Edited version of private advice

Authorisation Number: 1051632959991

Date of advice: 22 June 2020

Ruling

Subject: GST and long-term 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 Contract, Project Delivery Agreement (including Design Guidelines) and the executed Crown Leases (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

Entity A is a privately owned company. Entity A registered for GST from ddmmyyyy.

On ddmmyyyy, Entity A entered into a Contract for the grant of Crown Leases for the Land from the relevant government agency (Contract).

The Contract, Project Delivery Agreement [PDA] (including the Design Guidelines) and Crown Leases (collectively, the Transaction Documents include a number of mechanisms to ensure Entity A satisfactorily completes the development within the agreed timeframe and to the agreed specifications. The relevant clauses in the transaction documents are outlined below.

Contract of Sale

Under the Contract, the relevant government agency agreed to grant, or procure the grant of, a Crown Lease to Entity A on Completion of the Contract.

On ddmmyyyy, the relevant government agency granted Crown Leases over the Land to Entity A. The Crown Leases were granted on substantially the same terms as the Specimen Leases annexed to the Contract. The purchase price stated in the contract was $X (including any GST payable). The supply of the Land was made under the margin scheme. Further, the relevant government agency warrants that it can use the margin scheme and promises that it will.

Completion of the Contract occurred X Working Days from the date the relevant government agency served the Lease on Entity A.

Under Clause X of the Contract, Entity A was required to comply with the Design Guidelines and acknowledged, by execution of the Contract, having read and understood its contents.

Clause X is with respect to Entity A's obligations under the PDA. In particular:

A.     Entity A and the relevant government agency entered into a PDA, with effect from the making of the Contract

B.     Entity A must comply with all of its obligations under the PDA.

C.     Entity A is restricted from dealing with the land until it has complied with its obligations under the PDA.

D.     Entity A may not sell the land or permit any transfer of the land to be registered until it has complied with all of its obligations under the PDA.

E.     Entity A acknowledges and agrees that the relevant government agency may retain and use the Security in respect of its obligations under the Contract and the PDA. With reference to the PDA, the Security is set at X% of the Contract price (as noted in the definition of Security Amount in the PDA). This amount is agreed to be security for the performance by Entity A of its obligations under the Contract and PDA.

F.     The relevant government agency may register a Charge or caveat over the Crown Lease, provided that the caveat does not prevent Entity A from registering a mortgage in respect of the Lease.

The Charge must be released and any associated caveat must be withdrawn once Entity A has complied with all obligations under the Contract and PDA and Entity A requests the relevant government agency to withdraw the caveat.

The Annexures attached to the Contract are:

·         Annexure A - Specimen Leases

·         Annexure B - Project Delivery Agreement

·         Annexure C - Background Documents

·         Annexure D - Block Details Plan

·         Annexure E - Special Conditions

Project Delivery Agreement (PDA)

The PDA is dated ddmmyyyy and, as required by special condition X of the Contract, was entered into simultaneously with the Contract. The PDA includes the Design Guidelines which outlines the intended Design and Development Outcomes for the Land and provides a framework for development of the development sites within the Area.

Clause X of the Background links the PDA to the Contract, and states that the relevant government agency and the Developer have entered into the Contract for Sale.

Clause X of the Background states that the Developer will, in developing the Land, comply with the Developer's obligations set out in the PDA.

Clause X specifies that it remains in force until the parties have complied with all of their obligations under the PDA.

Clause X is with respect to Design and Development Outcomes. Under Clause X, the Developer must design and construct all buildings on the Land consistent with all applicable laws, the Design Guidelines and the terms and conditions contained in the PDA.

Clause X provides for the protection of Government property, such as verges and footpaths during development.

Clause X imposes specific timing requirements in relation to the construction of dwellings on the Land.

Entity A must, within X months after completion of the Contract for Sale:

A.     complete construction of dwellings on the Land in accordance with the Development Application(s) endorsed by the relevant government agency and obtain a Compliance Certificate in respect of each Crown Lease, and

B.     complete the Services at the Developer's expense in accordance with all applicable laws and the requirements of each relevant government agency.

Clause X is with respect to the Security. In particular:

A.     Entity A must provide to the relevant government agency security for the performance of all of Entity A's obligations under the PDA. The amount of the security was set at X% of the Contract Price, which is calculated as $X.

B.     If Entity A breaches its obligations under the PDA, the relevant government agency may remedy the breach and call on the Security for all costs incurred to remedy the breach.

C.     The security will be released to Entity A following completion by Entity A of its obligations under the PDA.

D.     In addition to the Security, Entity A charged, in favour of the relevant government agency, the whole of their interest in the Land and Crown Leases as security for the performance of its obligation under the PDA and Contract for Sale.

E.     The relevant government agency may register a charge or caveat over the Crown Leases, provided the caveat does not prevent the registration of a mortgage by Entity A in respect of the Lease.

F.     The charge must be released and any associated caveat must be withdrawn within X days of Entity A having complied with all obligations under the Contract for Sale and the PDA and Entity A requesting the relevant government agency to withdraw the caveat.

