Edited Version of private advice

Authorisation Number: 1051614264197

Date of advice: 5 June 2020

Ruling

Subject: Development leases

Question 1

Did Entity A make a taxable supply, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), of development services to the relevant government agency in completing development works pursuant to the specified documents (collectively referred to as the Transaction Documents) on the Land?

Answer

No

Question 2

Are the development works undertaken by Entity A pursuant to the Transaction Documents, non-monetary consideration pursuant to section 9-15 of the GST Act for the taxable supply of the Land by the relevant government agency under section 9-5 of the GST Act to Entity A?

Answer

No

Relevant facts and circumstances

The following are the facts as outlined in your request together with further facts we have ascertained. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is a partnership which is registered for GST. It carries on a business of property development. On ddmmyyyy Entity A, entered into a contract for the grant of a 99 year Crown Lease for the Land (the Contract).

The Sale Contract

Under the Contract, a 99 year Crown Lease was granted to Entity A.

The purchase price stated in the Contract is $XX and the supply was made under the margin scheme.

The Contract provides that the Buyer acknowledges that the Land may be affected by:

·        requirements of legislation;

·        variations to the relevant Plan;

·        the requirements of government authorities; and/or

·        physical conditions affecting the Works

and may result in one or more of the following:

·        minor redefinition of the boundaries of the Land;

·        minor road re-alignment or dedication; and

·        minor variations of the easements relating to the provision of electricity, gas, water, sewerage and stormwater services.

The Annexures attached to the Contract are:

·        Annexure A: Specimen Lease

·        Annexure B: Block detail Plan

·        Annexure C: Special Conditions

The Contract and Annexures and attachments thereto form part of the relevant facts and circumstances.

Stamp Duty of $XX was paid on the purchase price.

Project Delivery Agreement (PDA)

It was a requirement of the Special Conditions in Annexure C of the Contract that the PDA be entered into before or at the time of the Contract. The PDA along with the Estate Guide (EG) (annexed to the PDA) and the Estate Development Plan (EDP) (attached to the EG) requires that all buildings constructed on the land are consistent with the terms under the PDA. The PDA also sets out steps required to obtain development approval, including the government agency endorsement of the Development Application/s and consultation required between Entity A and the government agency. It also sets out details of easements and mechanisms to protect property.

The PDA provides that the Developer must sell not less than X% of all dwellings erected on the Land as Affordable Housing.

Security is also required for the performance of Entity A's obligations.

Crown Lease

The Crown Lease is a market value lease.

The key terms of the Crown Lease are:

·        The term was for 99 years.

·        Entity A is required to pay rent of 5 cents per annum.

·        The Crown Lease outlines the purpose for which the premises may lawfully be used:

·        Entity A must undertake the following:

(a) commence within X months from the lease commencement date (or such further time approved by the government agency in writing), the erection of an 'approved development' on the Land

(b) complete, within X months from the lease commencement date (or such further time approved by the government agency in writing), the erection of an 'approved development' on the Land

(c) provide and thereafter maintain certain works on the land, to an acceptable standard and in accordance with previously submitted and approved plans and specifications.

·        The Crown Lease may be terminated by the government agency in certain circumstances

Entity A shall, at the expiration of the Crown Lease, be entitled to a further lease of the land for such further term and at such rent and subject to such conditions as may then be provided or permitted by the relevant legislation.

The development and building approval process

Entity A obtained development approval to construct X dwellings with associated infrastructure.

The cost of construction was $X million.

Entity A completed construction of the development and the units were sold.

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

Reasons for decision

In this reasoning:

·        unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·        all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·        all reference materials, published by the Australian Taxation office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

Section 9-5 provides that you make a taxable supply if:

·        you make the supply for consideration; and

·        the supply is made in the course or furtherance of on enterprise that you carry on; and

·        the supply is connected with the indirect tax zone (Australia), and

·        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.

Supply

Section 9-10 defines a supply very broadly, as being any form of supply whatsoever and includes:

·        A supply of goods.

·        A supply of services.

·        An entry into an obligation to do anything.

Characterising the supply

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies examines the meaning of supply for the purposes of the GST Act.

Paragraph 22 of GSTR 2006/9 outlines the ten propositions which may be relevant to characterising and analysing supplies. The relevant propositions include:

·        Proposition 5: An entity will make a supply if it provides something to another entity.

·        Proposition 6: 'Supply' usually, but not necessarily, requires something to be passed from one entity to another.

·        Proposition 9: Creation of expectations alone does not establish a supply.

Proposition 5 provides that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

When analysing an arrangement to determine the GST consequences, it is necessary to examine the terms of the agreements between the parties and the facts and circumstances in which the arrangement is carried out to identify what is being supplied.

Lease transactions involve the granting of various rights and entry into various obligations by the parties to the transaction. However, not every obligation that arises under a lease is a separate supply made for consideration. Some obligations are merely part of the terms and conditions of the lease. For example, the terms of a lease may include an obligation by the tenant to repair any damage done and return the premises to their condition as at the commencement of the lease.

Paragraph 21 of Goods and Services Tax Ruling GSTR 2003/16 Goods and services tax: inducements to enter into a lease of commercial premises states:

21. However, where the tenant agrees to carry out work on the premises in addition to the normal obligations of a tenant, there may be a separate supply made by the landlord. If so, that consideration (that is, the work carried out by the tenant) may be for the separate supply of the entry, or agreement to enter, into the lease by the landlord. It is also a separate supply made by the tenant in these circumstances, rather than merely a condition of the lease.

In the relevant State or Territory, it is a key obligation of Crown lessees to develop the land in accordance with the building and development covenant which requires that lessees complete a building on the land within a specified time period from commencement of the lease.

