing building;

● A was required to enter into the agreement at the time of the contract of sale and comply with its obligations under the agreement including development outcomes;

● A charged in favour of the agency the whole of its interest in the land as security for the performance of the development services;

● A was required to design and construct buildings on the land consistent with the development outcomes and the terms and conditions of the agreement;

Question 2

Were the development services provided by A to the agency non-monetary consideration for A’s acquisition of the land from the agency?

Under section 195-1, ‘consideration’, for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition. Section 9-15(1) provides that consideration includes:

● any payment, or any act or forbearance, in connection with a supply of anything; and

● any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

In paragraph 47 of GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) the Commissioner states that in order for a supply to be a supply for consideration,

“there needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The same analysis applies to determining whether the supply of a good, service or thing is consideration for a supply.”

Paragraph 81 of GSTR 2001/6 states:

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

The development services undertaken by A have a clear economic value and independent identity. Physical performance of the development services by A enables completion of the development in accordance with the agreement and the development outcomes thereby enabling the agency to fulfil its statutory functions with respect to the development.

The development services supplied by A to the agency are therefore of economic value and independently identifiable and constitute non-monetary consideration for the supply of land, in addition to the monetary consideration payable by A.

Paragraphs 33-37 of Goods and Services Tax Ruling Goods and services tax: development lease arrangements with government agencies (GSTR 2015/2) consider the respective supplies between the Developer and a government agency under development lease/licence arrangements. While you have not entered into a licence with the government agency, the principles in this ruling as they relate to supplies of development services in exchange for interests in real property are applicable to your circumstances. These paragraphs state:

33. In completing the development works on the government agency's land, in accordance with the terms of a development lease arrangement, the developer makes a supply of development services to the government agency.

34. The supply of the land to the developer by the government agency is consideration for the developer's supply of development services if there is a sufficient nexus between supply of the development services and transfer of the land.

35. There is a sufficient nexus between the development services and the transfer of freehold or grant of a long-term lease if the development lease arrangement makes the supply of the land subject to or conditional on the developer completing specified development works. For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development.

36. In some cases, under the terms of a development lease arrangement, the government agency grants a call option to the developer. When exercised, the call option entitles the developer to the transfer of the freehold or a long-term leasehold interest in the land. The grant of a call option by the government agency is consideration for the developer's supply of development services if the grant of the call option is subject to or conditional on the developer completing specified development works.

37. Where the circumstances set out in paragraphs 33 to 36 of this Ruling apply, supply of development services by the developer is, in turn, consideration for the supply of the land or the grant of a call option by the government agency. The developer makes a taxable supply of development services and the government agency makes a taxable supply of land or a taxable supply of the grant of a call option.

Further, paragraphs 56 to 60 of GSTR 2015/2 discuss the GST position where works undertaken on the land are not transferred to, or retained by, the developer. These paragraphs state:

56. In some cases, as a condition of a development lease arrangement, the developer is required to complete works on land that is retained by the government agency and is not transferred to, or retained by, the developer as part of the arrangement (additional works). These works may include construction of other facilities required by the government agency, for example, car parks, parkland, or entertainment precincts. They may also include general infrastructure works such as sewers, roads and footpaths.

57. The developer makes a supply of development services to the government agency when the developer completes additional works on land that is retained by the government agency, in accordance with the terms of a development lease arrangement.

58. The supply of the land by the government agency is consideration for this supply of development services, by the developer, if:

● the terms of the development lease arrangement make the government agency's supply of land subject to or conditional on the developer completing the additional works, and

● Division 82 does not apply.

59. In other cases, where the grant of a call option by the government agency is subject to or conditional on the developer completing the additional works, the grant of the call option is consideration for the developer's supply of development services if Division 82 does not apply.

60. Where the circumstances in paragraphs 58 and 59 of this Ruling apply, the supply of development services by the developer, in the form of the additional works, also forms part of the consideration for the government agency's supply of land or grant of the call option.

The terms of the contract entered into between A and the agency evidence that the provision of the development services by A was a condition for the transfer of the land by the agency. This is further demonstrated by the fact that the Crown Lease is handed back to the agency upon satisfactory performance of the development services and new Crown Leases are then granted by to A.

In relation to the nexus between A’s supply of the development services and the supply of land by the agency, paragraph 70 of GSTR 2001/6 refers to the High Court decision in Berry v. FC of T (1953) 89 CLR 653 and the meaning given to the term ‘in connection with’. Kitto J commented that consideration will be in connection with property where: ‘the receipt of the payment has a substantial relation, in a practical business sense, to that property.

The facts show that there are a number of provisions in the contract, agreement and the Crown Lease which ensure that A satisfactorily completes the development services within the agreed timeframe in return for the supply of land. Specifically:

● the contract, the agreement, the Crown Lease and the development outcomes are interdependent;

● the Crown Lease is conditional upon completion of the development services by A being performed;

● the agency may terminate the Crown Lease if A does not complete the development services with respect to the approved development within the agreed timelines.

The supply of the land by the agency to A constitutes non-monetary consideration for As supply of the development services and the development services provided by A are non-monetary consideration for its acquisition of the land from the agency on the basis that the entities have engaged in a ‘barter arrangement’ for GST purposes. A and the agency are making supplies to each other.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).