Clause X is with respect to Sale of the Property. In particular:

A. Entity A is prohibited from selling or assigning any interest in the Crown Lease or Land to any person before the Release Date (i.e. the date when the relevant government agency releases the Security) unless certain conditions are satisfied.

B. Entity A may enter into agreements for sale before the Release Date in respect of the development it proposes to construct on the Land provided that no such sales may be completed unless and until Entity A has complied with all its obligations under the PDA.

Pursuant to clause X, Entity A indemnifies the relevant government agency from any claim, expense, loss or damage suffered by the relevant government agency arising out of a failure by Entity A to duly and punctually perform its obligations under the PDA.

The PDA contains a GST 'gross-up' clause, which requires a recipient of a taxable supply to pay to the supplier the amount of GST in respect of the supply (unless the supply is expressly stated to be GST inclusive). If the amount paid by Entity A to the relevant government agency is more or less than the GST on the taxable supply, then the supplier shall refund, or the receiver will pay the deficiency, with respect to the GST. Any amounts of GST only need to be paid when a tax invoice has been issued in respect of that supply.

Crown Lease

There are X blocks to be developed in Section X. The terms of the Crown Lease outlined below are identical to the terms of the Crown Leases for all the Blocks.

The Crown Lease is a market value lease.

The key terms of the Crown Lease are:

·         It commenced on ddmmyyyy.

·         The term is for X years.

·         The Memorandum of Provisions (MOP) No. X registered in the registrar-generals office and/or any provisions set out in any annexure are part of the Crown Lease.

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

·         Clause X imposes an obligation on Entity A to obtain written approval from the relevant government agency prior to constructing any building or making structural alterations to any building on the land.

·         The lease provides that the land may be used for the purpose of single dwelling housing.

·         Entity A must undertake the following:

(a)          commence, within X months from the date of commencement of the lease (or such further time approved by the relevant government agency in writing), construction of an approved development on the Land as approved by the relevant government agency at a cost of not less than $X per Dwelling.

(b)          complete, within X months from the lease Commencement Date (or such further time approved by the relevant government agency in writing), construction of an approved development as approved by the relevant government agency.

(c)           and also:

(i) ensure that facilities for electrical and telephone cables are installed underground to a standard acceptable to the relevant government agency.

(ii) preserve all trees on the land that have been identified for retention in the development approval, unless the relevant government agency consents to their removal.

(iii) maintain, repair and keep in repair the premises to the satisfaction of the relevant government agency; and

(iv) keep the premises clean, tidy and free from rubbish and other matter.

For clarity, in this private ruling the above requirements at points (a) to (c), which Entity A is required to undertake within a specified time period, are referred to as 'development works'. If the context requires, points (a) and (b) are referred to as 'approved development' and the other point, (c), as 'additional site works'.

·         The Crown Lease may be terminated by the relevant government agency in the following circumstances:

-                     Entity A does not use the Land for a period of X year for the Purpose specified.

-                     Entity A fails to do any of the things contained in the Crown Lease and that failure continues for X months (or such longer period as may be specified by the relevant government agency) after the date of service on the Lessee of a written notice from the relevant government agency specifying the nature of the failure.

·         Entity A will be entitled to a further lease of the Land on such terms as the relevant legislation provides.

The Development and Building Approval Process

Entity A has completed construction of the housing development on the Land at a cost of $X.

On ddmmyyyy, a certificate of occupancy and use for each block was granted to Entity A by the relevant government agency under the relevant legislation. It states that the building work has been completed substantially in accordance with the prescribed requirements and is considered fit for occupation and use. The building works referred to on the certificate are a townhouse and garage.

On ddmmyyyy, a certificate of compliance (Certificate) for each block was issued to Entity A by the delegate of the relevant government agency under the relevant legislation.

Other Documents Provided

Stamp Duty Notice of Assessment outlining the amount of stamp duty paid, calculated on a value of $X.

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

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

·         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/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/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/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 X years and is renewable at no cost. It is the most extensive interest in land that can be held in the relevant State/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. This requirement to pay the lessee compensation for improvements when a lease is not renewed supports a conclusion that the development works are performed for the benefit of the lessee and are not provided to the relevant State/Territory.

The purchase price stated in the Contract is $X (including any GST payable). Stamp Duty was paid on the basis that the consideration for the grant of the X year leases (being market value leases) was $X.

The cost of the development Entity A has already completed is about $X.

As with any Crown Lease in the relevant State/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 a consideration of $X. It is a typical feature of a lease that it can be terminated for breaches of the lease.

Entity A's agreement with the relevant government agency that the approved development will 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/Territory's broader land development policy of ensuring timely and orderly development of the area and to avoid land-banking by developers.

The special conditions annexed to the Contract and PDA 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 the relevant State/Territory's policy outcome rather than the provision to the relevant State/Territory of something which has measurable economic value.

The relevant State/Territory does not derive any economic benefit from the multi-unit 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 contained on the land.

Entity A is required to provide and maintain additional site works under Clause X of 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 relevant 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 relevant 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/Territory. The development works do not benefit the relevant 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/Territory or relevant government agency.

In the absence of a supply from Entity A to the relevant 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 relevant 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 relevant government agency.

As set out in the response to Question 1, there is not a supply of development works by Entity A to the relevant 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 relevant government agency.

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).