That is, in the relevant State or Territory it is a normal obligation of a lessee under a Crown Lease to carry out development works within a specified timeframe. For this reason, paragraph 21 of GSTR 2003/16 is not applicable to development requirements in Crown Leases granted to lessees in the relevant State or Territory.

In AP Group Limited v Commissioner of Taxation (AP Group) the Full Federal Court confirmed the earlier Tribunal decision that the car dealer's agreement to perform obligations imposed by dealer agreements was not a supply to the car manufacturer. The Tribunal recognised there is an "air of unreality" if every possible obligation is considered to be a supply. The Tribunal considered the overall business relationships and contractual arrangements between the dealer and the manufacturer and concluded that the acceptance of the obligations or the making of the promises were not supplies but were part of the foundation underpinning the relationships and the background to the bargain the parties had made. That is, not every promise or obligation to do something under a contract is a supply. Some things are just the terms of the arrangement on which the respective parties have reached agreement.

Effect of the arrangements

The Crown Lease acquired by Entity A is for 99 years and is renewable at no cost. It is the most extensive interest in land that can be granted to anyone in the relevant State or Territory, with the Commonwealth holding the reversion. The Commonwealth can never dispose of the reversion. If the lease is not renewed and a development has been completed, then Entity A or the lessee at the time is entitled to compensation for the development (see the relevant Act). This requirement to pay the lessee compensation for improvements when a lease is not renewed supports a conclusion that the development works are retained for the benefit of the lessee and are not provided to the relevant State or Territory.

The purchase price stated in the Contract is $XX (including any GST payable). Stamp Duty was paid on the basis that the consideration for the grant of the 99 year lease - a market value lease - was $XX. The cost of construction was $XX.

As with any Crown Lease in the relevant State or Territory, there are obligations about how the land could be used for the benefit of Entity A and requirements that it had to be developed within a specified time period. There is nothing unusual in a leasehold estate having limitations about how it will be used and containing obligations to use it. A leasehold estate is a lesser interest in land than a freehold estate and those restrictions would be reflected in the value and price paid for it.

Further, the fact that Entity A could have the Crown Lease terminated for breaching provisions of the lease does not alter that it acquired the lease for consideration of $XX. It is a typical feature of a lease that it can be terminated for breaches of the lease.

Entity A's agreement with the government agency that the approved development would commence within X months and be completed within X months is primarily concerned with the timing of the completion of the development. It is designed to encourage compliance with the relevant State or Territory Government's broader land development policy of ensuring timely and orderly development of the area and to operate as a deterrent to land speculation in the relevant State or Territory.

Entity A obtained development approval on ddmmyyy for the development and associated works. The special conditions annexed to the Contract are in the nature of acknowledgements by Entity A that the lease would have certain restrictions and that it was aware of these. This prevents Entity A claiming damages for having received something less than complete unfettered rights to use the leased land.

However the restrictions are in the nature of planning and development conditions that would be expected to be imposed by a local government when approving a development. The existence of those restrictions would have been reflected in the value of the Crown Lease in the same way planning restrictions impact the value of other land.

Accordingly, the requirement to build dwellings within a particular time period is properly characterised as a condition of the Crown Lease, designed to achieve a relevant State or Territory policy outcome rather than the provision to the relevant State or Territory of something which has measurable economic value. Similarly, the requirement for the Developer to sell not less than X% of the dwellings erected on the Land as Affordable Housing may be seen as in the nature of a restriction on the development of the land that is properly characterised as a condition of the PDA and does not involve the provision to the relevant State or Territory of something which has measurable economic value. While it may impact the profitability of the project if there are different profit margins on different types of units, this is no different to a requirement that soundproofing or fire rating between apartments be of a particular standard. It is a condition for obtaining development approval not the price for the land.

The relevant State or Territory does not derive any economic benefit from the development being built on the land other than having the relevant land developed in a manner consistent with policy and design guidelines. Only Entity A is able to sell dwellings constructed on the land.

Entity A is required to provide and maintain additional site works under the Crown Lease. These additional site works can only be provided on the site after Entity A is already the lessee under the Crown Lease. Entity A does not receive any further supply of anything from the government agency after completion of these works.

Conclusion

Complying with the requirements of the Transaction Documents does not result in Entity A making a supply to the government agency. The requirements are simply terms of the arrangement to ensure that the development of the land is managed according to legislation and the objectives of the relevant State or Territory. The development works do not benefit the government agency rather they benefit Entity A for the duration of the Crown Lease. Consequently, apart from the monetary consideration paid under the Contract in this arrangement, nothing of economic value passes to the relevant State or Territory or government agency.

In the absence of a supply from Entity A to the government agency under the arrangement, there is no taxable supply of development works under section 9-5.

Question 2

Subsection 9-15(1) provides that consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything

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

Consideration, for a supply or acquisition, means any consideration in connection with the supply or acquisition. Consideration for a supply is something the supplier receives for making the supply. Non-monetary consideration, such as the provision of works, can constitute consideration for GST purposes. The issue in these circumstances is whether the building works and the associated site works are for or 'in connection with' the supply of the Crown Lease by the government agency. This is determined by considering whether there is sufficient nexus between the supply and the payment.

However, a supply needs to be established before a question of nexus becomes relevant. There is no need to consider if the requisite nexus exists if there is no supply of works made by the developer to the government agency.

As set out in the response to Question 1, there is not a supply of development works by Entity A to the government agency and therefore the development works undertaken by Entity A are not non-monetary consideration for the taxable supply of the land by the government agency.

Conclusion

The development works are not non-monetary consideration for the supply of the Land by the government agency to Entity A.

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